Fibrocell Science Inc Annual Report 2007

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2007OR o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Isolagen, Inc.(Exact name of registrant as specified in its Charter.) Delaware(State or other jurisdiction of incorporation) 001-31564(Commission File Number) 87-0458888(I.R.S. EmployerIdentification No.)405 Eagleview BoulevardExton, Pennsylvania 19341(Address of principal executive offices, including zip code)(484) 713-6000(Issuer’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which RegisteredCommon Stock, $.001 par value American Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þIndicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for any 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 þ No oIndicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained inthis form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is shell company (as defined in the Exchange Act Rule 12b-2) Yes o No þAs of June 30, 2007, the aggregate market value of the issuer’s common stock held by non-affiliates of the issuer basedupon the price at which such common stock was sold on the American Stock Exchange as of such date was $129,057,544.As of March 3, 2008, issuer had 41,639,408 shares issued and 37,639,408 shares outstanding of common stock, par value$0.001.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within120 days of the end of the fiscal year ended December 31, 2007, are incorporated by reference in Part III hereof. Except withrespect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed aspart hereof. TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS 2 ITEM 1A. RISK FACTORS 13 ITEM 1B. UNRESOLVED STAFF COMMENTS 31 ITEM 2. PROPERTIES 31 ITEM 3. LEGAL PROCEEDINGS 32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 35 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES 36 ITEM 6. SELECTED FINANCIAL DATA 38 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE 53 ITEM 9A. CONTROLS AND PROCEDURES 53 ITEM 9B. OTHER INFORMATION 54 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 55 ITEM 11. EXECUTIVE COMPENSATION 55 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS 55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE 55 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 55 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE 56 Exhibit 10.18 Exhibit 10.19 Exhibit 23 Exhibit 31 Exhibit 32 Table of ContentsPart 1This Annual Report on Form 10-K (including the section regarding Management’s Discussion and Analysis of FinancialCondition and Results of Operations) contains certain “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as informationrelating to Isolagen, Inc. and its subsidiaries (referred to as “Isolagen,” “Company,” “we,” or “our”) that is based onmanagement’s exercise of business judgment and assumptions made by and information currently available to management.Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management,such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements areinherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomesdiscussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases andreports released by us, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of similarimport, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-lookingstatements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as notedbelow. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, ouractual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions andresults may materially differ from the anticipated events, transactions or results described in such statements. Although webelieve that our expectations are based on reasonable assumptions, we can give no assurance that our expectations willmaterialize. Many factors could cause actual results to differ materially from our forward looking statements including those setforth in Item 1A of this report. Other unknown, unidentified or unpredictable factors could materially and adversely impact ourfuture results. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to ourforward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of anyunanticipated events.We file reports with the Securities and Exchange Commission (“SEC” or “Commission”). We make available on ourwebsite (www.Isolagen.com) free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with orfurnish them to the SEC. Information appearing at our website is not a part of this Annual Report on Form 10-K. You can alsoread and copy any materials we file with the Commission at its Public Reference Room at 100 F Street, NE, Washington, DC20549. You can obtain additional information about the operation of the Public Reference Room by calling the Commission at1-800-SEC-0330. In addition, the Commission maintains an Internet site (www.sec.gov) that contains reports, proxy andinformation statements, and other information regarding issuers that file electronically with the Commission, includingIsolagen.Our corporate headquarters is located at 405 Eagleview Boulevard, Exton, Pennsylvania 19341. Our phone number is(484) 713-6000. Our fiscal year begins on January 1, and ends on December 31, and any references herein to “Fiscal 2007”mean the year ended December 31, 2007, and references to other “Fiscal” years mean the year ending December 31, of the yearindicated.We own or have rights to various copyrights, trademarks and trade names used in our business including but not limited tothe following: Isolagen, Isolagen Therapy, Isolagen Process, Agera and Agera Rx. This report also includes other trademarks,service marks and trade names of other companies. Other trademarks and trade names appearing in this report are the property ofthe holder of such trademarks and trade names.We obtained statistical data, market data and other industry data and forecasts used in this Form 10-K from publiclyavailable information. While we believe that the statistical data, industry data, forecasts and market research are reliable, wehave not independently verified the data, and we do not make any representation as to the accuracy of that information. 1Table of ContentsItem 1. BusinessOverviewWe are an aesthetic and therapeutic development stage company focused on developing novel skin and tissuerejuvenation products. Our clinical development product candidates are designed to improve the appearance of skin injured bythe effects of aging, sun exposure, acne and burn scars with a patient’s own, or autologous, fibroblast cells produced by ourproprietary Isolagen Process. Our clinical development programs encompass both aesthetic and therapeutic indications. Ourmost advanced indication utilizing the Isolagen Therapy is for the treatment of nasolabial folds/wrinkles and is currently inPhase III clinical development. We also have an ongoing Phase II/III study for the treatment of acne scars and ongoing Phase IIstudies related to full face rejuvenation, restrictive burns scars and periodontal disease.We also develop and market an advanced skin care product line through our Agera Laboratories, Inc. subsidiary, in whichwe acquired a 57% interest in August 2006.Going ConcernAs of December 31, 2007, we had cash, cash equivalents and restricted cash of $17.0 million and working capital of$13.8 million (including our cash, cash equivalents and restricted cash). We believe our existing capital resources are adequateto finance our current operating plan through September 1, 2008; however, our long-term viability is dependent uponsuccessful operation of our business, our ability to improve our manufacturing process, the approval of our products and theability to raise additional funding to meet our business objectives. We estimate that we will require additional cash resourcesduring the third quarter of 2008 based upon our current operating plan and condition. This estimate excludes any proceeds thatwould be realized from the sale of our Swiss campus, which we are attempting to sell (refer to Note 3 of the ConsolidatedFinancial Statements). We will add any proceeds from the sale of the Swiss campus to our working capital, which wouldpartially alleviate our need to obtain financing from other sources. There is no assurance that capital in any form would beavailable to us, and if available, on terms and conditions that are acceptable.As a result of the above discussed conditions, and in accordance with generally accepted accounting principles in theUnited States, there exists substantial doubt about our ability to continue as a going concern, and our ability to continue as agoing concern is contingent upon our ability to secure additional adequate financing or capital prior to or during the thirdquarter of 2008. If we are unable to obtain additional sufficient funds prior to this time, we will be required to terminate or delayregulatory approval of one, more than one, or all of our product candidates, curtail or delay the implementation ofmanufacturing process improvements or delay the expansion of our sales and marketing capabilities. Further, if we do notobtain additional funding prior to or during the third quarter of 2008, we may enter into bankruptcy during 2008 and possiblycease operations thereafter. Any of these actions would have an adverse affect on our operations, the realization of our assetsand the timely satisfaction of our liabilities. Our financial statements are presented on a going concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements donot include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may benecessary should it be determined that we are unable to continue as a going concern.Isolagen’s Technology PlatformWe use our proprietary Isolagen Process to produce an autologous living cell therapy. We refer to this autologous livingcell therapy as the Isolagen Therapy. We believe this therapy addresses the normal effects of aging or injury to the skin. Each ofour product candidates is designed to use Isolagen Therapy to treat an indicated condition. We use our Isolagen Process toharvest autologous fibroblasts from a small skin punch biopsy from behind the ear with the use of a local anesthetic. We chosethis location both because of limited exposure to the sun and to avoid creating a visible scar. In the case of our dental productcandidate, the biopsy is taken from the patient’s palette. The biopsy is then packed in a vial in a special shipping container andshipped to our laboratory where the fibroblast cells are released from the biopsy and initiated into our cell culture process wherethe cells proliferate until they reach the required cell count. The fibroblasts are then harvested, tested by quality control andreleased by quality assurance prior to shipment. The number of cells and the frequency of injections may vary and will dependon the indication or application being studied. 2Table of ContentsIf and when approved, we expect our product candidates will offer patients their own living fibroblast cells in apersonalized therapy designed to improve the appearance of damaged skin and wrinkles; or in the case of restrictive burn scars,improve range of motion. Our product candidates are intended to be a minimally invasive alternative to surgical interventionand a viable natural alternative to other chemical, synthetic or toxic treatments. We also believe that because our productcandidates are autologous, the risk of an immunological or allergic response is low. With regard to the therapeutic markets, webelieve that our product candidates may address an insufficiently met medical need for the treatment of each of restrictive burnscars, acne scars and dental papillary insufficiency, or gum recession, and potentially help patients avoid surgical intervention.Our product candidates are still in clinical development and, as such, benefits we expect to see associated with our productcandidates may not be validated in our clinical trials. In addition, disadvantages of our product candidates may become knownin the future.Our StrategyOur business strategy is primarily focused on our current Phase III nasolabial fold/wrinkle study. Specifically, during 2008our efforts will be focused on our Phase III wrinkle study milestones, such as completing the six month efficacy follow-up,accumulating and analyzing the related study data, and continuing our Biologics License Application (BLA) efforts (assumingefficacious results from this Phase III study). Our additional objectives include achieving regulatory milestones related to ourother Phase II/III and Phase II studies currently underway (refer to Clinical Development Programs below).Recent Management ChangesIn January 2008, Mr. Declan Daly assumed the role of our Chief Executive Officer. Our former Chief Executive Officer,Mr. Nicholas L. Teti, Jr., will continue to serve as Chairman of the Board of Directors and as a consultant to the Company.Clinical Development ProgramsOur product development programs are focused on the aesthetic and therapeutic markets. These programs are supported bya number of clinical trial programs at various stages of development.Our aesthetics development programs include product candidates to treat targeted areas or wrinkles and to provide full-facerejuvenation that includes the improvement of fine lines, wrinkles, skin texture and appearance. Our therapeutic developmentprograms are designed to treat acne scars, restrictive burn scars and dental papillary recession. All of our product candidates arenon-surgical and minimally invasive. Although the discussions below include estimates of when we expect trials to becompleted, the prediction of when a clinical trial will complete is subject to a number of factors and uncertainties.Aesthetic Development ProgramsWrinkles/Nasolabial Folds — Phase III Trials: In October 2006, we reached an agreement with the U.S. Food and DrugAdministration, or FDA, on the design of a Phase III pivotal study protocol for the treatment of nasolabial folds (lines which runfrom the sides of the nose to the corners of the mouth). The randomized, double-blind protocol was submitted to the FDA underthe agency’s Special Protocol Assessment, or SPA. Pursuant to this assessment process, the FDA has agreed that our study designfor two identical trials, including subject numbers, clinical endpoints, and statistical analyses, is adequate to provide thenecessary data that, depending on the outcome, could form the basis of an efficacy claim for a marketing application. Thepivotal Phase III trials will evaluate the efficacy and safety of Isolagen Therapy against placebo in approximately 400 subjectstotal with approximately 200 subjects enrolled in each trial. We completed enrollment of the study and commenced injection ofsubjects in early 2007. As we have previously disclosed, we encountered certain delays related to manufacturing andscheduling in connection with the study. We conferred with the FDA regarding these issues, and based on our findings and ourdialogue with the FDA, we submitted an amendment to our study protocol and chemistry, manufacturing and control(CMC) submission. In June 2007, we received approval of the amendment and the related Informed Consent Forms from theInvestigational Review Board. In July 2007, the FDA notified us that our proposed changes to the protocol were acceptable andwithin the scope of the original SPA review. We completed injections related to this study during January 2008 and arecurrently in the six-month efficacy follow-up period. 3Table of ContentsRefer to Part I, Item 1A of this Form 10-K for a discussion of our risk factors, including “Higher than anticipated dropoutrates of subjects in our clinical trials could adversely affect trial results and make it more difficult to obtain regulatoryapproval.”In March 2004, we announced positive results of a first Phase III exploratory clinical trial for our lead product candidate,and in July 2004 we commenced a 200 subject Phase III study of Isolagen Therapy for facial wrinkles consisting of twoidentical, simultaneous trials. The study was concluded during the second half of 2005. In August 2005 we announced thatresults of this study failed to meet co-primary endpoints. Based on the results of this study, we commenced preparations for oursecond Phase III pivotal study discussed in the preceding paragraph.Full Face Rejuvenation — Phase II Trial: In March 2007 we commenced an open label (unblinded) trial of approximately50 subjects. Injections of Isolagen Therapy began to be administered in July 2007. This trial is designed to further evaluate thesafety and use of Isolagen Therapy to treat fine lines and wrinkles for the full face. Five investigators across the United States areparticipating in this trial. The subjects will receive two series of injections approximately one month apart. The subjects will befollowed for six months following each subject’s last injection. In late December 2007, all 45 remaining subjects completedinjections. This study is currently in the six-month efficacy follow-up period.Therapeutic Development ProgramsAcne Scars — Phase II/ III Trial: In November 2007, we commenced an acne scar Phase II/III study. This study is to includeapproximately 120 subjects. This placebo controlled trial is designed to evaluate the use of our Isolagen Therapy to correct orimprove the appearance of acne scars. Each subject will serve as their own control, receiving Isolagen Therapy on one side oftheir face and placebo on the other. The subjects will receive three injections two weeks apart. The follow-up and evaluationperiod will be complete four months after each subject’s last injection.We filed a pre-Investigational New Drug application, or pre-IND, for a Phase III clinical trial program in July 2007 togetherwith our protocol. In September 2007, the IND was accepted by the FDA. We held an investigator meeting in earlyNovember 2007 and commenced biopsies shortly thereafter.In connection with this acne scar program, we have developed a validated photo guide for use in the evaluators’assessment of acne study subjects. We had originally designed the acne scar clinical program as two randomized, double-blind,Phase III, placebo-controlled trials of approximately 120 subjects each. However, our evaluator assessment scale and photoguide have never been utilized in a clinical trial. In November 2007, the FDA recommended that we consider conducting aPhase II study in order to address certain study issues, including issues related to our evaluator assessment scale. As such, wemodified our clinical plans to initiate a single Phase II/III trial. This Phase II/III study, which is powered to demonstrate efficacy,will allow for a closer assessment of the evaluator assessment scale and photo guide. Upon successful completion of the PhaseII/III study, we expect to initiate a subsequent, additional Phase III trial. We believe that the two trials may have the potential toform the basis of a licensure submission to the FDA.Restrictive Burn Scars - Phase II Trial: In January 2007, we met with the FDA to discuss our clinical program for the use ofIsolagen Therapy for restrictive burn scar patients. This Phase II trial will evaluate the use of Isolagen Therapy to improve rangeof motion, function and flexibility, among other parameters, in existing restrictive burn scars in approximately 20 patients. Wefiled IND in February 2007 and are currently in the process of obtaining Investigational Review Board approval related to theinvestigative sites.Dental Study - Phase II Trial: In late 2003, we completed a Phase I clinical trial for the treatment of condition relating toperiodontal disease, specifically to treat Interdental Papillary Insufficiency. In the second quarter of 2005, we concluded thePhase II dental clinical trial with the use of Isolagen Therapy and subsequently announced that investigator and subject visualanalog scale assessments demonstrated that the Isolagen Therapy was statistically superior to placebo at four months aftertreatment. Although results of the investigator and subject assessment demonstrated that the Isolagen Therapy was statisticallysuperior to placebo, an analysis of objective linear measurements did not yield statistically significant results. 4Table of ContentsIn 2006, we commenced a Phase II open-label dental trial for the treatment of Interdental Papillary Insufficiency. Thissingle site study includes 11 subjects and the trial is expected to be completed and the data evaluated during the first half of2008. We are identifying a development strategy for this application as we do not expect to fund an additional trial related tothis application.Agera Skincare SystemsWe market and sell a skin care product line through our majority-owned subsidiary, Agera Laboratories, Inc., which weacquired in August 2006. Agera offers a complete line of skincare systems based on a wide array of proprietary formulations,trademarks and nano-peptide technology. These skincare products can be packaged to offer anti-aging, anti-pigmentary andacne treatment systems. Agera markets its products in both the United States and Europe (primarily the United Kingdom). Our Target Market OpportunitiesAesthetic Market OpportunityOur Isolagen product candidate for wrinkles/nasolabial folds and full face rejuvenation are directed primarily at theaesthetic market. Aesthetic procedures have traditionally been performed by dermatologists, plastic surgeons and othercosmetic surgeons. According to the American Society for Aesthetic Plastic Surgery, or ASAPS, the total market for non-surgicalcosmetic procedures was approximately $4.7 billion in 2007. We believe the aesthetic procedure market is driven by: • aging of the “baby boomer” population, which currently includes ages approximately 44 to 62; • increasing desire of many individuals to improve their appearance; • impact of managed care and reimbursement policies on physician economics, which has motivated physicians toestablish or expand the menu of elective, private-pay aesthetic procedures that they offer; and • broadening base of the practitioners performing cosmetic procedures beyond dermatologists and plastic surgeons tonon-traditional providers.According to the ASAPS, 11.7 million surgical and non-surgical cosmetic procedures were performed in 2007, as comparedto 11.4 million in 2006. Also according to the ASAPS, approximately 9.6 million non-surgical procedures were performed in2007 and approximately 9.5 million non-surgical procedures were performed in 2006. We believe that the concept of non-surgical cosmetic procedures involving injectable materials has become more mainstream and accepted. According to theASAPS, the following table shows the top five non-surgical cosmetic procedures performed in 2007: Procedure Number Botox injection 2,775,176 Hyaluronic acids 1,448,716 Laser hair removal 1,412,657 Microdermabrasion 829,658 Laser skin resurfacing 647,707 Procedures among the 35 to 50 year old age group made up approximately 47% of all cosmetic procedures in 2007. The 51to 64 year old age group made up 25% of all cosmetic procedures in 2007, while the 19 to 34 year old age group made up 21%of cosmetic procedures in 2007. Botox injection was the most popular treatment among the 35 to 50 year old age group.Therapeutic Market OpportunitiesIn addition to the aesthetic market, we believe there are opportunities for our Isolagen Therapy to treat certain medicalconditions such as acne scars, restrictive burn scars and tissue loss due to papillary recession. Presently, we are studyingtherapeutic applications of our technology for acne scars, restrictive burn scars and periodontal disease. We are not aware ofother autologous cell-based treatments for any of these therapeutic applications. 5Table of ContentsAcne Scars. Acne is the most common skin disorder in the United States. The term acne includes conditions ranging fromclogged pores to outbreaks of severe lesions. According to the American Academy of Dermatology and the National Institute ofHealth, nearly 80% of people aged 11 to 30 have acne outbreaks at some point, and approximately 95% of these patients willhave some degree of scarring depending on the severity and duration of the condition. Over time, as facial tone declines andfacial fat stores are depleted, the scars typically become more noticeable. Current treatments for acne scarring are dermabrasion,laser resurfacing, surgical excision, and certain temporary fillers. We believe this market represents a significant opportunity forour acne scar product candidate.Burns and Burn Scars. According to a Kalorama Information study on burns (Wound Care Volume II: Burns, KaloramaInformation, August 2005), an estimated 2.5 million Americans seek medical care each year for burns and approximately100,000 are hospitalized. Approximately 50% of patients with deep second degree, third and fourth degree burns developrestrictive scarring which are often painful, and reduce flexibility and functionality of the area affected. We believe this marketrepresents a significant opportunity for our non-surgical treatment of existing restrictive burn scars. We also believe additionalmarket opportunity exists for the use of our product candidate prior to the formation of a restrictive scar to promote healing inthe acute phase of burn wound healing.Periodontal. In the dental field, a majority of the population will experience periodontal disease at some point in theirlives; therefore a market opportunity exists for an effective therapy for treating papillary recession. Therapeutic options thatdecrease the depth of the periodontal pockets make the patient’s daily home care more effective and reduce the chance offurther gum and bone loss.Papillary recession, also known as “black triangles,” can be associated with the progression of periodontal disease, andinvolves the recession of the triangular section of gum tissue between two teeth. While the number of Americans with some formof gum disease is significant (up to 30% of the population may be genetically susceptible to gum disease—American Academyof Periodontology—perio.org), we are focused on a targeted subset of this patient population with papillary recession (blacktriangles). Currently, the loss of tissue associated with severe periodontal disease can only be treated through surgicalprocedures. These surgical procedures are expensive and painful, can potentially result in complications and have variableoutcomes.Agera Skincare Market OpportunitiesBased on the Kline & Company, Inc. study, “The U.S. Professional Skin Care Market 2003,” the 2008 U.S. professionalskin care market is estimated at $742 million. This report describes the market as comprised of the following sub-markets:Salons and spas (59%), Retail stores (22%) and Medical care (19%). The doctor dispensing market is primarily focused in theDermatology and Plastic Surgeon segments but we believe is gaining interest with a broader audience of physician specialties,including the medical spa environment.Sales and MarketingWhile our Isolagen Therapy product candidates are still in the pre-approval phase in the United States, no marketing orsales can occur within the United States. Our Agera skincare products are primarily sold directly to our established distributorsand salons, with historically very little focus on marketing efforts. We are currently attempting to identify additional third partydistributors for our Agera product line. We believe that our Agera products have the strong potential to complement ourIsolagen Therapy product candidates in the future.Intellectual PropertyWe believe that patents, trademarks, copyrights, proprietary formulations (related to our Agera skincare products) and otherproprietary rights are important to our business. We also rely on trade secrets, know-how and continuing technologicalinnovations to develop and maintain our competitive position. We seek to protect our intellectual property rights by a varietyof means, including obtaining patents, maintaining trade secrets and proprietary know-how, and technological innovation tooperate without infringing on the proprietary rights of others and to prevent others from infringing on our proprietary rights. Ourpolicy is to seek to protect our proprietary position by, among other methods, actively seeking patent protection in the UnitedStates and certain foreign countries. 6Table of ContentsAs of December 31, 2007, we had 8 issued U.S. patents, 6 pending U.S. patent applications, 32 granted foreign patents and19 pending foreign patent applications. Our issued patents and patent applications primarily cover the method of usingautologous cell fibroblasts for the repair of skin and soft tissue defects and the use of autologous fibroblast cells for tissueregeneration. We are in the process of pursuing several other patent applications.In January 2003, we acquired two pending U.S. patent applications. As consideration, we issued 100,000 shares of ourcommon stock and agreed to pay a royalty on revenue from commercial applications and licensing, up to a maximum of$2.0 million.In August 2006, we acquired 57% of the common stock of Agera Laboratories. Agera has a number of trade names,trademarks, exclusive proprietary rights to product formulations and specified peptides that are used in the Agera skincareproducts.Our success depends in part on our ability to maintain our proprietary position through effective patent claims and theirenforcement against our competitors, and through the protection of our trade secrets. Although we believe our patents andpatent applications provide a competitive advantage, the patent positions of companies like ours are generally uncertain andinvolve complex legal and factual questions. We do not know whether any of our patent applications or those patentapplications which we have acquired will result in the issuance of any patents. Our issued patents, those that may be issued inthe future or those acquired by us, may be challenged, invalidated or circumvented, and the rights granted under any issuedpatent may not provide us with proprietary protection or competitive advantages against competitors with similar technology.In particular, we do not know if competitors will be able to design variations on our treatment methods to circumvent ourcurrent and anticipated patent claims. Furthermore, competitors may independently develop similar technologies or duplicateany technology developed by us. Because of the extensive time required for the development, testing and regulatory review of apotential product, it is possible that, before any of our products can be commercialized or marketed, any related patent claimmay expire or remain in force for only a short period following commercialization, thereby reducing the advantage of thepatent.We also rely upon trade secrets, confidentiality agreements, proprietary know-how and continuing technologicalinnovation to remain competitive, especially where we do not believe patent protection is appropriate or obtainable. Wecontinue to seek ways to protect our proprietary technology and trade secrets, including entering into confidentiality or licenseagreements with our employees and consultants, and controlling access to and distribution of our technologies and otherproprietary information. While we use these and other reasonable security measures to protect our trade secrets, our employeesor consultants may unintentionally or willfully disclose our proprietary information to competitors.Our commercial success will depend in part on our ability to operate without infringing upon the patents and proprietaryrights of third parties. It is uncertain whether the issuance of any third party patents would require us to alter our products ortechnology, obtain licenses or cease certain activities. Our failure to obtain a license to technology that we may require todiscover, develop or commercialize our future products may have a material adverse impact on us. One or more third-partypatents or patent applications may conflict with patent applications to which we have rights. Any such conflict maysubstantially reduce the coverage of any rights that may issue from the patent applications to which we have rights. If thirdparties prepare and file patent applications in the United States that also claim technology to which we have rights, we mayhave to participate in interference proceedings in the United States Patent and Trademark Office to determine priority ofinvention.We have collaborated and may collaborate in the future with other entities on research, development andcommercialization activities. Disputes may arise about inventorship and corresponding rights in know-how and inventionsresulting from the joint creation or use of intellectual property by us and our subsidiaries, collaborators, partners, licensors andconsultants. As a result, we may not be able to maintain our proprietary position.CompetitionThe pharmaceutical and dermal aesthetics industries are characterized by intense competition, rapid product developmentand technological change. Competition is intense among manufacturers of prescription pharmaceuticals and dermal injectionproducts, such as for our core products. 7Table of ContentsIf certain of our product candidates are approved, we will compete with a variety of companies in the dermatology andplastic surgery markets, many of which offer substantially different treatments for similar problems. These include siliconeinjections, laser procedures, facial surgical procedures, such as facelifts and eyelid surgeries, fat injections, dermabrasion,collagen and hyaluronic acid injections and Botulinum toxin injections, and other dermal fillers. Indirect competition comesfrom facial care treatment products. Items catering to the growing demand for therapeutic skin care products include facialscrubs, anti-aging treatments, tonics, astringents and skin-restoration formulas.Many of our competitors are large, well-established pharmaceutical, chemical, cosmetic or health care companies withconsiderably greater financial, marketing, sales and technical resources than those available to us. Additionally, many of ourpresent and potential competitors have research and development capabilities that may allow them to develop new or improvedproducts that may compete with our product lines. Our products could be rendered obsolete or made uneconomical by thedevelopment of new products to treat the conditions addressed by our products, technological advances affecting the cost ofproduction, or marketing or pricing actions by one or more of our competitors. Our facial aesthetics product may compete for ashare of the existing market with numerous products and/or technologies that have become relatively accepted treatmentsrecommended or prescribed by dermatologists and administered by plastic surgeons and aesthetic dermatologists.There are several dermal filler products under development and/or in the FDA pipeline for approval which claim to offercertain facial aesthetic benefits. Depending on the clinical outcomes of the Isolagen Therapy trials in aesthetics, the success orfailure of gaining approval and the label granted by the FDA if and when the therapy is approved, the competition for theIsolagen Therapy may prove to be direct competition to certain dermal fillers, laser technologies or new technologies. However,if we gain approval, we believe our Isolagen Therapy would be a “first to market” autologous cellular technology that couldcomplement other modalities of treatment and represent a significant additional market opportunity.The field for therapeutic treatments or tissue regeneration for use in wound healing is rapidly evolving. A number ofcompanies are either developing or selling therapies involving stem cells, human-based, animal-based or synthetic tissueproducts. If approved as a therapy for acne scars, restrictive burn scars or periodontal disease, our product candidates wouldcompete with synthetic, human or animal derived cell or tissue products marketed by companies like Genzyme, Integra LifeSciences, Johnson & Johnson, C.R. Bard, LifeCell, Organogenesis, and others.The market for skincare products is quite competitive with low barriers to entry. We believe Agera’s dominant competitorsin this market include companies like Obagi Medical Products, Inc., Skin Medica, Murad, Inc., Dermalogica, Pevonia Botanicaand others.Government RegulationOur Isolagen Therapy technologies are subject to extensive government regulation, principally by the FDA and state andlocal authorities in the United States and by comparable agencies in foreign countries. Governmental authorities in the UnitedStates extensively regulate the pre-clinical and clinical testing, safety, efficacy, research, development, manufacturing, labeling,storage, record-keeping, advertising, promotion, import, export, marketing and distribution, among other things, ofpharmaceutical products under various federal laws including the Federal Food, Drug and Cosmetic Act, or FFDCA, and undercomparable laws by the states and in most foreign countries.Domestic RegulationIn the United States, the FDA, under the FFDCA, the Public Health Service Act and other federal statutes and regulations,subjects pharmaceutical and biologic products to rigorous review. If we do not comply with applicable requirements, we may befined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products orproduct candidates, and we may be criminally prosecuted. The FDA also has the authority to discontinue or suspendmanufacture or distribution, require a product withdrawal or recall or revoke previously granted marketing authorizations if wefail to comply with regulatory standards or if we encounter problems following initial marketing. 8Table of ContentsFDA Approval ProcessTo obtain approval of a new product from the FDA, we must, among other requirements, submit data demonstrating theproduct’s safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. Inmost cases, this entails extensive laboratory tests and pre-clinical and clinical trials. This testing and the preparation ofnecessary applications and processing of those applications by the FDA are expensive and typically take many years tocomplete. The FDA may deny our applications or may not act quickly or favorably in reviewing these applications, and we mayencounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketingany products we may develop. The FDA also may require post-marketing testing and surveillance to monitor the effects ofapproved products or place conditions on any approvals that could restrict the commercial applications of these products.Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards or if we encounterproblems following initial marketing. With respect to patented products or technologies, delays imposed by the governmentalapproval process may materially reduce the period during which we will have the exclusive right to exploit the products ortechnologies.The FDA does not apply a single regulatory scheme to human tissues and the products derived from human tissue. On acase-by-case basis, the FDA may choose to regulate such products as transplanted human tissue, medical devices or biologics. Afundamental difference in the treatment of products under these classifications is that the FDA generally permits human tissuefor transplantation to be commercially distributed without marketing approval. In contrast, products that require manufacturingor processing are regulated as medical devices or biologics and require FDA approval.The process required by the FDA before a new drug or biologic may be marketed in the United States generally involvesthe following: • completion of pre-clinical laboratory tests or trials and formulation studies; • submission to the FDA of an IND for a new drug or biologic, which must become effective before human clinical trialsmay begin; • performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposeddrug or biologic for its intended use; • detailed information on product characterization and manufacturing process; and • submission and approval of a New Drug Application, or NDA, for a drug, or a Biologics License Application, or BLA,for a biologic.Pre-clinical tests include laboratory evaluation of product chemistry formulation and stability, as well as animal and otherstudies to evaluate toxicity. In view of the autologous nature of our product candidates and our prior clinical experience withour product candidates, we concluded that it was reasonably safe to initiate clinical trials without pre-clinical studies and thatthe clinical trials would be adequate to further assess both the safety and efficacy of our product candidates. The results of pre-clinical testing, together with manufacturing information and analytical data, are submitted to the FDA as part of an INDapplication. The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin,in order to ensure that human research subjects will not be exposed to unreasonable health risks. At any time during this 30-dayperiod or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, or may authorize trials only on specifiedterms. The IND application process may become extremely costly and substantially delay development of our products.Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in clinical trials. 9Table of ContentsThe sponsor typically conducts human clinical trials in three sequential phases, which may overlap. These phasesgenerally include the following: • Phase I: The product is usually first introduced into healthy humans or, on occasion, into patients, and is tested forsafety, dosage tolerance, absorption, distribution, excretion and metabolism. • Phase II: The product is introduced into a limited subject population to: • assess its efficacy in specific, targeted indications; • assess dosage tolerance and optimal dosage; and • identify possible adverse effects and safety risks. • Phase III: These are commonly referred to as pivotal studies. If a product is found to have an acceptable safety profileand to be potentially effective in Phase II clinical trials, new clinical trials will be initiated to further demonstrateclinical efficacy, optimal dosage and safety within an expanded and diverse subject population at geographically-dispersed clinical study sites. • If the FDA does ultimately approve the product, it may require post-marketing testing, including potentiallyexpensive Phase IV studies, to confirm or further evaluate its safety and effectiveness.Before proceeding with a study, sponsors may seek a written agreement from the FDA regarding the design, size, andconduct of a clinical trial. This is known as a Special Protocol Assessment, or SPA. Among other things, SPAs can cover clinicalstudies for pivotal trials whose data will form the primary basis to establish a product’s efficacy. Where the FDA agrees to anSPA, the agreement may not be changed by either the sponsor or the FDA except if the sponsor and the FDA agree to a change,or a senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of theproduct was identified after the testing began. SPAs thus help establish up-front agreement with the FDA about the adequacy ofa clinical trial design to support a regulatory approval, but the agreement is not binding if new circumstances arise. There is noguarantee that a study will ultimately be adequate to support an approval even if the study is subject to an SPA.Clinical trials must meet requirements for Institutional Review Board, or IRB, oversight, patient informed consent and theFDA’s Good Clinical Practices. Prior to commencement of each clinical trial, the sponsor must submit to the FDA a clinicalplan, or protocol, accompanied by the approval of the committee responsible for overseeing clinical trials at the clinical trialsites. The FDA or the IRB at each institution at which a clinical trial is being performed may order the temporary or permanentdiscontinuation of a clinical trial at any time if it believes that the clinical trial is not being conducted in accordance with FDArequirements or presents an unacceptable risk to the clinical trial subjects. Data safety monitoring committees, who monitorcertain studies to protect the welfare of study subjects, may also require that a clinical study be discontinued or modified.The sponsor must submit to the FDA the results of the pre-clinical and clinical trials, together with, among other things,detailed information on the manufacturing and composition of the product, and proposed labeling, in the form of an NDA, or, inthe case of a biologic, a BLA. The applicant must also submit with the NDA or BLA a substantial user fee payment, unless awaiver or reduction applies. For fiscal year 2008 this fee is $1,178,000. The FDA has advised us it is regulating our IsolagenTherapy as a biologic. Therefore, we expect to submit BLAs to obtain approval of our product candidates. Each NDA or BLAsubmitted for FDA approval is usually reviewed for administrative completeness and reviewability within 45 to 60 daysfollowing submission of the application. If deemed complete, the FDA will “file” the NDA or BLA, thereby triggeringsubstantive review of the application. The FDA can refuse to file any NDA or BLA that it deems incomplete or not properlyreviewable. Once the submission has been accepted for filing, the FDA will review the application and respond to the applicantin accordance with performance goals the FDA has established for the review of NDAs and BLAs — six months for priorityapplications and 10 months for regular applications. The review process is often significantly extended by FDA requests foradditional information or clarification, or changes to the application submitted by the applicant in the form of amendments. TheFDA may refer the BLA to an advisory committee for review, evaluation and recommendation as to whether the applicationshould be approved, but the FDA is not bound by the recommendation of an advisory committee. 10Table of ContentsIt is possible that our product candidates will not successfully proceed through this approval process or that the FDA willnot approve them in any specific period of time, or at all. The FDA may deny or delay approval of applications that do not meetapplicable regulatory criteria, or if the FDA determines that the clinical data do not adequately establish the safety and efficacyof the product. Satisfaction of FDA pre-market approval requirements for a new biologic is a process that may take several yearsand the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. TheFDA reviews these applications and, when and if it decides that adequate data are available to show that the product is both safeand effective and that other applicable requirements have been met, approves the drug or biologic for marketing. Governmentregulation may delay or prevent marketing of potential products for a considerable period of time and impose costly proceduresupon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained fromclinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or preventregulatory approval. Upon approval, a product candidate may be marketed only for those indications approved in the BLA orNDA and may be subject to labeling and promotional requirements or limitations, including warnings, precautions,contraindications and use limitations, which could materially impact profitability. Once approved, the FDA may withdraw theproduct approval if compliance with pre- and post-market regulatory standards is not maintained or if safety, efficacy or otherproblems occur after the product reaches the marketplace.The FDA may, during its review of an NDA or BLA, ask for additional test data. If the FDA does ultimately approve theproduct, it may require post-marketing testing, including potentially expensive Phase IV studies, to confirm or otherwise furtherevaluate the safety and effectiveness of the product. In addition, the FDA may, in some circumstances, impose restrictions on theuse of the product, which may be difficult and expensive to administer and may require prior approval of promotional materials.Following approval, FDA may require labeling changes or impose new post-approval study, risk management, or distributionrestriction requirements.Ongoing FDA RequirementsBefore approving an NDA or BLA, the FDA often will inspect the facilities at which the product is manufactured and willnot approve the product unless the manufacturing facilities are in compliance with the FDA’s current Good ManufacturingPractices, or cGMP, requirements which govern the manufacture, holding and distribution of a product. Manufacturers ofbiologics also must comply with the FDA’s general biological product standards. Following approval, the FDA periodicallyinspects drug and biologic manufacturing facilities to ensure continued compliance with the cGMP requirements.Manufacturers must continue to expend time, money and effort in the areas of production, quality control, record keeping andreporting to ensure compliance with those requirements. Failure to comply with these requirements subjects the manufacturer topossible legal or regulatory action, such as suspension of manufacturing, seizure of product, voluntary recall of product,withdrawal of marketing approval or civil or criminal penalties. Adverse experiences with the product must be reported to theFDA and could result in the imposition of marketing restrictions through labeling changes or market removal. Productapprovals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety orefficacy of the product occur following approval.The labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be in compliancewith FDA and FTC requirements which include, among others, standards and regulations for direct-to-consumer advertising,industry-sponsored scientific and educational activities, and promotional activities involving the internet. In general, allproduct promotion must be consistent with the FDA approval for such product, contain a balanced presentation of informationon the products uses and benefits and important safety information and limitations on use, and otherwise not be false ormisleading. The FDA and FTC have very broad enforcement authority, and failure to abide by these regulations can result inpenalties, including the issuance of a Warning Letter directing a company to correct deviations from regulatory standards andenforcement actions that can include seizures, injunctions and criminal prosecution.Manufacturers are also subject to various laws and regulations governing laboratory practices, the experimental use ofanimals and the use and disposal of hazardous or potentially hazardous substances in connection with their research. In each ofthe above areas, the FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties,suspend or delay issuance of approvals, seize or recall products and deny or withdraw approvals. 11Table of ContentsHIPAA RequirementsOther federal legislation may affect our ability to obtain certain health information in conjunction with our researchactivities. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, mandates, among other things, theadoption of standards designed to safeguard the privacy and security of individually identifiable health information. In relevantpart, the U.S. Department of Health and Human Services, or HHS, has released two rules to date mandating the use of newstandards with respect to such health information. The first rule imposes new standards relating to the privacy of individuallyidentifiable health information. These standards restrict the manner and circumstances under which covered entities may useand disclose protected health information so as to protect the privacy of that information. The second rule released by HHSestablishes minimum standards for the security of electronic health information. While we do not believe we are directlyregulated as a covered entity under HIPAA, the HIPAA standards impose requirements on covered entities conducting researchactivities regarding the use and disclosure of individually identifiable health information collected in the course of conductingthe research. As a result, unless they meet these HIPAA requirements, covered entities conducting clinical trials for us may notbe able to share with us any results from clinical trials that include such health information.Other U.S. Regulatory RequirementsIn the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products arepotentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers forMedicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the U.S. Department ofHealth and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individual U.S. Attorneyoffices within the Department of Justice, and state and local governments. For example, sales, marketing andscientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the FalseClaims Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebaterequirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. Ifproducts are made available to authorized users of the Federal Supply Schedule of the General Services Administration,additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumerprotection, unfair competition, and other laws.International RegulationThe regulation of our product candidates outside of the United States varies by country. Certain countries regulate humantissue products as a pharmaceutical product, which would require us to make extensive filings and obtain regulatory approvalsbefore selling our product candidates. Certain other countries classify our product candidates as human tissue fortransplantation but may restrict its import or sale. Other countries have no application regulations regarding the import or saleof products similar to our product candidates, creating uncertainty as to what standards we may be required to meet.ManufacturingWe currently have one operational manufacturing facility located in Exton, Pennsylvania. As part of our continuing effortsto evaluate the best uses of our resources, in the fourth quarter of 2006, the Board of Directors approved the proposed closing ofour UK operation. We completed the closure of our London manufacturing facility on March 31, 2007. We previously used ourLondon facility for the commercialization of our process (for which we earned revenue from the sale of Isolagen Therapy in theUnited Kingdom and other non-US markets) and as a means to improve our manufacturing process.The costs incurred in operating our Exton facility (except for costs related to general corporate administration) arecurrently classified as research and development expenses. All component parts used in our Exton, Pennsylvania manufacturingprocess are readily available with short lead times, and all machinery is maintained and calibrated. We believe we have madeimprovements in our manufacturing processes, and we expect to continue such efforts in the future.Our Agera products are manufactured by a third-party contract manufacturer under a contract manufacturing agreement.The agreement is effective through July 2014. 12Table of ContentsResearch and DevelopmentIn addition to our clinical development activities, our research and development activities include improving ourmanufacturing processes and reducing manufacturing costs. Fibroblasts are a general support cell for the tissue and, in additionto their direct production of collagen and elastin, produce endocrine factors, which we believe may assist in the growth or repairof surrounding tissues, such as the epidermis. We believe this effect is responsible for some of the positive results thatphysicians have observed when treating patients with severe scarring. We expense research and development costs as they areincurred. For the years ended December 31, 2007, 2006 and 2005, we incurred research and development expenses of$13.3 million, $8.8 million and $10.6 million, respectively.EmployeesAs of March 1, 2008, we employed 42 people on a full-time basis, all located in the United States, and one employee, ourChief Executive Officer, who is based in Ireland and works in both Ireland and the United States. We anticipate hiringadditional employees in the areas of executive management, sales and marketing, quality assurance, manufacturing and researchand development as the need arises. We also employ 2 part-time Agera employees. None of our employees are covered by acollective bargaining agreement, and we consider our relationship with our employees to be good. We also employ consultantsand temporary labor on an as needed basis to supplement existing staff.Segment InformationFinancial information concerning the Company’s business segments and geographic areas of operation is included in Note15 in the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.Discontinued OperationsAs part of our continuing efforts to evaluate the best uses of our resources, in the fourth quarter of 2006 our Board ofDirectors approved the closing of our United Kingdom operation. On March 31, 2007, we completed the closure of the UnitedKingdom manufacturing facility. As a result of the completion of the closure of the United Kingdom manufacturing facility, asof March 31, 2007 our United Kingdom operation was classified as a discontinued operation. In addition, as a result of theclosure of our United Kingdom operation, the operations that we previously conducted in Switzerland and Australia, which hadbeen absorbed into the United Kingdom operation, were also classified as discontinued operations as of March 31, 2007.Accordingly, the historical results of the United Kingdom, Switzerland and Australia have been retrospectively adjusted herein,for all period presented, to reflect the treatment of these operations as discontinued operations.Corporate HistoryOn August 10, 2001, our company, then known as American Financial Holding, Inc., acquired Isolagen Technologiesthrough the merger of our wholly-owned subsidiary, Isolagen Acquisition Corp., and an affiliated entity, Gemini IX, Inc., withand into Isolagen Technologies. As a result of the merger, Isolagen Technologies became our wholly owned subsidiary. OnNovember 13, 2001, we changed our name to Isolagen, Inc.Item 1A. Risk FactorsPotential and current investors should carefully consider the following risk factors prior to making any investmentdecisions regarding our securities.We could fail to remain a going concern. We will need to raise substantial additional capital to fund our operationsthrough the near term and through commercialization of our product candidates, and we do not have any commitments forthat capital.There exists substantial doubt regarding our ability to continue as a going concern. As discussed in Note 2 to theConsolidated Financial Statements-Going Concern, as of December 31, 2007 we had cash, cash equivalents and restricted cashof $17.0 million and working capital of $13.8 million (including our cash, cash equivalents and restricted cash). We believe ourexisting capital resources are adequate to finance our operations through September 1, 2008. We are focused on theadvancement of our clinical trials, research and development, are incurring losses from operations, have limited capitalresources, and do not have access to a line of credit or other debt facility. 13Table of ContentsWe will need additional capital to achieve commercialization of our product candidates and to execute our businessstrategy, and if we are unsuccessful in raising additional capital we will be unable to achieve commercialization of our productcandidates or unable to fully execute our business strategy on a timely basis, if at all. If we raise additional capital through theissuance of debt securities, the debt securities may be secured and any interest payments would reduce the amount of cashavailable to operate and grow our business. If we raise additional capital through the issuance of equity securities, suchissuances will likely cause dilution to our stockholders, particularly if we are required to do so during periods when ourcommon stock is trading at historically low price levels.Additionally, we do not know whether any financing, if obtained, will be adequate to meet our capital needs and tosupport our growth. If adequate capital cannot be obtained on satisfactory terms, we may terminate or delay our efforts related toregulatory approval of one or more of our product candidates, curtail or delay the implementation of manufacturing processimprovements or delay the expansion of our sales and marketing capabilities, any of which could cause our business may fail.Further, if we do not obtain additional funding prior to or during the third quarter of 2008, we may enter into bankruptcy during2008 and possibly cease operations thereafter.Our independent registered public accounting firm has modified their report for our fiscal year ended December 31, 2007with respect to our ability to continue as a going concern. Our consolidated financial statements have been prepared on thebasis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course ofbusiness. If we became unable to continue as a going concern, we would have to liquidate our assets and we might receivesignificantly less than the values at which they are carried on our consolidated financial statements. The inclusion of a goingconcern modification in our independent registered public accounting firm’s audit opinion for the year ended December 31,2007 may materially and adversely affect our stock price and our ability to raise new capital.Clinical trials may fail to demonstrate the safety or efficacy of our product candidates, which could prevent or significantlydelay regulatory approval and prevent us from raising additional financing.Prior to receiving approval to commercialize any of our product candidates, we must demonstrate with substantialevidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities in the UnitedStates and abroad, that our product candidates are both safe and effective. We will need to demonstrate our product candidates’efficacy and monitor their safety throughout the process. We are conducting a pivotal Phase III clinical trial related to our leadfacial aesthetic product candidate. The success of prior pre-clinical or clinical trials does not ensure the success of these trials,which are being conducted in populations with different racial and ethnic demographics than our previous trials. If our currenttrials or any future clinical trials are unsuccessful, our business and reputation would be harmed and the price at which our stocktrades could be adversely affected. In addition, if our Phase III clinical trial related to our lead facial aesthetic product candidateis unsuccessful, we may be unable to raise additional equity or debt financing that we may require to continue to our operations.All of our product candidates are subject to the risks of failure inherent in the development of biotherapeutic products. Theresults of early-stage clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials.Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despite havingsuccessfully progressed through initial clinical testing. Even if we believe the data collected from clinical trials of our productcandidates is promising, this data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatoryapproval. Pre-clinical and clinical data can be interpreted in different ways. Accordingly, FDA officials could reach differentconclusions in assessing such data than we do, which could delay, limit or prevent regulatory approval. In addition, the FDA,other regulatory authorities, our Institutional Review Boards or we, may suspend or terminate clinical trials at any time. 14Table of ContentsUnlike our Phase III Nasolabial/Wrinkle trial, our Phase II/III Acne Scar trial is not subject to a Special Protocol Assessment(“SPA”) with the FDA. Isolagen has a photo guide for use in the evaluators’ assessment of acne study subjects. Our evaluatorassessment scale and photo guide have not yet been used in a clinical trial.Any failure or delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the saleof any product candidates, has the potential to materially harm our business, and may prevent us from raising necessary,additional financing that we may need in the future.Higher than anticipated dropout rates of subjects in our clinical trials could adversely affect trial results and make it moredifficult to obtain regulatory approval.Enrollment of 421 patients in our Phase III nasolabial/wrinkle trials was completed in February 2007. Our Phase III clinicaltrials include three separate treatment sessions for each subject followed by a 26 week efficacy observation period. Patientdropouts are expected and can occur for a variety of reasons. A subject who drops out of the trial prior to the 26 week post-treatment observation would, under the current protocol, be considered a “failure to respond” in the results of the clinical trial.As fewer patients complete a trial, a higher positive response rate to the therapy must be obtained for the group of remainingtreated subjects in order to demonstrate statistically significant benefit compared to placebo. Our Phase III nasolabial/wrinkletrial consists of two studies, 006 and 005. Our 006 study enrolled 218 subjects and, as of March 3, 2008, has 191 remaining. Our005 study enrolled 203 subjects and, as of March 3, 2008, has 168 remaining.In October 2007, we submitted a protocol amendment to the FDA which, among other things, attempted to amend ourSpecial Protocol Assessment to redefine the intent-to-treat population to exclude subjects for whom adequate cell yields couldnot be obtained for treatment. In December 2007, the FDA declined the Company’s protocol amendment, and as such thesubject numbers remain as stated above. We continue to focus our efforts to prevent additional dropouts in both trials.Higher than anticipated dropout rates may result in additional time, expense and uncertainty which may also affect ourability to obtain FDA clearance of our product and which could ultimately adversely affect our profitability and financialposition.Obtaining FDA and other regulatory approvals is complex, time consuming and expensive, and the outcomes areuncertain.The process of obtaining FDA and other regulatory approvals is time consuming, expensive and difficult. Clinical trials arerequired and the marketing and manufacturing of our product candidates are subject to rigorous testing procedures. We havefinished injections related to our pivotal Phase III clinical trial for our lead facial product candidate. Our other productcandidates will require additional clinical trials. The commencement and completion of clinical trials for any of our productcandidates could be delayed or prevented by a variety of factors, including: • delays in obtaining regulatory approvals to commence a study; • delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites; • delays in the enrollment of subjects; • manufacturing difficulties; • lack of efficacy during clinical trials; or • unforeseen safety issues. 15Table of ContentsWe do not know whether our clinical trials will need to be restructured or will be completed on schedule, if at all, orwhether they will provide data necessary to support necessary regulatory approval. Significant delays in clinical trials willimpede our ability to commercialize our product candidates and generate revenue, and could significantly increase ourdevelopment costs.We utilize bovine-sourced materials to manufacture our Isolagen Therapy. Future FDA regulations, as well as currentlyproposed regulations, may require us to change the source of the bovine-sourced materials we use in our products or to ceaseusing bovine-sourced materials. If we are required to use alternative materials in our products, and in the event that suchalternative materials are available to us, or if we choose to change the materials used in our products in the future, we wouldneed to validate the new manufacturing process and run comparability trials with the reformulated product, which could delayour submission for regulatory approval.Even if marketing approval from the FDA is received for one or more of our product candidates, the FDA may impose post-marketing requirements, such as: • labeling and advertising requirements, restrictions or limitations, including the inclusion of warnings, precautions,contra-indications or use limitations that could have a material impact on the future profitability of our productcandidates; • testing and surveillance to further evaluate or monitor our future products and their continued compliance withregulatory standards and requirements; • submitting products for inspection; • suspending manufacturing; or • withdrawing marketing clearance.We may issue additional equity securities and thereby materially and adversely affect the price of our common stock.Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales mayoccur, could cause the market price of our common stock to decline. We have used and it is likely that we will continue to useour common stock or securities convertible into or exchangeable for our common stock to fund our working capital needs or toacquire technology, product rights or businesses, or for other purposes. If we issue additional equity securities, particularlyduring times when our common stock is trading at relatively low price levels, the price of our common stock may be materiallyand adversely affected.We have yet to be profitable, losses may continue to increase from current levels and we will continue to experiencesignificant negative cash flow as we expand our operations, which may limit or delay our ability to become profitable.We have incurred losses since our inception, have never generated significant revenue from commercial sales of ourproducts, and have never been profitable. We are focused on product development, and we have expended significant resourceson our clinical trials, personnel and research and development. We expect these costs to continue to rise in the future. Inaddition, we have incurred, and will continue to incur, marketing and brand development costs for Agera, and will continue toincur such costs in the future. Our consolidated net losses for the years ended 2007, 2006 and 2005 were $35.6 million,$35.8 million and $35.8 million, respectively. As of December 31, 2007, we had an accumulated development stage net lossattributable to common shareholders of $162.6 million. We expect to continue to experience increasing operating losses andnegative cash flow as we expand our operations.We expect to continue to incur significant additional costs and expenses related to: • FDA clinical trials and regulatory approvals; • expansion of laboratory and manufacturing operations; 16Table of Contents • research and development; • brand development; • personnel costs; • development of relationships with strategic business partners, including physicians who might use our futureproducts; • interest expense and amortization of issuance costs related to our outstanding note payables; and • legal defense costs related to our class action and derivative action matters and any threatened actions.If our product candidates fail in clinical trials or do not gain regulatory approval, if our product candidates do not achievemarket acceptance, or if we do not succeed in effectively and efficiently implementing manufacturing process and technologyimprovements to make our product commercially viable, we will not be profitable. If we fail to become and remain profitable, orif we are unable to fund our continuing losses, our business may fail.We will continue to experience operating losses and significant negative cash flow until we begin to generate significantrevenue from (a) the sale of our product candidates, which is dependent on the receipt of FDA approval for our productcandidates and is dependent on our ability to successfully market and sell such product candidates, and (b) our Agera productline, which is dependent on achieving significant market penetration in its approved markets.We may be unable to successfully commercialize any of our product candidates currently under development.Before we can commercialize any of our product candidates in the United States, we will need to: • conduct substantial additional research and development; • successfully complete lengthy and expensive pre-clinical and clinical testing, including the Phase III clinical trial forour lead facial aesthetic product candidate; • successfully improve our manufacturing process; and • obtain FDA approvals.Even if our product development efforts are successful, we cannot assure you that we will be able to commercialize any ofour product candidates currently under development. In that event, we will be unable to generate significant revenue, and ourbusiness will fail.We have not generated significant revenue from commercial sales of our products to date, and we do not know whether wewill ever generate significant revenue.We are focused on product development and have not generated significant revenue from commercial sales of our productsto date. Prior to the fourth quarter of 2006 we offered the Isolagen Therapy for sale in the United Kingdom. Our United Kingdomoperation had been operating on a negative gross margin as we investigated means to improve manufacturing technologies forthe Isolagen Process. During the fourth quarter of 2006 we determined to cease offering our Isolagen Therapy in the UnitedKingdom, as part of our continuing efforts to evaluate the best uses of our resources. Our revenue for the years endedDecember 31, 2007, 2006 and 2005 was $1.4 million and $0.4 million and $0, respectively. 17Table of ContentsWe do not currently offer any products for sale that are based upon our Isolagen Therapy, and we cannot guarantee that wewill ever market any such products. We must demonstrate that our product candidates satisfy rigorous standards of safety andefficacy before the FDA and other regulatory authorities in the United States and abroad will approve the product candidates forcommercial marketing. We will need to conduct significant additional research, pre-clinical testing and clinical testing beforewe can file applications with the FDA for approval of our product candidates. We must also develop, validate and obtain FDAapproval of any improved manufacturing process. In addition, to compete effectively our future products must be easy to use,cost-effective and economical to manufacture on a commercial scale. We may not achieve any of these objectives, and we maynever generate revenue from our product candidates.Our ability to effectively commercialize our product candidates depends on our ability to improve our manufacturingprocess and validate such future improvements.As part of the approval process, we must pass a pre-approval inspection of our manufacturing facility before we can obtainmarketing approval for our product candidates. We have never gone through a FDA pre-approval regulatory inspection of ourmanufacturing facility and we cannot guarantee that we will satisfy the requirements for approval. All of our manufacturingmethods, equipment and processes must comply with the FDA’s current Good Manufacturing Practices, or cGMP, requirements.We will also need to perform extensive audits of our suppliers, vendors and contract laboratories. The cGMP requirementsgovern all areas of recordkeeping, production processes and controls, personnel and quality control. To ensure that we meetthese requirements, we will expend significant time, money and effort. Due to the unique nature of our Isolagen Therapy, wecannot predict the likelihood that the FDA will approve our facility as compliant with cGMP requirements even if we believethat we have taken the steps necessary to achieve compliance.The FDA, in its regulatory discretion, may require us to undergo additional clinical trials with respect to any new orimproved manufacturing process we develop or utilize, in the future, if any. This could include a requirement to change thematerials used in our manufacturing process. These improvements or modifications could delay or prevent approval of ourproduct candidates. If we fail to comply with cGMP requirements, pass an FDA pre-approval inspection or obtain FDA approvalof our manufacturing process, we would not receive FDA approval and would be subject to possible regulatory action. Thefailure to successfully implement our manufacturing process may delay or prevent our future profitability.Even if we obtain FDA approval in the future and satisfy the FDA with regard to a validated manufacturing process, we stillmay be unable to commercially manufacture the Isolagen Therapy profitably. Our manufacturing cost has been subject tofluctuation, depending, in part, on the yields obtained from our manufacturing process. There is no guarantee that futuremanufacturing improvements will result in a manufacturing cost low enough to effectively compete in the market. Further, wecurrently manufacture the Isolagen Therapy on a limited basis (for research and development and for trial purposes only) and wehave not manufactured commercial levels of the Isolagen Therapy in the United States. Such commercial manufacturingvolumes, in the future, could lead to unexpected inefficiencies and result in unprofitable performance results.We may not be successful in our efforts to develop commercial-scale manufacturing technology and methods.In order to successfully commercialize any approved product candidates, we will be required to produce such products on acommercial scale and in a cost-effective manner. As stated in the preceding risk factor, we intend to seek FDA approval of ourmanufacturing process as a component of the BLA application and approval process. However, we can provide no assurancethat we will be able to cost-effectively and commercially scale our operations using our current manufacturing process. If we areunable to develop suitable techniques to produce and manufacture our product candidates, our business prospects will suffer.We depend on a third-party manufacturer for our Agera product line, the loss or unavailability of which would require usto find a substitute manufacturer, if available, resulting in delays in production and additional expenses.Our Agera skin care product line is manufactured by a third party. We are dependent on this third party to manufactureAgera’s products, and the manufacturer is responsible for supplying the formula ingredients for the Agera product lines. If forany reason the manufacturer discontinues production of Agera’s products at a time when we have a low volume of inventory onhand or are experiencing a high demand for the products, significant delays in production of the products and interruption ofproduct sales may result as we seek to establish a relationship and commence production with a new manufacturer, which wouldnegatively impact our results of operation. 18Table of ContentsIf our Isolagen Therapy is found to be unsafe or ineffective, or if our Isolagen Therapy is perceived to be unsafe orineffective, our business would be materially harmed.Our product candidates utilize our Isolagen Therapy. In addition, we expect to utilize our Isolagen Therapy in thedevelopment of any future product candidates. If our Isolagen Therapy is found to be, or perceived to be, unsafe or ineffective,we will not be successful in obtaining marketing approval for any product candidates then pending, and we may have to modifyor cease production of any products that previously may have received regulatory approval. Negative media exposure, whetherfounded or unfounded, related to the safety and/or effectiveness of our Isolagen Therapy may harm our reputation and/orcompetitive position.Subjects in our clinical development programs are required to sign Informed Consent Forms and amendments made to ourInformed Consent Form could give rise to delays in our clinical development programs.The subjects in our clinical trials are required to sign Informed Consent Forms. These forms are subject to amendmentbased on new knowledge obtained during the execution of our clinical trials or based on changes to the basic design oradministration of our clinical trials. In the early stages of producing our Isolagen Therapy, we utilize certain raw materials,which include antibiotics, bovine-sourced materials and other animal-based materials. We have in the past amended ourInformed Consent Form to address these items. Amendments made to our Informed Consent Form could give rise to delays inour clinical development programs.If physicians do not follow our established protocols, the efficacy and safety of our product candidates may be adverselyaffected.We are dependent on physicians to follow our established protocols both as to the administration and the handling of ourproduct candidates in connection with our clinical trials, and we will continue to be dependent on physicians to follow suchprotocols if our product candidates are commercialized. The treatment protocol requires each physician to verify the patient’sname and date of birth with the patient and the patient records immediately prior to injection. In the event more than onepatient’s cells are delivered to a physician or we deliver the wrong patient’s cells to the physician, which has occurred in thepast, it is the physician’s obligation to follow the treatment protocol and assure that the patient is treated with the correct cells.If the physicians do not follow our protocol, the efficacy and safety of our product candidates may be adversely affected.Our business, which depends on one facility, is vulnerable to natural disasters, telecommunication and information systemsfailures, terrorism and similar problems, and we are not fully insured for losses caused by all of these incidents.We currently conduct all our research, development and manufacturing operations in one facility located in Exton,Pennsylvania. As a result, if we obtain FDA approval of any of our product candidates, all of the commercial manufacturing forthe U.S. market will take place at a single U.S. facility. If regulatory, manufacturing or other problems require us to discontinueproduction at that facility, we will not be able to supply product, which would adversely impact our business.Our Exton facility could be damaged by fire, floods, power loss, telecommunication and information systems failures orsimilar events. Our insurance policies have limited coverage levels for loss or damages in these events and may not adequatelycompensate us for any losses that may occur. In addition, terrorist acts or acts of war may cause harm to our employees ordamage our Exton facility. The potential for future terrorist attacks, the national and international responses to terrorist attacksor perceived threats to national security, and other acts of war or hostility have created many economic and politicaluncertainties that could adversely affect our business and results of operations in ways that we cannot predict, and could causeour stock price to fluctuate or decline. We are uninsured for these types of losses. 19Table of ContentsAs a result of our limited operating history, we may not be able to correctly estimate our future operating expenses, whichcould lead to cash shortfalls.We have a limited operating history and our primary business activities consist of conducting clinical trials. As such, ourhistorical financial data is of limited value in estimating future operating expenses. Our budgeted expense levels are based inpart on our expectations concerning the costs of our clinical trials, which depend on the success of such trials and our ability toeffectively and efficiently conduct such trials. In addition, our budgeted expense levels are based in part on our expectations offuture revenue that we may receive from our Agera product line, and the size of future revenue depends on the choices anddemand of individuals. Our limited operating history and clinical trial experience make these costs and revenues difficult toforecast accurately. We may be unable to adjust our operations in a timely manner to compensate for any unexpected increase incosts or shortfall in revenue. Further, our fixed manufacturing costs and business development and marketing expenses willincrease significantly as we expand our operations. Accordingly, a significant increase in costs or shortfall in revenue couldhave an immediate and material adverse effect on our business, results of operations and financial condition.Our operating results may fluctuate significantly in the future, which may cause our results to fall below the expectations ofsecurities analysts, stockholders and investors.Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outsideof our control. These factors include, but are not limited to: • the level of demand for the products that we may develop; • the timely and successful implementation of improved manufacturing processes; • our ability to attract and retain personnel with the necessary strategic, technical and creative skills required foreffective operations; • the amount and timing of expenditures by practitioners and their patients; • introduction of new technologies; • product liability litigation, class action and derivative action litigation, or other litigation; • the amount and timing of capital expenditures and other costs relating to the expansion of our operations; • the state of the debt and/or equity markets at the time of any proposed offering we choose to initiate; • our ability to successfully integrate new acquisitions into our operations; • government regulation and legal developments regarding our Isolagen Therapy in the United States and in the foreigncountries in which we may operate in the future; and • general economic conditions.As a strategic response to changes in the competitive environment, we may from time to time make pricing, service,technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on ouroperating results. Due to any of these factors, our operating results may fall below the expectations of securities analysts,stockholders and investors in any future period, which may cause our stock price to decline. 20Table of ContentsWe are party to securities and derivative litigation that distracts our management, is expensive to conduct and seeks adamage award against us.We and certain of our current and former officers have been named as defendants in a consolidated putative shareholderclass action lawsuit in the United States District Court for the Eastern District of Pennsylvania. The complaint purports to seekunspecified damages on behalf of an alleged class of persons who purchased our publicly traded securities between March 3,2004 and August 9, 2005. The complaints allege that we and our officers violated Section 10(b) and Rule 10b-5 of theExchange Act and Sections 11 and 12(a)(2) of the Securities Act by making certain false statements and omissions to theinvesting public regarding our business operations, management, and intrinsic value of our publicly traded securities. Thecomplaints also allege liability against the individual defendants under Sections 20(a) and 20A of the Exchange Act andSection 15 of the Securities Act. In addition, stockholders have filed derivative actions seeking recovery on behalf of Isolagenagainst certain of our current and former officers and directors, alleging, among other things, breach of fiduciary duties andother wrongful conduct by those individual defendants. While we have directors and officers liability insurance, it is uncertainwhether the insurance will be sufficient to cover all damages, if any, that we may be required to pay. In addition, the securitiesand derivative lawsuits may distract the attention of our management, and are expensive to conduct. We have and may continueto incur substantial legal and other professional service costs in connection with the stockholder lawsuits. The amount of anyfuture costs in this respect cannot be determined at this time, and could have a material adverse effect on our business results.We may be liable for product liability claims not covered by insurance, and we have been publicly threatened with claimsrelated to our product in the United Kingdom.Physicians who used our facial aesthetic product in the past, or who may use any of our future products, and patients whohave been treated by our facial aesthetic product in the past, or who may use any of our future products, may bring productliability claims against us. In particular, we have received negative publicity and negative correspondence from patients in theUnited Kingdom that had previously received our treatment. More recently, we received a written demand by an attorneyrepresenting approximately 82 former patients each claiming, on average, £3,500 (or approximately $7,000), plus unquantifiedinterest and incidental expenses. To date, no formal legal action has been brought by the attorney against us. While we havetaken, and continue to take, what we believe are appropriate precautions, we may be unable to avoid significant liabilityexposure. We currently keep in force product liability insurance, although such insurance may not be adequate to fully coverany potential claims or may lapse in accordance with its terms prior to the assertion of claims. We may be unable to obtainproduct liability insurance in the future, or we may be unable to do so on acceptable terms. Any insurance we obtain or haveobtained in the past may not provide adequate coverage against any asserted claims. In addition, regardless of merit or eventualoutcome, product liability claims may result in: • diversion of management’s time and attention; • expenditure of large amounts of cash on legal fees, expenses and payment of damages; • decreased demand for our products or any of our future products and services; or • injury to our reputation.If we are the subject of product liability claims our business could be adversely affected, and if these claims are in excess ofinsurance coverage, if any, that we may possess, our financial position will suffer. 21Table of ContentsOur failure to comply with extensive governmental regulation may significantly affect our operating results.Even if we obtain regulatory approval for some or all our product candidates, we will continue to be subject to extensiverequirements by a number of foreign, national, state and local agencies. These regulations will impact many aspects of ouroperations, including testing, research and development, manufacturing, safety, efficacy, labeling, storage, quality control,adverse event reporting, record keeping, approval, advertising and promotion of our future products. We must also submit newor supplemental applications and obtain FDA approval for certain changes to an approved product, product labeling ormanufacturing process. Application holders must also submit advertising and other promotional material to the FDA and reporton ongoing clinical trials. The FDA enforces post-marketing regulatory requirements, including the cGMP requirements,through periodic unannounced inspections. We do not know whether we will pass any future FDA inspections. Failure to passan inspection could disrupt, delay or shut down our manufacturing operations. Failure to comply with applicable regulatoryrequirements could, among other things, result in: • fines; • changes to advertising; • failure to obtain marketing approvals for our product candidates; • revocation or suspension of regulatory approvals of products; • product seizures or recalls; • court-ordered injunctions; • import detentions; • delay, interruption or suspension of product manufacturing, distribution, marketing and sales; or • civil or criminal sanctions.The discovery of previously unknown problems with our future products may result in restrictions of the products,including withdrawal from the market. In addition, the FDA may revisit and change its prior determinations with regard to thesafety or efficacy of our future products. If the FDA’s position changes, we may be required to change our labeling or cease tomanufacture and market our future products. Even prior to any formal regulatory action, we could voluntarily decide to ceasethe distribution and sale or recall any of our future products if concerns about their safety or efficacy develop.In their regulation of advertising and other promotion, the FDA and the FTC may issue correspondence alleging that someadvertising or promotional practices are false, misleading or deceptive. The FDA and FTC are authorized to impose a wide arrayof sanctions on companies for such advertising and promotion practices, which could result in any of the following: • incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements; • changes in the methods of marketing and selling products; • taking FDA mandated corrective action, which may include placing advertisements or sending letters to physiciansrescinding previous advertisements or promotions; or • disruption in the distribution of products and loss of sales until compliance with the FDA’s position is obtained.Improper promotional activities may also lead to investigations by federal or state prosecutors, and result in criminal andcivil penalties. If we become subject to any of the above requirements, it could be damaging to our reputation and restrict ourability to sell or market our future products, and our business condition could be adversely affected. We may also incursignificant expenses in defending ourselves. 22Table of ContentsPhysicians may prescribe pharmaceutical or biologic products for uses that are not described in a product’s labeling ordiffer from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulatephysicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use.Companies cannot promote FDA-approved pharmaceutical or biologic products for off-label uses, but under certain limitedcircumstances they may disseminate to practitioners articles published in peer-reviewed journals. To the extent allowed by law,we intend to disseminate peer-reviewed articles on our future products to practitioners. If, however, our activities fail to complywith the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA or otherregulatory or law enforcement authorities.Our sales, marketing, and scientific/educational grant programs, if any in the future, must also comply with applicablerequirements of the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act and similar state laws, eachas amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus BudgetReconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each as amended. If products are made available toauthorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirementsapply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act.Depending on the circumstances, failure to meet post-approval requirements can result in criminal prosecution, fines orother penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, or refusal to allow us to enter into supply contracts, including government contracts. Anygovernment investigation of alleged violations of law could require us to expend significant time and resources in response,and could generate negative publicity.Legislative or regulatory reform of the healthcare system may affect our ability to sell our future products profitably.In the United States and a number of foreign jurisdictions, there have been legislative and regulatory proposals to changethe healthcare system in ways that could impact our ability to sell our future products profitably. The FDA’s policies maychange and additional government regulations may be enacted, which could prevent or delay regulatory approval of ourproduct candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise fromfuture legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatorycompliance, we might not be permitted to market our future products and our business could suffer.We currently conduct business in foreign markets, and our business strategy involves selling our product candidates inforeign markets. These operations are and will be subject to a variety of regulations in those foreign markets that couldhave a material adverse effect on our business in a particular market or in general.Our Agera product line is currently sold in the United Kingdom. In addition, our business strategy includes the sale of ourproduct candidates in foreign markets. With respect to our product candidates, we will be required to comply with local lawsregulating and approving the sale of biologics in each foreign market that we attempt to operate in. As such, we may becomesubject to a variety of foreign regulations. In addition, to the extent that our currently available product lines are regulated inany foreign markets, we will be required to comply with such regulations. Our failure to comply, or assertions that we fail tocomply, with any foreign regulations could have a material adverse effect on our business in a particular market or in general.Government regulations in international markets could delay or prevent the introduction, or require the reformulation orwithdrawal, of some of our future products. 23Table of ContentsOur foreign operations and any foreign operations we may commence in the future are exposed to risks associated withexchange rate fluctuations, trade restrictions and political, economic and social instability.Our foreign operations and any foreign operations we commence in the future will subject us to the risks of doing businessabroad, including: • unexpected changes in regulatory requirements; • export and import restrictions, tariffs and other trade barriers; • difficulties in staffing and managing foreign operations; • longer payment cycles and problems in collecting accounts receivable; • potential adverse tax consequences; • exchange rate fluctuations; • increased risks of piracy and limits on our ability to enforce our intellectual property rights; • limits on repatriation of funds; and • political risks that may limit or disrupt international sales.A foreign government may impose trade or foreign exchange restrictions or increased tariffs, which could adversely affectour operations. Our operations in some markets also may be adversely affected by political, economic and social instability inforeign countries, including terrorism. Any limitations or interruptions in our foreign operations could have a material adverseeffect on our business.Any future products that we develop may not be commercially successful.Even if we obtain regulatory approval for our product candidates in the United States and other countries, those productsmay not be accepted by the market. A number of factors may affect the rate and level of market acceptance of our products,including: • labeling requirements or limitations; • market acceptance by practitioners and their patients; • our ability to successfully improve our manufacturing process; • the effectiveness of our sales efforts and marketing activities; and • the success of competitive products.If our current or future product candidates fail to achieve market acceptance, our profitability and financial condition willsuffer.Our competitors in the pharmaceutical, medical device and biotechnology industries may have superior products,manufacturing capabilities, financial resources or marketing position.The human healthcare products and services industry is extremely competitive. Our competitors include majorpharmaceutical, medical device and biotechnology companies. Most of these competitors have more extensive research anddevelopment, marketing and production capabilities and greater financial resources than we do. Our future success will dependon our ability to develop and market effectively our future products against those of our competitors. If our future productsreceive marketing approval but cannot compete effectively in the marketplace, our results of operations and financial positionwill suffer. 24Table of ContentsDifficulties managing growth could adversely affect our business, operating results and financial condition.If we achieve growth in our operations in the next few years, which we must do to succeed, such growth could place a strainon our management, and our administrative, operational and financial infrastructure. We would need to hire additionalmanagement, financial, sales and marketing personnel to manage our operations. In addition, our ability to manage our futureoperations and growth would require the continued improvement of operational, financial and management controls, reportingsystems and procedures. If we are unable to manage our growth effectively or if we are unable to attract additional highlyqualified personnel, our business, operating results and financial condition may be materially adversely affected.We are dependent on our key scientific and other management personnel, and the loss of any of these individuals couldharm our business.We are dependent on the efforts of our key management and scientific staff. The loss of any of these individuals, or ourinability to recruit and train additional key personnel in a timely manner, could materially and adversely affect our business andour future prospects. A loss of one or more of our current officers or key personnel could severely and negatively impact ouroperations. We have employment agreements with most of our key management personnel, but some of these people areemployed “at-will,” and any of them may elect to pursue other opportunities at any time. We have no present intention ofobtaining key man life insurance on any of our executive officers or key management personnel.We will need to attract, train and retain additional highly qualified senior executives and technical and managerialpersonnel in the future.In the future, we may need to seek additional senior executives, as well as technical and managerial staff members. There isa high demand for highly trained executive, technical and managerial personnel in our industry. We do not know whether wewill be able to attract, train and retain highly qualified technical and managerial personnel in the future, which could have amaterial adverse effect on our business, financial condition and results of operations.If we are unable to effectively promote our brands and establish a competitive position in the marketplace, our businessmay fail.Our Isolagen Therapy brand names are new and unproven. We believe that the importance of brand recognition willincrease over time. In order to gain brand recognition, we may increase our marketing and advertising budgets to create andmaintain brand loyalty. We do not know whether these efforts will lead to greater brand recognition. If we are unable effectivelyto promote our brands, including our Agera product line, and establish competitive positions in the marketplace, our businessresults will be materially adversely affected.If we are unable to adequately protect our intellectual property and proprietary technology, the value of our technologyand future products will be adversely affected, and if we are unable to enforce our intellectual property againstunauthorized use by third parties our business may be materially harmed.Our long-term success largely depends on our future ability to market technologically competitive products. Our ability toachieve commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection ofour technology and future products, as well as successfully defending these patents against third party challenges. In order to doso we must: • obtain and protect commercially valuable patents or the rights to patents both domestically and abroad; • operate without infringing upon the proprietary rights of others; and • prevent others from successfully challenging or infringing our proprietary rights. 25Table of ContentsAs of December 31, 2007, we had 8 issued U.S. patents, 6 pending U.S. patent applications, 32 granted foreign patents, and19 pending foreign applications. However, we may not be able to obtain additional patents relating to our technology orotherwise protect our proprietary rights. If we fail to obtain or maintain patents from our pending and future applications, wemay not be able to prevent third parties from using our proprietary technology. We will be able to protect our proprietary rightsfrom unauthorized use only to the extent that these rights are covered by valid and enforceable patents that we control or areeffectively maintained by us as trade secrets. Furthermore, the degree of future protection of our proprietary rights is uncertainbecause legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep acompetitive advantage.The patent situation of companies in the markets in which we compete is highly uncertain and involves complex legal andfactual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claimsallowed in such companies’ patents has emerged to date in the United States. The laws of other countries do not protectintellectual property rights to the same extent as the laws of the United States, and many companies have encounteredsignificant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries,particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection,particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop theinfringement of our patents in foreign countries in which we hold patents. Proceedings to enforce our patent rights in the UnitedStates or in foreign jurisdictions would likely result in substantial cost and divert our efforts and attention from other aspects ofour business. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries maydiminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed orenforced in our patents or in third-party patents.Other risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: • the inventors of the inventions covered by each of our pending patent applications might not have been the first tomake such inventions; • we might not have been the first to file patent applications for these inventions or similar technology; • the future and pending applications we will file or have filed, or to which we will or do have exclusive rights, may notresult in issued patents or may take longer than we expect to result in issued patents; • the claims of any patents that are issued may not provide meaningful protection; • our issued patents may not provide a basis for commercially viable products or may not be valid or enforceable; • we might not be able to develop additional proprietary technologies that are patentable; • the patents licensed or issued to us may not provide a competitive advantage; • patents issued to other companies, universities or research institutions may harm our ability to do business; 26Table of Contents • other individual companies, universities or research institutions may independently develop or have developedsimilar or alternative technologies or duplicate our technologies and commercialize discoveries that we attempt topatent; • other companies, universities or research institutions may design around technologies we have licensed, patented ordeveloped; and • many of our patent claims are method, rather than composition of matter, claims; generally composition of matterclaims are easier to enforce and are more difficult to circumvent.Our business may be harmed and we may incur substantial costs as a result of litigation or other proceedings relating topatent and other intellectual property rights.A third party may assert that we, one of our subsidiaries or one of our strategic collaborators has infringed his, her or itspatents and proprietary rights or challenge the validity or enforceability of our patents and proprietary rights. Likewise, we mayneed to resort to litigation to enforce our patent rights or to determine the scope and validity of a third party’s proprietary rights.We cannot be sure that other parties have not filed for or obtained relevant patents that could affect our ability to obtainpatents or operate our business. Even if we have previously filed patent applications or obtain issued patents, others may filetheir own patent applications for our inventions and technology, or improvements to our inventions and technology. We havebecome aware of published patent applications filed after the issuance of our patents that, should the owners pursue and obtainpatent claims to our inventions and technology, could require us to challenge such patent claims. Others may challenge ourpatent or other intellectual property rights or sue us for infringement. In all such cases, we may commence legal proceedings toresolve our patent or other intellectual property disputes or defend against charges of infringement or misappropriation. Anadverse determination in any litigation or administrative proceeding to which we may become a party could subject us tosignificant liabilities, result in our patents being deemed invalid, unenforceable or revoked, or drawn into an interference,require us to license disputed rights from others, if available, or to cease using the disputed technology. In addition, ourinvolvement in any of these proceedings may cause us to incur substantial costs and result in diversion of management andtechnical personnel. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable reliefthat could effectively block our ability to develop, commercialize and sell products, and could result in the award of substantialdamages against us.The outcome of these proceedings is uncertain and could significantly harm our business. If we do not prevail in this typeof litigation, we or our strategic collaborators may be required to: • pay monetary damages; • expend time and funding to redesign our Isolagen Therapy so that it does not infringe others’ patents while stillallowing us to compete in the market with a substantially similar product; • obtain a license, if possible, in order to continue manufacturing or marketing the affected products or services, andpay license fees and royalties, which may be non-exclusive. This license may be non-exclusive, giving ourcompetitors access to the same intellectual property, or the patent owner may require that we grant a cross-license toour patented technology; or • stop research and commercial activities relating to the affected products or services if a license is not available onacceptable terms, if at all.Any of these events could materially adversely affect our business strategy and the value of our business.In addition, the defense and prosecution of intellectual property suits, interferences, oppositions and related legal andadministrative proceedings in the United States and elsewhere, even if resolved in our favor, could be expensive and timeconsuming and could divert financial and managerial resources. Some of our competitors may be able to sustain the costs ofcomplex patent litigation more effectively than we can because they have substantially greater financial resources. 27Table of ContentsIf we are unable to keep up with rapid technological changes, our future products may become obsolete or unmarketable.Our industry is characterized by significant and rapid technological change. Although we attempt to expand ourtechnological capabilities in order to remain competitive, research and discoveries by others may make our future productsobsolete. If we cannot compete effectively in the marketplace, our potential for profitability and financial position will suffer.Our acquisitions of companies or technologies may result in disruptions in business and diversion of management attention.We have made and may in the future make acquisitions of complementary companies, products or technologies. Anyacquisitions will require the assimilation of the operations, products and personnel of the acquired businesses and the trainingand motivation of these individuals. Acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our relationships with current employees, customers and strategic partners. We may alsohave to, or we may choose to, incur debt or issue equity securities to pay for any future acquisitions. The issuance of equitysecurities for an acquisition could be substantially dilutive to our security holders. In addition, our results of operations maysuffer because of acquisition-related costs or amortization or impairment costs for acquired goodwill and other intangible assets.If management is unable to fully integrate acquired businesses, products, technologies or personnel with existing operations, wemay not receive the intended benefits of the acquisitions.We have not declared any dividends on our common stock to date, and we have no intention of declaring dividends in theforeseeable future.The decision to pay cash dividends on our common stock rests with our Board of Directors and will depend on ourearnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends inthe foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should notexpect to receive dividend income on their investment, and investors will be dependent on the appreciation of our commonstock to earn a return on their investment.Provisions in our charter documents could prevent or delay stockholders’ attempts to replace or remove currentmanagement.Our charter documents provide for staggered terms for the members of our Board of Directors. Our Board of Directors isdivided into three staggered classes, and each director serves a term of three years. At stockholders’ meetings, only thosedirectors comprising one of the three classes will have completed their term and be subject to re-election or replacement.In addition, our Board of Directors is authorized to issue “blank check” preferred stock, with designations, rights andpreferences as they may determine. Accordingly, our Board of Directors may, without stockholder approval, issue shares ofpreferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power orother rights of the holders of our common stock. This type of preferred stock could also be issued to discourage, delay orprevent a change in our control.In May 2006, our Board of Directors declared a dividend of one right for each share of our common stock to purchase ournewly created Series C participating preferred stock in connection with the adoption of a stockholder rights plan. These rightsmay have certain anti-takeover effects. For example, the rights may cause substantial dilution to a person or group that attemptsto acquire us in a manner which causes the rights to become exercisable. As such, the rights may have the effect of renderingmore difficult or discouraging an acquisition of our company which is deemed undesirable by our board of directors. 28Table of ContentsThe use of a staggered Board of Directors, the ability to issue “blank check” preferred stock, and the adoption ofstockholder rights plans are traditional anti-takeover measures. These provisions in our charter documents make it difficult for amajority stockholder to gain control of the Board of Directors and of our company. These provisions may be beneficial to ourmanagement and our Board of Directors in a hostile tender offer and may have an adverse impact on stockholders who may wantto participate in such a tender offer, or who may want to replace some or all of the members of our Board of Directors.Provisions in our bylaws provide for indemnification of officers and directors, which could require us to direct funds awayfrom our business and future products.Our bylaws provide for the indemnification of our officers and directors. We have in the past and may in the future berequired to advance costs incurred by an officer or director and to pay judgments, fines and expenses incurred by an officer ordirector, including reasonable attorneys’ fees, as a result of actions or proceedings in which our officers and directors areinvolved by reason of being or having been an officer or director of our company. Funds paid in satisfaction of judgments, finesand expenses may be funds we need for the operation of our business and the development of our product candidates, therebyaffecting our ability to attain profitability.Future sales of our common stock may depress our stock price.The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in thepublic market, or as a result of the perception that these sales could occur. In addition, these factors could make it more difficultfor us to raise funds through future offerings of common stock. As of March 1, 2008, there were 41,639,408] shares of commonstock issued and 37,639,408 outstanding. All of our outstanding shares are freely transferable without restriction or furtherregistration under the Securities Act.There is a limited public trading market for our common stock.There is a limited public trading market for our common stock. Without an active trading market, there can be no assuranceof any liquidity or resale value of our common stock, and stockholders may be required to hold shares of our common stock foran indefinite period of time.Lack of effectiveness of internal controls over financial reporting could adversely affect the value of our securities.As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include areport of management on the company’s internal control over financial reporting in their annual reports on Form 10-K thatcontains an assessment by management of the effectiveness of the company’s internal control over financial reporting. Inaddition, the public accounting firm auditing the company’s financial statements must attest to and report on the company’sinternal control over financial reporting. Ineffective internal controls over our financial reporting have occurred in the past andmay arise in the future. As a consequence, our investors could lose confidence in the reliability of our financial statements,which could result in a decrease in the value of our securities.Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition,and prevent us from fulfilling our obligations under the notes.We have a substantial level of debt. As of December 31, 2007, we had approximately $90.5 million of indebtednessoutstanding (including related accrued interest of $0.5 million). The level and nature of our indebtedness, among other things,could: • make it difficult for us to make payments on our debt outstanding from time to time or to refinance it; • make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debtservice, acquisitions or general corporate purposes; 29Table of Contents • limit our flexibility in planning for or reacting to changes in our business; • reduce funds available for use in our operations, as we will be required to use a portion of our cash for the payment ofany principal or interest due on our outstanding indebtedness; • make us more vulnerable in the event of a downturn in our business; • place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have betteraccess to capital resources; • increase the impact to us of negative changes in general economic and industry conditions, as compared to lessleveraged competitors; or • impair our ability to merge or otherwise affect the sale of the company due to the right of the holders of certain of ourindebtedness to accelerate the maturity date of the indebtedness in the event of a change of control of the company.If we do not grow our revenues, we could have difficulty making required payments on our indebtedness. If we are unableto generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with thevarious requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness toaccelerate the maturity of the indebtedness and could cause defaults under any indebtedness we may incur in the future. Anydefault under our indebtedness would have a material adverse effect on our business, operating results and financial condition.General economic conditions, industry cycles and financial, business and other factors affecting our operations, many ofwhich are beyond our control, may affect our future performance, which may affect our ability to make principal and interestpayments on our indebtedness. If we cannot generate sufficient cash flow from operations in the future to service our debt, wemay, among other things: • seek additional financing in the debt or equity markets, and the documentation governing any future financing maycontain covenants that limit or restrict our strategic, operating or financing activities; • refinance or restructure all or a portion of our indebtedness; • sell selected assets; • reduce or delay planned capital expenditures; • reduce or delay planned research and development expenditures; and/or • enter into bankruptcy protection.These measures might not be sufficient to enable us to service our indebtedness. In addition, any financing, refinancing orsale of assets might not be available, or available on economically favorable terms. 30Table of ContentsThe price of our common stock has in the past and may in the future fluctuate significantly, which may make it difficult forholders of our common stock to sell our common stock when desired or at attractive prices.On March 3, 2008, the per share closing price of our common stock was $0.61. From January 1, 2006 until December 31,2007, the per share closing price of our common stock ranged from $1.76 to $5.00 per share. The value of our common stockmay decline regardless of our operating performance or prospects. The market price of our common stock is subject tosignificant fluctuations in response to the factors in this section and other factors, including: • market reaction to our capitalization, cash reserves and utilization of cash; • market reaction to announcements regarding our management; • the success or failure of our product development efforts, especially those related to obtaining regulatory approvalsdomestically and internationally; • the implementation of improved manufacturing processes; • technological innovations developed by us or our competitors; • variations in our operating results and the extent to which we achieve our key business targets; • differences between our reported results and those expected by investors and securities analysts; • market reaction to any acquisitions or joint ventures announced by us or our competitors; and • developments with respect to the class and derivative action litigation of which we are currently defendants, ordevelopment with respect to threatened litigation.In addition, in recent years, the stock market in general, and the market for life sciences companies in particular, haveexperienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued bymany companies, often for reasons unrelated to their operating performance, and it may adversely affect the price of ourcommon stock. In the past, securities class action litigation has often been instituted following periods of volatility in themarket price of a company’s securities. The current class and derivative action suits or a future securities class action suitagainst us could result in potential liabilities, substantial costs and the diversion of management’s attention and resources,regardless of whether we win or lose. These broad market fluctuations may adversely affect the price of our securities, regardlessof our operating performance.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur corporate headquarters and manufacturing operations are located in Exton, Pennsylvania. We currently leaseapproximately 86,500 square feet. This lease is noncancelable through March 31, 2013.During 2006, we entered into a lease for approximately 2,200 square feet of office space in Santa Barbara, California tosupport the Office of the Chief Executive and his staff, Investor Relations and our Business Development management team.This lease is noncancelable through August 31, 2008. We will not renew this lease as we are in the process of closing this SantaBarbara, California office.We currently lease approximately 14,800 square feet of office and laboratory space in Houston, Texas. Our lease expiresApril 30, 2008 and we do not expect to renew this lease. During 2006, we relocated our research and development activities toour Exton, Pennsylvania facility and we also subleased approximately 50% of the Houston, Texas facility to a third-partytenant. 31Table of ContentsDuring 2006, the Board of Directors approved the proposed closing of our UK operation, including our commercialmanufacturing facility and cellular laboratory located in London, England. This London, England facility consists ofapproximately 11,800 square feet under a lease that expires in March 2010. The facility was closed during the first half of 2007.We are attempting to sublease the facility to a third-party.In April 2005, we acquired a two-building, 100,000 square foot corporate campus in Bevaix, Canton of Neuchâtel,Switzerland. During 2006, management placed the corporate campus on the real estate market for sale. See “Assets Held forSale” in Note 3 of Notes to Consolidated Financial Statements.Item 3. Legal ProceedingsFederal Securities LitigationThe Company and certain of its current and former officers and directors are defendants in class action cases pending in theUnited States District Court for the Eastern District of Pennsylvania.In August 2005 and September 2005, various lawsuits were filed alleging securities fraud and asserting claims on behalf ofa putative class of purchasers of publicly traded Isolagen securities between March 3, 2004 and August 1, 2005. These lawsuitswere Elliot Liff v. Isolagen, Inc. et al., C.A. No. H-05-2887, filed in the United States District Court for the Southern District ofTexas; Michael Cummiskey v. Isolagen, Inc. et al., C.A. No. 05-cv-03105, filed in the United States District Court for theSouthern District of Texas; Ronald A. Gargiulo v. Isolagen, Inc. et al., C.A. No. 05-cv-4983, filed in the United States DistrictCourt for the Eastern District of Pennsylvania, and Gregory J. Newman v. Frank M. DeLape, et al., C.A. No. 05-cv-5090, filed inthe United States District Court for the Eastern District of Pennsylvania.The Liff and Cummiskey actions were consolidated on October 7, 2005. The Gargiolo and Newman actions wereconsolidated on November 29, 2005. On November 18, 2005, the Company filed a motion with the Judicial Panel onMultidistrict Litigation (the “MDL Motion”) to transfer the Federal Securities Actions and the Keene derivative case (describedbelow) to the United States District Court for the Eastern District of Pennsylvania. The Liff and Cummiskey actions were stayedon November 23, 2005 pending resolution of the MDL Motion. The Gargiulo and Newman actions were stayed on December 7,2005 pending resolution of the MDL Motion. On February 23, 2006, the MDL Motion was granted and the actions pending inthe Southern District of Texas were transferred to the Eastern District of Pennsylvania, where they have been captioned In reIsolagen, Inc. Securities & Derivative Litigation, MDL No. 1741 (the “Federal Securities Litigation”).On April 4, 2006, the United States District Court for the Eastern District of Pennsylvania appointed Silverback AssetManagement, LLC, Silverback Master, Ltd., Silverback Life Sciences Master Fund, Ltd., Context Capital Management, LLCand Michael F. McNulty as Lead Plaintiffs, and the law firms of Bernstein Litowitz Berger & Grossman LLP and KirbyMcInerney & Squire LLP as Lead Counsel in the Federal Securities Litigation.On July 14, 2006, Lead Plaintiffs filed a Consolidated Class Action Complaint in the Federal Securities Litigation onbehalf of a putative class of persons or entities who purchased or otherwise acquired Isolagen common stock or convertible debtsecurities between March 3, 2004 and August 9, 2005. The complaint purports to assert claims for securities fraud in violationof Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Isolagen and certain of its former officers anddirectors. The complaint also purports to assert claims for violations of Section 11 and 12 of the Securities Act of 1933 againstthe Company and certain of its current and former directors and officers in connection with the registration and sale of certainshares of Isolagen common stock and certain convertible debt securities. The complaint also purports to assert claims againstCIBC World Markets Corp., Legg Mason Wood Walker, Inc., Canaccord Adams, Inc. and UBS Securities LLC as underwriters inconnection with an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. On November 1,2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied the Company’s motions todismiss the complaint. On November 6, 2007, the court entered a scheduling order that provides for discovery to be complete byJune 8, 2009. 32Table of ContentsThe Company intends to defend these lawsuits vigorously. However, the Company cannot currently estimate the amountof loss, if any, that may result from the resolution of these actions, and no provision has been recorded in the consolidatedfinancial statements. The Company will expense its legal costs as they are incurred and will record any insurance recoveries onsuch legal costs in the period the recoveries are received.Derivative ActionsThe Company is the nominal defendant in derivative actions (the “Derivative Actions”) pending in State District Court inHarris County, Texas, the United States District Court for the Eastern District of Pennsylvania, and the Court of Common Pleasof Chester County, Pennsylvania.On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840, Carmine Vitale v. Frank DeLape, etal. in the 55th Judicial District Court of Harris County, Texas and in February 2006 Mr. Vitale filed an amended petition. In thisaction, the plaintiff purports to bring a shareholder derivative action on behalf of the Company against certain of theCompany’s current and former officers and directors. The Plaintiff alleges that the individual defendants breached theirfiduciary duties to the Company and engaged in other wrongful conduct. Jeffrey Tomz, who formerly served as Isolagen’s ChiefFinancial Officer, was accused of engaging in insider trading of Isolagen stock through a proxy. The plaintiff did not make ademand on the Board of Isolagen prior to bringing the action and plaintiff alleges that a demand was excused under the law asfutile.On December 2, 2005, the Company filed its answer and special exceptions pursuant to Rule 91 of the Texas Rules of CivilProcedure based on pleading defects inherent in the Vitale petition. The plaintiff filed an amended petition on February 15,2006, to which the defendants renewed their special exceptions. On September 6, 2006, the Court granted the specialexceptions and permitted the plaintiff thirty days to attempt to replead. Thereafter the plaintiff moved the Court for an ordercompelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the Court entered an order explainingits grounds for granting the special exceptions. On November 3, 2006, the plaintiff filed a second amended petition. OnFebruary 8, 2007, the Company filed its answer and special exceptions to the second amended petition. On August 9, 2007, theCourt granted the special exceptions and dismissed the second amended petition with prejudice. On September 4, 2007, theplaintiff moved for reconsideration of the dismissal with prejudice of the second amended petition, for a new trial, and for leaveto further amend the petition, and the defendants opposed that motion on September 20, 2007. On October 23, 2007, thatmotion was deemed denied by operation of law because the court had not acted on it by that date.On October 8, 2005, Richard Keene filed an action styled, C.A. No. H-05-3441, Richard Keene v. Frank M. DeLape et al.,in the United States District Court for the Southern District of Texas. This action makes substantially similar allegations as theoriginal complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior to filingthe action is excused as futile.The Company sought to transfer the Keene action to the United States District Court for the Eastern District ofPennsylvania as part of the MDL Motion. On January 21, 2006, the court stayed the Keene action pending resolution of theMDL Motion. On February 23, 2006, the Keene action was transferred with the Federal Securities Actions from the SouthernDistrict of Texas to the Eastern District of Pennsylvania. Thereafter, on May 15, 2006, the plaintiff filed an amended complaint,and on June 5, 2006, the defendants moved to dismiss the amended complaint. On August 21, 2006, the plaintiff moved forleave to file a second amended complaint, and on September 15, 2006, defendants filed an opposition to that motion. OnJanuary 24, 2007, the court denied the plaintiff’s motion to file a second amended complaint, and on April 10, 2007 the courtgranted the defendants’ motion to dismiss and dismissed the amended complaint without prejudice. On May 9, 2007, plaintifffiled a notice of appeal from the January 24, 2007 order denying plaintiff’s motion to file a second amended complaint, andfrom the April 10, 2007 order dismissing plaintiff’s amended complaint without prejudice. The appeal is fully briefed.On October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432, William Thomas Fordyce v.Frank M. DeLape, et al., in the Court of Common Pleas of Chester County, Pennsylvania. This action makes substantiallysimilar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand onthe Board prior to filing the action is excused as futile. 33Table of ContentsOn January 20, 2006, the Company filed its preliminary objections to the complaint. On August 31, 2006, the Court ofCommon Pleas entered an opinion and order sustaining the preliminary objections and dismissing the complaint with prejudice.On September 19, 2006, Fordyce filed a motion for reconsideration, which the Court of Common Pleas denied. OnSeptember 28, 2006, Fordyce filed a notice of appeal to the Superior Court of Pennsylvania. On July 27, 2007, the SuperiorCourt affirmed the decision of the Court of Common Pleas.On February 14, 2008, Ronald Beattie filed an action styled C.A. No. 08-724, Ronald Beattie v. Michael Macaluso, et al.,in the United States District Court for the Eastern District of Pennsylvania. This action makes substantially similar allegations asthe original complaint in the Vitale action. The complaint has not yet been served on the Company.The Derivative Actions are purportedly being prosecuted on behalf of the Company and any recovery obtained, less anyattorneys’ fees awarded, will go to the Company. The Company is advancing legal expenses to certain current and formerdirectors and officers of the Company who are named as defendants in the Derivative Actions and expects to receivereimbursement for those advances from its insurance carriers. The Company will expense its legal costs as they are incurred andwill record any insurance recoveries on such legal costs in the period the recoveries are received. The Company cannotcurrently estimate the amount of loss, if any, that may result from the resolution of these actions, and no provision has beenrecorded in the consolidated financial statements.Indemnity DemandsMr. Jeffrey TomzAfter the above referenced litigations were commenced, Mr. Jeffrey Tomz, who formerly served as Isolagen’s ChiefFinancial Officer, demanded reimbursement of his costs of defense, and reimbursement for the costs of responding to a Securitiesand Exchange Commission investigation of his alleged insider trading in Isolagen stock. It is understood that Tomz’s defensecosts to date amount to approximately $0.3 million.As the Vitale matter has now been resolved in favor of all defendants, including Mr. Tomz, the Company is presentlyobligated to reimburse him for the reasonable and necessary costs of defending all claims asserted therein other than the insidertrading allegations. Although decided on jurisdictional grounds, it is likely the Company is also obligated to reimburseMr. Tomz for the reasonable and necessary costs incurred in defending the Fordyce matter given that it has also been resolved infavor of all defendants. The Company would be liable to reimburse Mr. Tomz for the reasonable and necessary costs of defensein the Keene case if it is affirmed on appeal and in the putative securities cases should he prevail in that action. The Companyhas refused to pay the amount of fees and expenses for which Mr. Tomz has sought reimbursement because it believes they areexcessive, duplicative and have not been properly segregated between reimbursable and non-reimbursable claims. TheCompany has negotiated an acceptable compromise for the amounts billed by Mr. Tomz’s local Pennsylvania counsel for anamount less than $0.1 million.Prior to the resolution of the various derivative actions, Mr. Tomz filed a demand for arbitration seeking advancement ofhis defense costs. He subsequently agreed to stay those proceedings. At present, Mr. Tomz has not sought to lift this stay and itis uncertain whether he will attempt to do so in the future.The Company has accrued less than $0.1 million in the accompanying Consolidated Financial Statements as ofDecember 31, 2007 with respect to Mr. Tomz’s existing defense costs in dispute. The Company intends to seek reimbursementunder its directors and officers liability policy for any amounts paid to reimburse Mr. Tomz for his defense costs, which includesless than $0.1 million paid to date.UnderwritersThe Underwriters have each demanded that the Company indemnify, hold harmless and defend them with respect to theclaims asserted in the putative securities actions. The total amount demanded to date is less than $0.3 million, however, webelieve that cumulative future amounts of these defense costs are likely to be significant, although these cumulative futureamounts cannot be estimated at this time. 34Table of ContentsIsolagen has denied this demand on numerous grounds, including that: (i) as to the November 2004 convertible notesoffering, it only agreed to indemnify the Underwriters for any losses resulting from any untrue statement, or alleged untruestatement, of material fact in the offering documents provided by the Company to a holder or prospective purchaser ofsecurities, and plaintiffs’ claims in the securities action are not based upon alleged untrue statements in any such documents;(ii) as to the June 2004 secondary offering, it only agreed to indemnify the Underwriters for untrue statements, or alleged untruestatements, of material fact, in the preliminary prospectus, registration statement, prospectus or any amendment thereof, andthere were no such untrue statements in any such document; (iii) Isolagen assumed no duty to defend or advance defense costs;and (iv) Isolagen satisfied whatever duty to defend it may have to the Underwriters by offering to assume the Underwriters’defense. Accordingly, we have not accrued any amounts related to the Underwriters’ defense costs in our ConsolidatedFinancial Statements.United KingdomSubsequent to the Company’s public announcement regarding the closure of the United Kingdom operation, the Companyreceived negative publicity and negative correspondence from former patients in the United Kingdom that previously receivedour treatment. More recently, the Company received a written demand by an attorney representing approximately 82 formerpatients each claiming negligent misstatements were made and each claiming, on average, £3,500 (or approximately $7,000),plus unquantified interest and incidental expenses. The Company is in the process of evaluating the merits of the claims madein the demand. To date, no formal legal action has been brought by the attorney against the Company, and no provision hasbeen recorded in the consolidated financial statements related to this matter.OtherWe are involved in various other legal matters that are being defended and handled in the ordinary course of business.Although it is not possible to predict the outcome of these matters, management believes that the results will not have a materialimpact on the Company’s financial statements.Item 4. Submission of Matters to a Vote of Security HoldersOn November 5, 2007, we held our 2007 Annual Meeting of Stockholders at our office in Exton, Pennsylvania. Dr.Kenneth A. Selzer, Mr. Steven Morrell, and Mr. Marshall G. Webb were elected as directors by our stockholders at the meetingto serve until the 2010 annual meeting of stockholders or until their respective successors have been duly elected and qualified.The Company’s stockholders ratified the appointment of BDO Seidman, LLP as the Company’s auditors for the year endingDecember 31, 2007.The results of the vote were as follows:1. To ratify the appointment of BDO Seidman, LLP as the Company’s auditors for the year ending December 31, 2007. Shares voted FOR / AGAINST / ABSTAINING: 33,120,713 / 136,638 / 54,5762. To elect three directors to hold office until the Company’s 2010 annual meeting of stockholders, or until his successor isduly elected and qualified. Shares voted FOR / WITHHELD Mr. Steven Morrell: 31,935,719 / 1,376,208 Shares voted FOR / WITHHELD Mr. Marshall G. Webb: 32,069,017 / 1,242,910 Shares voted FOR / WITHHELD Dr. Kenneth A. Selzer: 33,009,911 / 302,016 35Table of ContentsPart IIItem 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationSince December 11, 2002, our common stock has been traded on the American Stock Exchange under the symbol “ILE.”Prior to December 11, 2002, our common stock was quoted on the OTC Bulletin Board under the symbol “ISLG.” The marketfor our common stock is limited and volatile. The following table sets forth the high and low sales prices, as applicable, for ourcommon stock for each of the periods indicated as reported by the AMEX. December 31, December 31, 2007 2006 High Low High Low First Quarter $3.93 $1.98 $2.72 $1.84 Second Quarter 5.00 3.54 4.20 1.76 Third Quarter 4.19 2.04 3.99 3.20 Fourth Quarter 3.40 2.24 3.67 2.84 The closing price of our common stock on March 3, 2008 was $0.61.HoldersAs of March 1, 2008, we had 383 stockholders of record of our common stock.DividendsWe have never paid any cash dividends on our common stock. We anticipate that we will retain future earnings, if any, tosupport operations and to finance the growth and development of our business. Therefore, we do not expect to pay cashdividends in the foreseeable future.Recent Sales of Unregistered SecuritiesWe did not sell unregistered securities during the fourth quarter of 2007.Purchases of Equity Securities.We did not repurchase any of our equity securities during the fourth quarter of 2007. 36Table of ContentsStock Performance GraphThe following graphs our performance in the form of cumulative total return to holders of our common stock sinceDecember 31, 2002 in comparison to the AMEX Composite Index, and the AMEX Biotech Index for that same period. Thegraph assumes that $100 was invested on December 31, 2002 in each of our common stock, the AMEX Composite Index, andthe AMEX Biotech Index, and that all dividends were reinvested. The comparisons shown in the graph below are based uponhistorical data. The stock price performance shown in the graph below is not necessarily indicative of, or intended to forecast,the potential future performance of our common stock. The stock performance graph shall not be deemed to be “solicitingmaterial” or to be “filed” with the SEC under the Securities Act or the Exchange Act, or incorporated by reference in anydocument so filed. 12/02 12/03 12/04 12/05 12/06 12/07 Isolagen, Inc. 100.00 107.69 151.35 35.58 56.35 48.27 AMEX Composite 100.00 143.18 175.20 215.26 257.04 299.37 AMEX Biotechnology 100.00 159.74 181.93 237.92 227.81 208.94 Peer Group 100.00 139.54 185.38 228.39 250.49 264.13 37Table of ContentsItem 6. Selected Financial DataOur selected consolidated financial information presented as of December 31, 2007, 2006, 2005, 2004 and 2003 and foreach of the five years ended December 31, 2007 was derived from our audited consolidated financial statements.This information should be read in conjunction with the historical consolidated financial statements and related notesincluded herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We haveclassified our discontinued operations as discontinued operations for all periods presented herein (see Note 5 of Notes toConsolidated Financial Statements). For the Year Ended December 31, 2007 (1)(3) 2006 (1)(3) 2005 2004 2003 Consolidated Statement of Operations Data: Revenue $1,400,986 $384,389 $— $— $— License fees — — — — — Total revenue 1,400,986 384,389 — — — Cost of sales 656,029 194,197 — — — Selling, general and administrative expenses 18,730,863 13,174,960 14,000,977 9,717,713 4,491,259 Research and development 13,298,338 8,796,219 10,592,170 4,647,553 3,100,059 Operating loss (31,284,244) (21,780,987) (24,593,147) (14,365,266) (7,591,318)Other income (expense) Interest income 901,262 2,261,899 2,808,328 558,536 40,663 Other income 150,138 — — 84,359 55,663 Interest expense (3,899,239) (3,899,239) (3,912,059) (636,676) — Minority interest 246,347 78,132 — — — Loss before income taxes from continuingoperations (33,885,736) (23,340,195) (25,696,878) (14,359,047) (7,494,993)Income tax benefit — 190,754 — — — Loss from continuing operations (33,885,736) (23,149,441) (25,696,878) (14,359,047) (7,494,993)Loss from discontinued operations, net of tax (1,687,378) (12,671,965) (10,080,706) (7,115,422) (3,773,301)Net loss (35,573,114) (35,821,406) (35,777,584) (21,474,469) (11,268,294)Deemed dividend associated with beneficialconversion of preferred stock — — — — (1,244,880)Preferred stock dividends — — — — (1,087,200)Net loss attributable to common shareholders $(35,573,114) $(35,821,406) $(35,777,584) $(21,474,469) $(13,600,374)Per share information Net loss from continuing operations—basicand diluted $(1.02) $(0.76) $(0.85) $(0.47) $(0.39)Net loss from discontinued operations— basicand diluted (0.05) (0.42) (0.33) (0.24) (0.19)Deemed dividend associated with beneficialconversion of preferred stock — — — — (0.06)Preferred stock dividends — — — — (0.06)Net loss attributable to common shareholders $(1.07) $(1.18) $(1.18) $(0.71) $(0.70)Weighted average shares outstanding 33,093,370 30,309,439 30,245,283 30,116,827 19,297,865 As of December 31, 2007 (2) 2006 (2) 2005 2004 2003 Consolidated Balance Sheet Data: Cash and cash equivalents, restricted cash andavailable-for-sale investments $17,042,102 $33,266,742 $67,013,659 $116,139,016 $15,935,558 Working capital 13,805,981 29,487,802 61,130,870 111,061,724 14,367,768 Total assets 39,491,190 57,286,875 90,179,922 128,121,138 19,644,465 Total liabilities 96,284,125 96,806,084 98,276,819 99,135,713 2,380,740 Total shareholders equity (deficit) (58,650,961) (41,623,582) (8,096,897) 28,985,425 17,263,725 (1) Includes the results of operations of Agera, which was acquired August 10, 2006 from the date of acquisition to December 31, 2006. See Note4 of Notes to Consolidated Financial Statements. (2) Includes the assets and liabilities of Agera which was acquired August 10, 2006. (3) Effective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires entities to recognize compensation expense for all share-basedpayments to employees and directors, including grants of employee stock options, based on the grant-date fair value of those share-basedpayments, adjusted for expected forfeitures. As a result of adopting Statement 123(R) on January 1, 2006, the Company’s loss before incometaxes and net loss for the years ended December 31, 2007 and 2006 was $1.8 million and $1.1 million higher, respectively, than if it hadcontinued to account for share-based compensation under APB No. 25 (refer to Note 13 in Notes to Consolidated Financial Statements forfurther stock-based compensation discussion). 38Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsGeneralWe are an aesthetic and therapeutic company focused on developing novel skin and tissue rejuvenation products. Ourclinical development product candidates are designed to improve the appearance of skin injured by the effects of aging, sunexposure, acne and burns with a patient’s own, or autologous, fibroblast cells produced in our proprietary Isolagen Process. Ourclinical development programs encompass both aesthetic and therapeutic indications. Our most advanced indication utilizingthe Isolagen Process is for the treatment of wrinkles and is currently in Phase III clinical development. We have also initiated aPhase II/III study in acne scars, a Phase II study for restrictive burn scars and have ongoing Phase II trials in full facerejuvenation and periodontal disease. We also develop and market an advanced skin care product line through our AgeraLaboratories, Inc. subsidiary, in which we acquired a 57% interest in August 2006.We sometimes refer to our product candidates in the aggregate as Isolagen Therapy. From 2002 through 2006, we madeIsolagen Therapy available to physicians primarily in the United Kingdom. In the fourth quarter of 2006, our Board of Directorsapproved closing our United Kingdom operation. Our United Kingdom operation was shutdown on March 31, 2007 (as morefully discussed in Note 5 in Notes to the Consolidated Financial Statements and below). We have refocused our managementand capital resources on the management of our clinical trials, and funding thereof.We market and sell an advanced skin care line through our majority-owned subsidiary, Agera, which we acquired inAugust 2006. Agera offers a complete line of skincare systems based on a wide array of proprietary formulations, trademarks andnano-peptide technology. Agera markets its product in both the United States and Europe (primarily the United Kingdom).We are considered to be a “development stage” enterprise.Going ConcernAt December 31, 2007, we have cash, cash equivalents and restricted cash of $17.0 million and working capital of$13.8 million (including our cash, cash equivalents and restricted cash). We believe that its existing capital resources areadequate to finance our operations through at least September 1, 2008. We estimate that we will require additional cashresources during the third quarter of 2008 based upon our current operating plan and condition. This estimate excludes anyproceeds that would be realized upon the sale of the Swiss campus (discussed further below under Factors Affecting OurCapital Resources).Through December 31, 2007, we have been primarily engaged in developing our initial product technology and recruitingpersonnel. In the course of our development activities, we have sustained losses and expect such losses to continue through atleast 2008. We expect to finance our operations primarily through our existing cash and any future financing, including the saleof assets. However, there exists substantial doubt about our ability to continue as a going concern. We will be required to obtainadditional capital in the future to continue our operations. There is no assurance that we will be able to obtain any suchadditional capital as we need to finance these efforts, through asset sales, equity or debt financing, or any combination thereof,or on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequateto meet our ultimate capital needs and to support our growth. If adequate capital cannot be obtained on a timely basis and onsatisfactory terms, our operations would be materially negatively impacted. Further, if we do not obtain additional funding priorto or during the third quarter of 2008, we may enter into bankruptcy during 2008 and possibly cease operations thereafter.We filed a shelf registration statement on Form S-3 during June 2007, which was subsequently declared effective by theSEC. The shelf registration allows us the flexibility to offer and sell, from time to time, up to an original amount of $50 millionof common stock, preferred stock, debt securities, warrants or any combination of the foregoing in one or more future publicofferings. In August 2007, we sold under this shelf registration statement 6,746,647 shares of common stock to institutionalinvestors, raising proceeds of $13.8 million, net of offering costs. We may offer and sell up to an additional $36.2 of commonstock pursuant to this shelf registration. 39Table of ContentsOur ability to complete additional offerings, including any additional offerings under our shelf registration statement, isdependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception ofour company and the offering terms. In addition, our ability to complete an offering may be dependent on the status of ourclinical trials, and in particular, the status of our Phase III clinical trial for the treatment of wrinkles, which cannot be predicted.We are also continuing its efforts to sell our Swiss campus (see Note 3). We will add any proceeds from the sale of the Swisscampus to our working capital, which would partially alleviate our need to obtain financing from other sources. There is noassurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.As a result of the above discussed conditions, and in accordance with generally accepted accounting principles in theUnited States, there exists substantial doubt about our ability to continue as a going concern, and our ability to continue as agoing concern is contingent upon our ability to secure additional adequate financing or capital prior to or during the thirdquarter of 2008. If we are unable to obtain additional sufficient funds during this time, we will be required to terminate or delayour efforts to obtain regulatory approval of one, more than one, or all of our product candidates, curtail or delay theimplementation of manufacturing process improvements and/or delay the expansion of our sales and marketing capabilities.Any of these actions would have an adverse effect on our operations, the realization of our assets and the timely satisfaction ofour liabilities. Our financial statements are presented on a going concern basis, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating tothe recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that weare unable to continue as a going concern.The report of our independent registered public accounting firm, BDO Seidman, LLP, contains a modification concerningour ability to continue as a going concern.Closure of the United Kingdom OperationAs part of our continuing efforts to evaluate the best uses of our resources, in the fourth quarter of 2006 our Board ofDirectors approved the proposed closing of the United Kingdom operation. On March 31, 2007, we completed the closure of theUnited Kingdom manufacturing facility. The United Kingdom operation was located in London, England with two locations; amanufacturing site and an administrative site. Both sites are under operating leases. The manufacturing site lease expiresFebruary 2010 and, as of December 31, 2007, the remaining lease obligation approximated $0.5 million. The administrative sitelease expired in April 2007.Since our public announcement regarding the closure of the United Kingdom operation, we have received negativepublicity and negative correspondence from former patients in the United Kingdom that previously received our treatment.More recently, we received a written demand by an attorney representing approximately 82 former patients each claimingnegligent misstatements were made and each claiming, on average, £3,500 (or approximately $7,000), plus unquantifiedinterest and incidental expenses. We are in the process of evaluating the merits of the claims made in the demand. To date, noformal legal action has been brought by the attorney against the Company, and no provision has been recorded in theconsolidated financial statements related to this matter.With the closure of the United Kingdom operation on March 31, 2007, our European operations (both the United Kingdomand Switzerland) and Australian operations have been presented in the financial statements as discontinued operations for allperiods presented. See Note 5 of Notes to Consolidated Financial Statements.Critical Accounting PoliciesThe following discussion and analysis of financial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in conformity with accounting principles generally accepted in the UnitedStates of America. Our significant accounting policies are more fully described in Note 3 of the Notes to the ConsolidatedFinancial Statements. However, certain accounting policies and estimates are particularly important to the understanding of ourfinancial position and results of operations and require the application of significant judgment by our management or can bematerially affected by changes from period to period in economic factors or conditions that are outside of the control ofmanagement. As a result they are subject to an inherent degree of uncertainty. In applying these policies, our management usestheir judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimatesare based on our historical operations, our future business plans and projected financial results, the terms of existing contracts,our observance of trends in the industry, information provided by our customers and information available from other outsidesources, as appropriate. The following discusses our critical accounting policies and estimates. 40Table of ContentsGoing Concern: As disclosed in Note 2 to the Consolidated Financial Statements, management has concluded thatsubstantial doubt exists about the Company’s ability to continue as a going concern. This conclusion is based on estimates ofour future spending and future funding required during 2008. We will be required to obtain additional capital in 2008 tocontinue and expand our operations. There is no assurance that we will be able to obtain any such additional capital as it needsto finance these efforts, through asset sales, equity or debt financing, or any combination thereof, or on satisfactory terms or atall.At December 31, 2007, our cash, cash equivalents and restricted cash balance was $17.0 million. For the year endedDecember 31, 2007, our cash used in operations and investing activities was nearly $30 million. These factors, as well as ourfuture spending estimates, were important factors in concluding that substantial doubt exists about our ability to continue as agoing concern. We believe these estimates are particularly important to the understanding of our financial position.Our financial statements are presented on a going concern basis, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating tothe recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that weare unable to continue as a going concern.Stock-Based Compensation: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”). SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees” (“APB No. 25”), and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123 (R) requiresentities to recognize compensation expense for all share-based payments to employees and directors, including grants ofemployee stock options, based on the grant-date fair value of those share-based payments, adjusted for expected forfeitures.We adopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective application method. Under themodified prospective application method, the fair value measurement requirements of SFAS No. 123(R) is applied to newawards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portionof awards for which the requisite service has not been rendered that were outstanding as of January 1, 2006 is recognized as therequisite service is rendered on or after January 1, 2006. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. Changes to the grant-date fair valueof equity awards granted before January 1, 2006 are precluded.The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with ourvaluation techniques previously utilized for awards in footnote disclosures required under SFAS No. 123. Prior to the adoptionof SFAS No. 123(R), we followed the intrinsic value method in accordance with APB No. 25 to account for our employee anddirector stock options. Historically, substantially all stock options have been granted with an exercise price equal to the fairmarket value of the common stock on the date of grant. Accordingly, no compensation expense was recognized fromsubstantially all option grants to employees and directors prior to the adoption of SFAS No. 123(R). However, compensationexpense was recognized in connection with the issuance of stock options to non-employee consultants in accordance with EITF96-18, “Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction withSelling Goods and Services.” SFAS No. 123(R) did not change the accounting for stock-based compensation related to non-employees in connection with equity based incentive arrangements. 41Table of ContentsThe adoption of SFAS No. 123(R) requires additional accounting related to the income tax effects and additionaldisclosure regarding the cash flow effects resulting from share-based payment arrangement. This change in accounting resultedin the recognition of compensation expense of $1.8 million and $1.1 million related to our employee and director stock optionsfor the years ended December 31, 2007 and 2006, respectively. During the year ended December 31, 2007, we granted stockoptions to purchase 0.7 million shares of our common stock. As of December 31, 2007, there was $1.8 million of totalunrecognized compensation cost related to non-vested director and employee stock options which vest over time. That cost isexpected to be recognized over a weighted-average period of 1.6 years. As of December 31, 2007, there was $0.8 million of totalunrecognized compensation cost related to performance-based, non-vested employee stock options. That cost will begin to berecognized when the performance criteria within the respective performance-base option grants become probable ofachievement.During December 2005, the board of directors approved the full vesting of all unvested, outstanding stock options issuedto current employees and directors. The board decided to take this action (the “acceleration event”) in anticipation of theadoption of SFAS No. 123 (R). As a result of this acceleration event, stock options to purchase approximately 1.4 million sharesof our common stock were vested that would have otherwise vested during 2006 and later periods. At the time of theacceleration event, the unamortized grant date fair value of the affected options was approximately $3.6 million (for SFASNo. 123 and SFAS No. 148 pro forma disclosure purposes), which was charged to pro forma expense in the fourth quarter of2005. Substantially all of the unvested employee stock options that were subject to the acceleration event had exercise pricesabove market price of our common stock at the time the board approved the acceleration event. However, in accordance withSFAS 123 (R) if we had not completed this acceleration event in December 2005, the majority of the $3.6 million amountdiscussed above would have been charged against the future results of operations, beginning in the first quarter of fiscal 2006and continuing through later periods as the options vested. As discussed above, substantially all of the unvested employeestock options which were accelerated had exercise prices above market price at the time of acceleration. For the purposes ofapplying APB No. 25 to such stock options in the statement of operations for the year ended December 31, 2005, theacceleration event was treated as the acceleration of the vesting of employee and director options that otherwise would havevested as originally scheduled, and accordingly was not a modification requiring the remeasurement of the intrinsic value of theoptions, or the application of variable option accounting, under APB No. 25. For stock options that had exercise prices belowmarket price at the time of acceleration and that would not have vested originally, a charge of approximately $15,000 wasrecorded in the statement of operations for the year ended December 31, 2005.In March 2007, and in connection with the separation of the Company’s President, the Company agreed to modify certainof the President’s stock options such that (1) 120,000 unvested, time-based stock options would vest immediately and (2) of400,000 performance based stock options, 100,000 would be cancelled and the remaining 300,000 would be extended such thatthe 300,000 options would expire 10 years from the original grant date, as opposed to expiring upon termination ofemployment. The 300,000 performance based stock options will continue to be subject to the same performance based vestingrequirements. The 120,000 modified stock options were valued using the Black-Scholes valuation model, and resulted in$0.3 million charge to selling, general and administrative expense during the year ended December 31, 2007. The 300,000modified performance stock options were valued using the Black-Scholes valuation model, and resulted in $0.8 million chargeto selling, general and administrative expense during the year ended December 31, 2007. Two other employee stock optionmodifications resulted in less than $0.1 million charge to selling, general and administrative expense during the year endedDecember 31, 2007.Accounting for Legal Matters: As discussed in Note 11 of Notes to Consolidated Financial Statements, set forth elsewherein this Report, we are currently defending ourselves against various class and derivative actions. We have also received threatsof litigation and demands from former patients associated with our United Kingdom operation. We intend to defend ourselvesvigorously against these actions. We cannot currently estimate the amount of loss, if any, that may result from the resolution ofthese actions, and no provision has been recorded in our consolidated financial statements. Generally, a loss must be bothreasonably estimable and probable in order to record a provision for loss. We will expense our legal costs as they are incurredand will record any insurance recoveries on such legal costs in the period the recoveries are received. Although we have notrecorded a provision for loss regarding these matters, a loss could occur in a future period.We are involved in various other legal matters that are being defended and handled in the ordinary course of business.Although it is not possible to predict the outcome of these matters, management currently believes that the results will not havea material impact on our financial statements. 42Table of ContentsResearch and Development Expenses: Research and development costs are expensed as incurred and include salaries andbenefits, costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drugmaterials and delivery devices, and a portion of facilities cost. Clinical trial costs are a significant component of research anddevelopment expenses and include costs associated with third-party contractors. Invoicing from third-party contractors forservices performed can lag several months. We accrue the costs of services rendered in connection with third-party contractoractivities based on our estimate of management fees, site management and monitoring costs and data management costs. Actualclinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.Results of Operations—Comparison of Years Ending December 31, 2007 and 2006REVENUES. Revenue increased $1.0 million to $1.4 million for the year ended December 31, 2007, as compared to$0.4 million for the year ended December 31, 2006. Our revenue from continuing operations is from the operations of Agerawhich we acquired on August 10, 2006. Agera markets and sells a complete line of advanced skin care systems based on a widearray of proprietary formulations, trademarks and non-peptide technology. On a pro forma basis, assuming that Agera had beenacquired on January 1, 2006, our revenue would have been $1.2 million for the year ended December 31, 2006. Due to ourfinancial statement presentation of our United Kingdom operation as a discontinued operation, our revenue for all periodspresented is representative of only Agera, as all historical United Kingdom revenue is reflected in loss from discontinuedoperations. We currently expect first quarter 2008 revenue to be approximately $0.2 million.COST OF SALES. Costs of sales increased to $0.7 million for the year ended December 31, 2007, as compared to $0.2million for the year ended December 31, 2006. Our cost of sales relates to the operation of Agera.As a percentage of revenue, Agera cost of sales were approximately 47% for the year ended December 31, 2007 andapproximately 50% for the year ended December 31, 2006. On a pro forma basis, assuming Agera had been acquired onJanuary 1, 2006, our cost of sales as a percentage of revenue would have been 50% for the full year ended December 31, 2006.The decrease in 2007 cost of sales as a percentage of revenue, as compared to 2006, is primarily due to selling price increasesimplemented during 2007.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increasedapproximately $5.6 million, or 42%, to $18.7 million for the year ended December 31, 2007, 2007, as compared to $13.2million for the year ended December 31, 2006. The increase in selling, general and administrative expense is primarily due tothe following:a) Additional severance expense and related costs associated with the termination of our President, pursuant to asettlement agreement executed in June 2007, resulted in an additional $4.6 million of selling, general and administrativeexpense for the year ended December 31, 2007 (see Notes 11 and 13 of Notes to Consolidated Financial Statements).b) Salaries, bonuses and payroll taxes increased by approximately $0.1 million to $5.3 million for the year endedDecember 31, 2007, as compared to $5.2 million for the year ended December 31, 2006, due to an increase in the averagenumber of our employees, primarily at the executive management level, which resulted in higher salary expense. Thehigher salary expense was partially offset by lower bonuses earned for the year ended December 31, 2007 as compared toDecember 31, 2006.c) Marketing expense increased by approximately $0.2 million to $0.8 million for the year ended December 31, 2007,as compared to $0.6 million during the year ended December 31, 2006 due primarily to marketing and promotional effortsrelated to marketing and selling our Agera line of advanced skin care systems.d) Travel expense increased by approximately $0.1 million to $0.7 million for the year ended December 31, 2007, ascompared to $0.6 million for the year ended December 31, 2006 due to the increase in the number of our employees,primarily at the executive management level, and increase in business development activities during 2007. 43Table of Contentse) Other general and administrative operating costs increased by approximately $1.6 million to $6.8 million for theyear ended December 31, 2007, as compared to $5.2 million for the year ended December 31, 2006 due primarily to costsof approximately $0.8 million related to our withdrawn and terminated debt offering, increased business developmentactivities and increased investor relations costs of $0.6 million for the year ended December 31, 2007, as well as theaddition of general expenses related to our August 2006 acquisition of Agera. We incurred non-cash amortization expenserelated to our Agera intangible assets of approximately $0.3 million for the year ended December 31, 2007, as compared to$0.1 million for the year ended December 31, 2006.f) Legal expenses decreased by approximately $1.0 million to $0.6 million for the year ended December 31, 2007, ascompared to $1.6 million for the year ended December 31, 2006. For the years ended December 31, 2007 and December 30,2006, we received $1.7 million and $0.9 million, respectively, of reimbursements from our insurance carrier asreimbursement for defense costs related to our class action and derivative matters. If we had not received thesereimbursements, our legal expenses would have been $2.3 million for the year ended December 31, 2007 and $2.5 millionfor the year ended December 31, 2006. Excluding the insurance carrier reimbursement, legal expenses remained relativelyconsistent. In general, our legal expense, net, fluctuates primarily as a result of the level of class action and derivativeaction defense costs incurred during a particular period and as a result of the timing of related insurance carrierreimbursements for defense costs. Such reimbursements are recorded when received. As discussed in Note 11 of Notes toConsolidated Financial Statements, on September 26, 2007 the Court denied our motion to dismiss the complaint in thefederal securities litigation against us, and on November 6, 2007 the court entered a scheduling order that provides thatdiscovery be completed by June 8, 2009. The commencement of the discovery process in this matter will likely cause legalexpenses to increase in 2008.RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $4.5 million for theyear ended December 31, 2007 to $13.3 million, as compared to $8.8 million for the year ended December 31, 2006. Researchand development costs are composed primarily of costs related to our efforts to gain FDA approval for our Isolagen Therapy forspecific dermal applications in the United States, as well as costs related to other potential indications for our Isolagen Therapy,such as acne scars and burn scars. Also, research and development expense includes costs to develop manufacturing, cellcollection and logistical process improvements. Research and development costs primarily include personnel and laboratorycosts related to these FDA trials and certain consulting costs. The total inception to date cost of research and development as ofDecember 31, 2007 was $44.0 million.The FDA approval process is extremely complicated and is dependent upon our study protocols and the results of ourstudies. In the event that the FDA requires additional studies for our dermal product candidate or requires changes in our studyprotocols or in the event that the results of the studies are not consistent with our expectations, as occurred during 2005 withrespect to our previously conducted Phase III wrinkle/nasolabial fold trial, the process will be more expensive and timeconsuming. Due to the complexities of the FDA approval process, we are unable to predict what the cost of obtaining approvalfor our dermal product candidate will be at this time.The major changes in research and development expenses are due primarily to the following:a) Consulting expense increased by approximately $3.0 million to $6.6 million for the year ended December 31,2007, as compared to $3.6 million for the year ended December 31, 2006, as a result of increased expenditures related toour current wrinkle/nasolabial fold study and acne scar study, and preparations related to other clinical trials such asrestrictive burn scars.b) Salaries, bonuses and payroll taxes increased by approximately $0.6 million to $3.0 million for the year endedDecember 31, 2007, as compared to $2.4 million for the year ended December 31, 2006, as a result of increased employeesengaged in research and development activities.c) Laboratory costs increased by approximately $0.6 million to $1.5 million for the year ended December 31, 2007, ascompared to $0.9 million for the year ended December 31, 2006, as a result of increased clinical and manufacturingactivities in our Exton, Pennsylvania location. 44Table of Contentsd) Contract labor support related to our clinical manufacturing operation increased $0.5 million to $0.5 million forthe year ended December 31, 2007, as compared to less than $0.1 million for the year ended December 31, 2006, as a resultof increased clinical activities in our Exton, Pennsylvania location.e) Facilities, depreciation and travel costs decreased $0.2 million to $1.7 million for the year ended December 31,2007, as compared to $1.9 million for the year ended December 31, 2006.LOSS FROM DISCONTINUED OPERATIONS. As discussed above under “—Closure of the United Kingdom Operation,”during the three months ended December 31, 2006, the Board of Directors approved the closure of our United Kingdomoperation. The United Kingdom operation was closed in March 2007, as compared to normal operations during the year endedDecember 31, 2006.The loss from discontinued operations decreased by approximately $11.0 million for the year ended December 31, 2007 to$1.7 million, as compared to $12.7 million for the year ended December 31, 2006. The $1.7 million loss from discontinuedoperations during the year ended December 31, 2007 consisted of $1.1 million of losses incurred during the first quarter 2007,which was the United Kingdom’s last quarter of full operations, and $0.6 million of second, third and fourth quarter 2007 losses(which, after closure of the operation, primarily consisted of facility expense, legal expense and public relations costs, as well ascosts to maintain our Switzerland corporate campus held for sale). The $1.1 million loss from discontinued operations duringthe three months ended March 31, 2007 primarily consisted of the following:a) Salaries, severance expense and payroll taxes were approximately $0.3 million for the three months endedMarch 31, 2007.b) Other general and administrative operating costs were approximately $0.5 million primarily related to leaseexpense and operating costs incurred during the three months ended March 31, 2007.c) Gross loss was $0.3 million during the three months ended March 31, 2007, primarily due to low productionvolumes during the shutdown period and due to the write-off of unrealizable inventory used in the manufacturing process.INTEREST INCOME. Interest income decreased approximately $1.4 million to $0.9 million for the year ended December31, 2007, as compared to $2.3 million for the year ended December 31, 2006. The decrease in interest income of $1.4 millionresulted from a decrease in the amount of cash, cash equivalents and restricted cash balances, as a result of our use of thesebalances primarily to fund our normal operating activities related to our efforts to gain FDA approval for our Isolagen Therapy.INTEREST EXPENSE. Interest expense remained constant at $3.9 million for the year ended December 31, 2007, ascompared to the year ended December 31, 2006. Our interest expense is related to our $90.0 million, 3.5% convertiblesubordinated notes, as well as the related amortization of deferred debt issuance costs of $0.8 million for each of the years endedDecember 31, 2007 and 2006, respectively.NET LOSS. Net loss decreased $0.2 million to $35.6 million for the year ended December 31, 2007, as compared to a netloss of $35.8 million for the year ended December 31, 2006. This decrease in net loss primarily represents the effects of ourdecrease in loss from discontinued operation and additional gross profit of $0.6 million, offset by the increases in our selling,general and administrative expenses and research and development expenses and reductions in interest income, as discussedabove.Results of Operations—Comparison of Years Ending December 31, 2006 and 2005REVENUE. Revenue increased $0.4 million for the year ended December 31, 2006, as compared to zero for the year endedDecember 31, 2005. The increase in revenue is due to the acquisition of Agera on August 10, 2006, which markets and sells acomplete line of advanced skin care systems based on a wide array of proprietary formulations, trademarks and nano-peptidetechnology. On a pro forma basis, assuming that Agera had been acquired on January 1, 2006 and 2005, respectively, ourrevenue would have been $1.2 million and $1.0 million for the years ended December 31, 2006 and 2005, respectively. 45Table of ContentsCOST OF SALES. Costs of sales increased to $0.2 million for the year ended December 31, 2006, as compared to zero forthe year ended December 31, 2005.As a percentage of revenue, Agera cost of sales were approximately 50% for the year ended December 31, 2006. Agera’scost of sales, as a percentage of revenue, for all of 2006 and 2005 (including the periods prior to our August 10, 2006acquisition of a 57% interest in Agera) were 46% and 37%, respectively.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreasedapproximately $0.8 million, or 6%, to $13.2 million for the year ended December 31, 2006, as compared to $14.0 million for theyear ended December 31, 2005. This decrease was net of the effect of a $0.6 million increase in selling, general andadministrative expenses for expenses of Agera for the period August 10, 2006 to December 31, 2006. The decrease in selling,general and administrative expense is primarily due to the following:a) Salaries, bonuses and payroll taxes increased by approximately $2.1 million to $5.2 million for the year endedDecember 31, 2006, as compared to $3.1 million for year ended December 31, 2005, due to an increase in the number ofour employees, primarily at the executive management level, which resulted in higher salary and bonus expense of$1.3 million during the year ended December 31, 2006. Additionally, as the result of the adoption of SFAS 123(R) onJanuary 1, 2006, equity-based compensation was approximately $1.1 million higher in 2006 as compared to the prior year.These increases were offset by a decrease in severance expense during 2006 of $0.3 million. We incurred $0.2 million ofseverance expense in the year ended December 31, 2006, as compared to $0.5 million in the year ended December 31,2005.b) Marketing expense increased by approximately $0.2 million to $0.6 million for the year ended December 31, 2006,as compared to $0.4 million for year ended December 31, 2005 due primarily to increased marketing and promotionalefforts related to marketing and selling our complete line of advanced skin care systems under the trade name Agera, sinceour acquisition of Agera on August 10, 2006.c) Travel expense decreased by approximately $0.2 million to $0.6 million for the year ended December 31, 2006, ascompared to $0.8 million for year ended December 31, 2005, due to less travel between our Houston, Texas and Exton,Pennsylvania facilities as a result of our closing of the Houston office during 2006.d) Consulting expense decreased by approximately $0.1 million to $0.7 million for the year ended December 31,2006, as compared to $0.8 million for the year ended December 31, 2005 primarily due to decreased recruiting costs during2006.e) Legal expenses, net, increased approximately $0.3 million to $1.6 million for the year ended December 31, 2006, ascompared to $1.3 million for the year ended December 31, 2005, due primarily to costs related to the securities andderivative lawsuits, for which we are defendants, and employment termination matters. While the change in legal expense,net, is not significant, included in the net legal expenses are insurance refunds of $0.9 million and $0 in the years endedDecember 31, 2006 and 2005, respectively. Insurance refunds received related to the reimbursement of legal defense costsare recorded in the period that they are received.f) Other general and administrative operating costs decreased approximately $3.1 million to $4.5 million for the yearended December 31, 2006, as compared to $7.6 million for the year ended December 31, 2005, due primarily to the write-off of third party developed software costs of approximately $1.4 million in the year ended December 31, 2005. Inaddition, with the completion of the Exton laboratory in the latter half of 2005, there were costs of approximately$1.4 million that were allocated from selling, general and administrative cost to research and development costs.Additionally, there was a decrease of approximately $0.3 million related to other corporate expenses, including publicrelations, investor relations and accounting fees. 46Table of ContentsRESEARCH AND DEVELOPMENT. Research and development expenses decreased by approximately $1.8 million duringthe year ended December 31, 2006 to $8.8 million, as compared to $10.6 million for the year ended December 31, 2005.Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for the IsolagenTherapy for specific dermal applications in the United States and also include costs to develop manufacturing, cell collectionand logistical process improvements. Research and development costs include personnel and laboratory costs related to theseFDA trials and certain consulting costs. The total inception to date cost of research and development as of December 31, 2006was $30.7 million. The FDA approval process is extremely complicated and is dependent upon our study protocols and theresults of our studies. In the event that the FDA requires additional studies for dermal applications or requires changes in ourstudy protocols or in the event that the results of the studies are not consistent with our expectations, as occurred during 2005with respect to our first pivotal Phase III dermal trial, the process will be more expensive and time consuming. Due to thecomplexities of the FDA approval process, we are unable to predict what the costs of obtaining approval for the dermalapplications will be at this time. We have other research projects currently underway. However, research and development costsrelated to these projects were not material during 2006 and 2005.The major changes in research and development expense are due primarily to the following: a) consulting expensedecreased by approximately $2.4 million to $4.5 million for the year ended December 31, 2006, as compared to $6.9 million forthe year ended December 31, 2005, as a result of decreased expenditures related to our clinical trials and manufacturing processresearch and development, b) salaries and payroll taxes decreased by approximately $0.9 million to $2.4 million for the yearended December 31, 2006, as compared to $3.3 million for the year ended December 31, 2005, as a result of the closure of ourresearch and development facility in Houston, Texas, during 2006, and termination of related personnel, as well as thetermination of certain Exton, Pennsylvania personnel during 2006 and c) facility costs, including rent, utilities, depreciationand other related costs, increased approximately $1.5 million, due primarily to the new Exton, Pennsylvania lease whichcommenced during 2005.LOSS FROM DISCONTINUED OPERATIONS. As discussed above under “Closure of the United Kingdom Operation,”during the three months ended December 31, 2006, the Board of Directors approved the closure of our United Kingdomoperation, and on March 31, 2007, the United Kingdom manufacturing facility was closed.The loss from discontinued operations increased by approximately $2.6 million for the year ended December 31, 2006 to$12.7 million, as compared to $10.1 million for the year ended December 31, 2005, and primarily consisted of the following:a) Gross loss increased by approximately $0.7 million to $1.2 million for the year ended December 31, 2006, ascompared to $0.5 million for the year ended December 31, 2005, due to a decrease in the number of biopsies, thus resultingin a decrease in revenue. With a decrease in revenue as a result of less marketing and promotional activities, and a largeportion of relatively fixed manufacturing costs, our gross loss increased.b) Salaries, bonuses and payroll taxes increased by approximately $1.0 million to $2.9 million for the year endedDecember 31, 2006, as compared to $1.9 million for year ended December 31, 2005, due primarily to an increase in thenumber of our employees dedicated to sales and marketing and customer service of our Isolagen Therapy in the UnitedKingdom. Further, severance expenses related to the decision to shutdown the United Kingdom operation wereapproximately $0.3 million for the year ended December 31, 2006.c) Marketing expense decreased by approximately $1.1 million to $1.7 million for the year ended December 31, 2006,as compared to $2.8 million for year ended December 31, 2005 due primarily to decreased marketing and promotionalefforts related to our Isolagen Therapy in the United Kingdom as a result of continued losses from the sale of the IsolagenTherapy and our related decision to shutdown the United Kingdom operations.d) Other general and administrative operating costs increased by approximately $1.6 million to $5.7 million for theyear ended December 31, 2006, as compared to $4.1 million for the year ended December 31, 2005, due primarily toimpairment charges of approximately $2.6 million related to the United Kingdom and Switzerland fixed assets; offset byapproximately $1.0 million in decreased United Kingdom and Swiss general office costs due to the anticipated UnitedKingdom shutdown and due to placing the Swiss campus for sale during the year ended December 31, 2006. 47Table of Contentse) The United Kingdom customer settlement charge was $0.8 million for the year ended December 31, 2006, ascompared to zero for the year ended December 31, 2005. As discussed further under Note 11, the United Kingdom customersettlement occurred during the first quarter of 2006.f) Research and development expenses decreased by approximately $0.4 million to $0.4 million for the year endedDecember 31, 2006, as compared to $0.8 million for the year ended December 31, 2005, due to a decrease in consultingrelated to process improvements related to our Isolagen manufacturing process as a result of the decision to shutdown theUnited Kingdom operation.INTEREST INCOME. Interest income decreased approximately $0.5 million to $2.3 million for the year ended December31, 2006, as compared to $2.8 million for the year ended December 31, 2005. The decrease in interest income resultedprincipally from a decrease in the amount of cash, restricted cash and short-term investment balances, as a result of our normaloperating activities related to our efforts to gain FDA approval for the Isolagen Therapy for specific dermal applications in theUnited States.INTEREST EXPENSE. Interest expense remained constant at $3.9 million for the year ended December 31, 2006, ascompared to the year ended December 31, 2005. Our interest expense is related to the issuance in November 2004 of $90million in principal amount of 3.5% convertible subordinated debt, as well as the related amortization of deferred debt issuancecosts of $0.8 million for each of the years ended December 31, 2006 and 2005.NET LOSS. Net loss for the year ended December 31, 2006 was $35.8 million as compared to a net loss of $35.8 million forthe year ended December 31, 2005. Our net loss, in total, was unchanged from 2005. However, the individual components of netloss have fluctuated, as discussed above.Liquidity and Capital ResourcesNet cash provided by (used in) operating, investing and financing activities for the three years ended December 31, 2007were as follows: Year Ended December 31, 2007 2006 2005 (in millions) Cash flows from operating activities $(29.7) $(29.6) $(34.0)Cash flows from investing activities (0.1) 19.8 11.6 Cash flows from financing activities $14.7 $0.2 $0.1 OPERATING ACTIVITIES. Cash used in operating activities during the year ended December 31, 2007 amounted to $29.7million, an increase of $0.1 million over the year ended December 31, 2006. The increase in our cash used in operatingactivities over the prior year is primarily due to an increase in net losses (adjusted for non-cash items) of $1.7 million, offset bychanges in operating assets and liabilities of $1.6 million. While our 2007 net loss was $0.2 million lower than the prior year,our net loss (adjusted for non-cash items) increased by $1.7 million; specifically our depreciation and amortization, impairmentlosses and bad debt provision were $3.4 million lower in 2007 as compared to 2006 (primarily due to the March 31, 2007closing of our United Kingdom operation), offset by $1.6 million of additional stock option expense (primarily due to stockoption modification expense incurred during 2007; see Note 13 to the Consolidated Financial Statements). In part as the resultof the closure of our United Kingdom operation during 2007, the majority of our operating assets and liabilities have fluctuatedas compared to the prior year. For example, the closure of our United Kingdom operations eliminated the accounts receivable,prepaid expenses and deferred revenue related to those operations. In addition, cash outflows related to inventory purchaseshave increased due to large inventory purchases by Agera during the first half of 2007.Our negative operating cash flows in 2007 were funded from cash on hand at December 31, 2006 and the proceeds from thesale of our common stock in August 2007 (discussed further below under Financing Activities). 48Table of ContentsINVESTING ACTIVITIES. Cash used in investing activities during the year ended December 31, 2007 amounted to $0.1million, an decrease of $19.9 million over the year ended December 31, 2006 cash inflow of $19.8 million. The cash used ininvesting activities of $0.1 million during the year ended December 31, 2007 related to capital expenditures of $0.2 millionoffset by $0.1 million of proceeds from property and equipment sold.The cash provided by investing activities of $19.8 million during the year ended December 31, 2006 was generated fromthe liquidation of $23.0 million of short-term investments (net of purchases) offset by $2.0 million of cash used (net of cashacquired) for the acquisition of a 57% interest in Agera, and further offset by $1.2 million of capital expenditures during 2006.The reduction of short-term investments was used to fund our 2006 purchases of property and equipment, our acquisition ofAgera and to partially fund our negative operating cash flows.FINANCING ACTIVITIES. Cash provided by financing activities was $14.7 million during the year ended December 31,2007, as compared to cash provided of $0.2 million during the year ended December 31, 2006. In June 2007, we filed a shelfregistration statement on Form S-3, which was subsequently declared effective by the SEC. The shelf registration allowed us theflexibility to offer and sell, from time to time, up to an original amount of $50 million of common stock, preferred stock, debtsecurities, warrants or any combination of the foregoing in one or more future public offerings. In August 2007, the Companysold under this shelf registration statement 6,767,647 shares of common stock to institutional investors, raising proceeds of$13.8 million, net of offering costs. In addition, during the year ended December 31, 2007 we generated $0.9 million of cashproceeds related to the exercise of stock options and warrants. The 2006 cash proceeds of $0.2 million related solely to stockoption exercises.Cash Flows Related to Discontinued OperationsCash flows related to discontinued operations, which are included in the table of cash flows above, were as follows: Years Ended December 31, 2007 2006 2005 (in millions) Cash flows used in operating activities $(2.6) $(10.8) $(9.0)Cash flows used in investing activities 0.1 (0.3) (13.0)Total cash flows used in discontinued operations during the year ended December 31, 2007 was $2.5 million, as comparedto $11.1 million during the year ended December 31, 2006. The large majority of cash outflow associated with discontinuedoperations related to the first quarter of 2007. Cash flows used in discontinued operations during the three months endedMarch 31, 2007 was $2.1 million. Our United Kingdom was in operation during the three months ended March 31, 2007, andwas shutdown on March 31, 2007. The net loss from our United Kingdom operation during the three months ended March 31,2007 was $1.1 million. In addition, accrued expenses and deferred revenue decreased by $1.2 million during this shutdownperiod (cash outflows), primarily related to the payment of severance and refunds to customers. The United Kingdom net lossand the large decrease in United Kingdom accrued expenses and United Kingdom deferred revenue during the three monthsended March 31, 2007 is what primarily generated the cash outflow from discontinued operations for the year endedDecember 31, 2007. The remaining cash outflows associated with discontinued operations during the second, third and fourthquarters of 2007 primarily related to the payment of our lease obligation, public relations costs and legal costs in the UnitedKingdom, as well as operating costs to maintain our Switzerland campus.Cash outflows from operating activities related to the years ended December 31, 2006 and 2005 related primarily to thenormal, historical operation of the United Kingdom and Swiss operations, prior to the decision to shutdown the UnitedKingdom operation. The cash outflow from investing activities of $13.0 million during the year ended December 31, 2005 isprimarily due to the purchase of the Swiss campus, and related capital improvements. 49Table of ContentsWORKING CAPITAL: At December 31, 2007, we had cash, cash equivalents and restricted cash of $17.0 million andworking capital of $13.8 million (including our cash, cash equivalents and restricted cash). The substantial majority of ourworking capital change, as compared to December 31, 2006, relates to the use of our cash, cash equivalents, restricted cash andavailable-for-sale investments for the purpose of funding and operating our business, offset by the cash proceeds from our$13.8 million common stock sale in August 2007. Our ability to operate profitably is contingent upon our success in obtainingadditional capital or financing, obtaining regulatory approval of our product candidates, development of markets for ourproducts, and development of profitable scalable manufacturing processes. We believe our existing capital resources areadequate to finance our operations through at least September 1, 2008, but we will need to engage in a capital-raisingtransaction during 2008 or we will need to significantly modify our business plan in order to sustain our operations. We can notassure you that we will be able to obtain regulatory approvals of our product candidates, successfully develop the markets forour product candidates or develop profitable scalable manufacturing processes or obtain the capital we require, on a timelybasis or on terms that we would find acceptable, or at all. Further, if we do not obtain additional funding prior to or during thethird quarter of 2008, we may enter into bankruptcy during 2008 and possibly cease operations thereafter. Our ability to raiseequity or debt financing may be dependent on the status of our Phase III clinical trial related to our lead facial aesthetic productcandidate, which cannot be predicted. If we are able to raise additional capital, it will likely result in dilution to our currentstockholders, which may be substantial.FACTORS AFFECTING OUR CAPITAL RESOURCES: In April 2005, we acquired a two-building, 100,000 square footcorporate campus in Bevaix, Canton of Neuchâtel, Switzerland for $10 million. The $10 million purchase price was paid usingcash on hand from the proceeds of our 2004 issuances of common stock and 3.5% convertible subordinated notes. Our initialestimate of the total cost of acquisition and renovation of the facility, including the purchase of required equipment, was$25 million, which includes approximately $1.8 million we had spent in renovations. The corporate campus is classified as“assets of discontinued operations held for sale” at December 31, 2007 with a value of $11.2 million, reflecting the fair value ofthe corporate campus. Fair value is defined as the price at which an asset would change hands in a transaction between a willingbuyer and willing seller in an unforced transaction. However, if we were to sell the Swiss campus in a forced transaction or adistress sale, it is likely that the price we would receive would be less, and we would recognize a loss, which may be significant,upon such sale. As the result of our cash position at December 31, 2007 and our need for funding, it is possible that we willchoose or be required to sell the Swiss campus under such conditions.Contractual ObligationsThe following table summarizes the amounts of payments due under specified contractual obligations as of December 31,2007: (in millions) Payments Due by Period Less than 1 - 3 4 - 5 More than Contractual Obligations 1 Year Years Years 5 Years Long-Term Debt Obligations, excluding interest* $— $90.0 $— $— Interest* 3.2 3.2 — — Lease Obligations 1.4 3.6 1.4 — Purchase Obligations** 1.3 0.1 — — Obligations in Connection with Acquisition*** 0.2 1.1 0.8 5.8 Total $6.1 $98.0 $2.2 $5.8 * The table above assumes that our 3.5% convertible subordinated notes will be called due on November 1, 2009. Refer tothe below for a description of our 3.5% convertible subordinated notes. ** In addition to the above, we have, in the ordinary course of business, various contractual agreements with variousconsultants and service providers whereby a fee or rate per hour has been agreed to, but no guaranteed minimums havebeen established. Generally, such agreements are related to our research and development efforts or general operatingmatters. The above table should be read in conjunction with our consolidated financial statements, which illustrate a 2007net loss of $35.6 million and net cash used in operations of $29.7 million during 2007. *** In August 2006, we paid $2.7 million in cash to acquire a 57% interest in Agera and also we agreed to contribute$0.3 million to the working capital of Agera to support marketing and inventory acquisitions. In addition, the acquisitionagreement includes future contingent payments up to a maximum of $8.0 million. Such additional purchase price is basedupon certain percentages of Agera’s cost of sales incurred after June 30, 2007. Accordingly, based upon the financialperformance of Agera, up to an additional $8.0 million of purchase price may be due to the selling shareholder in futureperiods. We believe any such payments will not be significant in fiscal year 2007. The timing of future payments maydiffer from the estimates above, and will depend on the future operating performance of Agera. 50Table of ContentsIn November 2004, we issued $90.0 million in principal amount of 3.5% convertible subordinated notes due November 1,2024, although these notes may be due sooner as discussed below. The notes are our general, unsecured obligations. The notesare subordinated in right of payment, which means that they rank in right of payment behind other indebtedness of ours. Inaddition, the notes are effectively subordinated to all existing and future liabilities of our subsidiaries. We will be required torepay the full principal amount of the notes on November 1, 2024 unless they are previously converted, redeemed orrepurchased.The notes bear interest at an annual rate of 3.5% from the date of issuance of the notes. We will pay interest twice a year, oneach May 1 and November 1, until the principal is paid or made available for payment or the notes have been converted.Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months.The note holders may convert the notes into shares of our common stock at any time before the close of business onNovember 1, 2024, unless the notes have been previously redeemed or repurchased. The initial conversion rate (which is subjectto adjustment) for the notes is 109.2001 shares of common stock per $1,000 principal amount of notes, which is equivalent toan initial conversion price of approximately $9.16 per share. Holders of notes called for redemption or submitted for repurchasewill be entitled to convert the notes up to and including the business day immediately preceding the date fixed for redemptionor repurchase.At any time on or after November 1, 2009, we may redeem some or all of the notes at a redemption price equal to 100% ofthe principal amount of such notes plus accrued and unpaid interest (including additional interest, if any) to, but excluding, theredemption date.The note holders will have the right to require us to repurchase their notes on November 1 of 2009, 2014 and 2019. Inaddition, if we experience a fundamental change (which generally will be deemed to occur upon the occurrence of a change incontrol or a termination of trading of our common stock), note holders will have the right to require us to repurchase their notes.In the event of certain fundamental changes that occur on or prior to November 1, 2009, we will also pay a make-wholepremium to holders that require us to purchase their notes in connection with such fundamental change.Off-Balance Sheet TransactionsWe do not engage in material off-balance sheet transactions.OtherINFLATION. Inflation did not have a significant impact on our results for year ended December 31, 2007. 51Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskMarket risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchangerates or interest rates. We are exposed to market risk in the form of foreign exchange rate risk and interest rate risk.Foreign Exchange Rate RiskThe effect of U.S. dollar currency fluctuations against the foreign currency in these countries is somewhat mitigated by thefact that expenses are generally incurred in the same currencies in which the revenue is generated. Our income will be higher orlower depending on the weakening or strengthening of the U.S. dollar against the respective foreign currency. Additionally,approximately 29% of our assets at December 31, 2007 (see Note 5 to our Consolidated Financial Statements, “DiscontinuedOperations”) were based in our foreign operations and translated into U.S. dollars at the foreign currency exchange rate in effectas of the end of each accounting period, with the effect of such translation reflected as a separate component of consolidatedshareholders’ deficit. Substantially all of the 28% in foreign assets relates to our Swiss campus held for sale, with a value of$11.2 million at December 31, 2007. Accordingly, our consolidated shareholders’ deficit will fluctuate depending on theweakening or strengthening of the U.S. dollar against the respective foreign currency.As a result of changing foreign currency exchange rates since December 31, 2006, specifically the exchange rate betweenthe US dollar and the Swiss franc, our accumulated other comprehensive loss of $0.1 million at December 31, 2006 has swung toan accumulated other comprehensive gain of $0.7 million at December 31, 2007; or a change of approximately $0.8 million.However, this $0.8 million gain is considered unrealized and is reflected on the Consolidated Balance Sheet. Accordingly, thisunrealized gain may increase or decrease in the future, based on the movement of foreign currency exchange rates, but will nothave an impact on net income (loss) until the related foreign capital investments are sold or otherwise realized.Interest Rate RiskOur 3.5%, $90.0 million convertible subordinated notes, pay interest at a fixed rate and, accordingly, we are not exposed tointerest rate risk as a result of this debt. However, the fair value of our $90.0 million convertible subordinated notes does varybased upon, among other factors, the price of our common stock and current interest rates on similar instruments.We do not enter into derivatives or other financial instruments for trading or speculative purposes.Item 8. Financial Statements and Supplementary DataThe financial statements, including the notes thereto and report of the independent auditors thereon, are included in thisreport as set forth in the “Index to Financial Statements.” See F-1 for Index to Consolidated Financial Statements. 52Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresDuring the fourth quarter of 2007, management, including our principal executive officer and principal financial officer,evaluated the disclosure controls and procedures related to the recording, processing, summarization and reporting ofinformation in the periodic reports that the Company files with the SEC. These disclosure controls and procedures have beendesigned to ensure that (a) material information relating to the Company, including its consolidated subsidiaries, is madeknown to management, including these officers, by other employees of the Company, and (b) this information is recorded,processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms.Accordingly, as of December 31, 2007, these officers (the principal executive officer and principal financial officer)concluded that the Company’s disclosure controls and procedures were effective.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as suchterm is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of ourmanagement, including our principal executive officer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the framework in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission.Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles in the United States of America. Our internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concludedthat our internal control over financial reporting was effective as of December 31, 2007.BDO Seidman, LLP, the independent registered public accounting firm who also audited our consolidated financialstatements, has issued its own attestation report on the effectiveness of the Company’s internal control over financial reportingas of December 31, 2007, which is filed herewith. 53Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Isolagen, Inc. (a development stage company)Exton, PennsylvaniaWe have audited Isolagen, Inc.’s (in the development stage) internal control over financial reporting as of December 31, 2007,based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (the COSO criteria). Isolagen, Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, includedin the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express anopinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internalcontrol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financial reporting includes those policies and proceduresthat (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Isolagen, Inc., maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2007, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Isolagen, Inc. as of December 31, 2007 and 2006, and the related consolidated statements ofoperations and comprehensive loss, shareholders’ equity (deficit), and cash flows for each of the three years in the period endedDecember 31, 2007 and the statements of shareholders’ equity (deficit) for the period from December 28, 1995 (inception) toDecember 31, 2004, and our report dated March 5, 2008 contains an explanatory paragraph regarding the Company’s ability tocontinue as a going concern./s/ BDO Seidman, LLPHouston, TexasMarch 5, 2008Changes in Internal ControlsThere was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone. 54Table of ContentsPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item 10 will be included in the Company’s Proxy Statement for the 2008 Annual Meetingof Stockholders which will be filed with the Securities and Exchange Commission no later than April 29, 2008 and isincorporated into this Item 10 by reference.Code of Ethics. We have adopted a written code of ethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller and any persons performing similar functions. The code of ethics isincorporated into this Item 10 by reference.Item 11. Executive CompensationThe information required by this Item 11 will be included in the Company’s Proxy Statement for the 2008 Annual Meetingof Stockholders which will be filed with the Securities and Exchange Commission no later than April 29, 2008 and isincorporated into this Item 11 by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersExcept as provided below, the information required by this Item 12 will be included in the Company’s Proxy Statement forthe 2008 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later thanApril 29, 2008 and is incorporated into this Item 12 by reference.Securities Authorized for Issuance Under Equity Compensation PlansAs of December 31, 2007, our equity compensation plan information was as follows: Number of Securities to be issued upon Weighted-average Number of exercise of exercise price of securities remaining outstanding options outstanding options for future issuanceEquity compensation plans approvedby security holders 4,155,666 $4.34 4,486,320 Equity compensation plans notapproved by security holders (1) 3,568,333 $2.42 —Total 7,723,999 $3.45 4,486,320 (1) Represents options issued to employees, in connection with initial employment, outside of our approved plans.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item 13 will be included in the Company’s Proxy Statement for the 2008 Annual Meetingof Stockholders which will be filed with the Securities and Exchange Commission no later than April 29, 2008 and isincorporated into this Item 13 by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this Item 14 will be included in the Company’s Proxy Statement for the 2008 Annual Meetingof Stockholders which will be filed with the Securities and Exchange Commission no later than April 29, 2008 and isincorporated into this Item 14 by reference. 55Table of ContentsPart IVItem 15. Exhibits and Financial Statement Schedule(a)(1) Financial Statements. • Report of Independent Registered Public Accounting Firm • Consolidated Balance Sheets as of December 31, 2007 and 2006 • Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005 and inception toDecember 31, 2007 • Consolidated Statements of Shareholders’ Equity and Comprehensive Loss from inception to December 31, 2007 • Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 and inception toDecember 31, 2007 • Notes to Consolidated Financial Statements(a)(2) Financial Statement Schedule.All schedules are omitted because of the absence of conditions under which they are required or because the requiredinformation is presented in the Financial Statements or Notes thereto.(a)(3) The exhibits listed under Item 15(b) are filed or incorporated by reference herein. 56Table of Contents(b) Exhibits.The following exhibits are filed as part of this annual report: EXHIBIT NO. IDENTIFICATION OF EXHIBIT2 Agreement and Plan of Merger by and among American Financial Holding, Inc., ISO Acquisition Corp., IsolagenTechnologies, Inc., Gemini IX, Inc., and William K. Boss, Jr., Olga Marko and Dennis McGill dated August 1,2001(1)3(i) Amended Certificate of Incorporation(17)3(ii) Third Amended and Restated Bylaws(25)4.1 Specimen of Common Stock certificate(2)4.2 Certificate of Designations of Series A Convertible Preferred Stock(7)4.3 Certificate of Designations of Series B Convertible Preferred Stock(5)4.4 Indenture, dated November 3, 2004, between the Company and The Bank of New York Trust Company, N.A., astrustee(11)4.5 Rights Agreement, dated as of May 12, 2006, by and between the registrant and American Stock Transfer & TrustCompany, including the Form of Certificate of Designation, Preferences and Rights of Series C Junior ParticipatingPreferred Stock attached as Exhibit A thereto, the Form of Rights Certificate attached as Exhibit B thereto and theSummary of Rights to Purchase Preferred Stock attached as Exhibit C thereto. (21)10.1 2003 Stock Option and Stock Appreciation Rights Plan(3)*10.2 2001 Stock Option and Appreciation Rights Plan(4)*10.3 Lease Agreement dated March 24, 2002 by and between the Registrant as Lessee and Claire O Aceti Gbmh asLessor(7)10.4 Intellectual Property Purchase Agreement between Isolagen Technologies, Inc., Gregory M. Keller, and PacGenPartners(8)10.5 Purchase Agreement among CIBC World Market Corp., UBS Securities LLC, and Adams, Harkness & Hill, Inc.dated October 28, 2004(11)10.6 Registration Rights Agreement among CIBC World Market Corp., UBS Securities LLC, and Adams, Harkness &Hill, Inc. dated November 3, 2004(11)10.7 Lease Agreement between Isolagen Technologies, Inc. and Beltway 8 Service Center Investors Ltd. datedFebruary 16, 2005(13)10.8 Lease Agreement between Isolagen, Inc and The Hankin Group dates April 7, 2005(15)10.9 Purchase Option Agreement between Isolagen, Inc and 405 Eagleview Associates dated April 7, 2005(15)10.10 2005 Equity Incentive Plan, as amended(18)10.11 Separation and Release Agreement, dated October 27, 2005, among Isolagen, Inc., Isolagen Technologies, Inc. andFrank DeLape(19)10.12 Amended Employment Agreement between Isolagen, Inc. and Susan Ciallella(20)*10.13 Employment Agreement between Isolagen, Inc. and Todd Greenspan(20)*10.14 Employment Agreement dated June 5, 2006 between Isolagen, Inc. and Nicholas L. Teti(22)*10.15 Employment Agreement dated March 12, 2007 between Isolagen, Inc. and Declan Daly(23)*10.16 Employment Agreement dated March 12, 2007 between Isolagen, Inc. and Steven Trider(23)*10.17 Settlement Agreement and Release between Susan Stranahan Ciallella and Isolagen, Inc. dated June 8, 2007 (24)10.18 Consulting and Non-Competition Agreement dated January 7, 2008 between Isolagen, Inc. and Nicholas L.Teti * (26)10.19 Employment Agreement dated January 7, 2008 between Isolagen, Inc. and Declan Daly * (26)14 Code of Ethics(9)21 List of Subsidiaries(23)23 BDO Seidman, LLP Consent(26)31 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of2002(26)32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002(26) 57Table of Contents * Indicates a management contract or a compensatory plan or arrangement. (1) Previously filed as an exhibit to the company’s Form 8-K, filed on August 22, 2001, and is incorporated by referencehereto. (2) Previously filed as an exhibit to the company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2001, and is incorporated by reference hereto. (3) Previously filed as an appendix to the company’s Definitive Proxy Statement, as filed on May 6, 2003, in connection withthe 2003 Annual Stockholder Meeting, and is incorporated by reference hereto. (4) Previously filed as an appendix to the company’s Definitive Proxy Statement, as filed on October 23, 2001, in connectionwith the 2001 Annual Stockholder Meeting, and is incorporated by reference hereto. (5) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended March 31, 2003, as filed on May 15,2003, and is incorporated by reference hereto. (6) Previously filed as an exhibit to the company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2002, and is incorporated by reference hereto. (7) Previously filed as an exhibit to the company’s Form S-1, as filed on September 12, 2003, and is incorporated by referencehereto. (8) Previously filed as an exhibit to the company’s amended Form S-1, as filed on October 24, 2003, and is incorporated byreference hereto. (9) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003,and is incorporated by reference hereto. (10) Previously filed as an exhibit to the company’s Annual Report on Form 10-K/A for the fiscal year ended December 31,2003, and is incorporated by reference hereto. (11) Previously filed as an exhibit to the company’s Current Report on Form 8-K dated November 4, 2004, and is incorporatedby reference hereto. (12) Reserved. (13) Previously filed as an exhibit to the company’s Form 8-K, filed on February 23, 2005, and is incorporated by referencehereto. (14) Reserved. (15) Previously filed as an exhibit to the company’s Form 8-K, filed on April 12, 2005, and is incorporated by reference hereto. (16) Reserved. (17) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended June 30, 2005, as filed on August 9,2005, and is incorporated by reference hereto. (18) Previously filed as an exhibit to the company’s Form S-8, filed on February 13, 2006, and is incorporated by referencehereto. (19) Previously filed as an exhibit to the company’s Form 8-K, filed on November 2, 2005, and is incorporated by referencehereto. (20) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005,and is incorporated by reference hereto. (21) Previously filed as an exhibit to the company’s Form 8-K, filed on May 15, 2006, and is incorporated by reference hereto. (22) Previously filed as an exhibit to the company’s Form 8-K, filed on June 9, 2006, and is incorporated by reference hereto. (23) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007,and is incorporated by reference hereto. (24) Previously filed as an exhibit to the company’s Form 8-K, filed on June 13, 2007, and is incorporated by reference hereto. (25) Previously filed as an exhibit to the company’s Form 8-K, filed on January 8, 2007, and is incorporated by referencehereto. (26) Filed herewith. 58Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized. Isolagen, Inc. By: /s/ Declan Daly Declan Daly, Chief Executive Officer &Chief Financial Officer Date: March 6, 2008Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date /s/ Nicholas L. TetiNicholas L. Teti Chairman of the Board of Directors March 6, 2008/s/ Declan DalyDeclan Daly Chief Executive Officer and Chief FinancialOfficer March 6, 2008/s/ Todd J. GreenspanTodd J. Greenspan Vice President of Finance and Administration,Corporate Controller March 6, 2008/s/ Steven MorrellSteven Morrell Director March 6, 2008/s/ Henry TohHenry Toh Director March 6, 2008/s/ Ralph De MartinoRalph De Martino Director March 6, 2008/s/ Marshall G. WebbMarshall G. Webb Director March 6, 2008/s/ Terry E. VandewarkerTerry E. Vandewarker Director March 6, 2008/s/ Kenneth A. SelzerKenneth A. Selzer Director March 6, 2008 59Table of ContentsIsolagen, Inc.(A Development Stage Company)Index to Consolidated Financial Statements PAGE Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2007 and 2006 F-3 Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 and Inception toDecember 31, 2007 (Unaudited) F-4 Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss From Inception to December 31,2007 F-5-13 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 and Inception toDecember 31, 2007 (Unaudited) F-14 Notes to Consolidated Financial Statements F-15-46 F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders of Isolagen, Inc. (a development stage company)Exton, PennsylvaniaWe have audited the accompanying consolidated balance sheets of Isolagen, Inc. (in the development stage) as of December 31,2007 and 2006 and the related consolidated statements of operations and comprehensive loss, shareholders’ equity (deficit),and cash flows for each of the three years in the period ended December 31, 2007. We have also audited the statements ofshareholders’ equity (deficit) for the period from December 28, 1995 (inception) to December 31, 2004. These consolidatedfinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Isolagen, Inc. at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2007 and the statements of shareholders’ equity (deficit) for the period from December28, 1995 (inception) to December 31, 2007 in conformity with accounting principles generally accepted in the United States ofAmerica.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Isolagen, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria establishedin Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) and our report dated March 5, 2008 expressed an unqualified opinion thereon.The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Asdiscussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capitaldeficit that raise substantial doubt about its ability to continue as a going concern. Management’s plan in regard to thesematters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcomeof this uncertainty./s/ BDO Seidman, LLPHouston, TexasMarch 5, 2008 F-2Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Balance Sheets December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $16,590,720 $31,783,545 Restricted cash 451,382 1,483,197 Accounts receivable, net 319,674 81,502 Inventory 669,119 181,865 Other receivables 29,250 357 Prepaid expenses 701,214 860,244 Current assets of discontinued operations, net 14,515 739,009 Total current assets 18,775,874 35,129,719 Property and equipment, net of accumulated depreciation and amortization of$2,921,651 and $1,816,125, respectively 3,395,723 4,331,605 Intangibles, net of amortization of $718,762 and $381,795, respectively 4,599,538 4,936,505 Other assets, net of amortization of $2,372,589 and $1,623,352, respectively 1,424,456 2,204,685 Assets of discontinued operations held for sale 11,202,725 10,503,234 Other long-term assets of discontinued operations 92,874 181,127 Total assets $39,491,190 $57,286,875 Liabilities, Minority Interests and Shareholders’ Deficit Current liabilities: Accounts payable $403,815 $886,598 Accrued expenses 4,348,256 2,886,041 Deferred revenue — 5,421 Current liabilities of discontinued operations 217,822 1,863,857 Total current liabilities 4,969,893 5,641,917 Long term debt 90,000,000 90,000,000 Other long term liabilities of continuing operations 1,206,721 999,940 Long term liabilities of discontinued operations 107,511 164,227 Total liabilities 96,284,125 96,806,084 Commitments and contingencies (see Note 10) Minority interests 1,858,026 2,104,373 Shareholders’ deficit: Preferred stock, $.001 par value; 5,000,000 shares authorized — — Series C junior participating preferred stock, $.001 par value; 10,000 sharesauthorized — — Common stock, $.001 par value; 100,000,000 shares authorized 41,640 34,363 Additional paid-in capital 129,208,631 111,516,561 Treasury stock, at cost, 4,000,000 shares (25,974,000) (25,974,000)Accumulated other comprehensive income (loss) 718,926 (127,462)Accumulated deficit during development stage (162,646,158) (127,073,044)Total shareholders’ deficit (58,650,961) (41,623,582)Total liabilities, minority interests and shareholders’ deficit $39,491,190 $57,286,875 The accompanying notes are an integral part of these consolidated financial statements. F-3Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Statements of Operations Cumulative Period from December 28, 1995 (date of inception) to For the Year Ended December 31, December 31, 2007 2007 2006 2005 (Unaudited) Revenue Product sales $1,400,986 $384,389 $— $3,175,489 License fees — — — 260,000 Total revenue 1,400,986 384,389 — 3,435,489 Cost of sales 656,029 194,197 — 1,252,685 Gross profit 744,957 190,192 — 2,182,804 Selling, general and administrative expenses 18,730,863 13,174,960 14,000,977 66,146,085 Research and development 13,298,338 8,796,219 10,592,170 43,989,034 Operating loss (31,284,244) (21,780,987) (24,593,147) (107,952,315)Other income (expense) Interest income 901,262 2,261,899 2,808,328 6,807,777 Other income 150,138 — — 322,581 Interest expense (3,899,239) (3,899,239) (3,912,059) (12,658,841)Minority interest 246,347 78,132 — 324,479 Loss before income taxes from continuingoperations (33,885,736) (23,340,195) (25,696,878) (113,156,319)Income tax benefit — 190,754 — 190,754 Loss from continuing operations (33,885,736) (23,149,441) (25,696,878) (112,965,565)Loss from discontinued operations, net of tax (1,687,378) (12,671,965) (10,080,706) (36,666,908)Net loss (35,573,114) (35,821,406) (35,777,584) (149,632,473)Deemed dividend associated with beneficialconversion of preferred stock — — — (11,423,824)Preferred stock dividends — — — (1,589,861)Net loss attributable to common shareholders $(35,573,114) $(35,821,406) $(35,777,584) $(162,646,158)Per share information: Loss from continuing operations — basic anddiluted $(1.02) $(0.76) $(0.85) $(7.59)Loss from discontinued operations — basicand diluted (0.05) (0.42) (0.33) (2.47)Deemed dividend associated with beneficialconversion of preferred stock — — — (0.77)Preferred stock dividends — — — (0.11)Net loss per common share—basic and diluted $(1.07) $(1.18) $(1.18) $(10.94)Weighted average number of basic and dilutedcommon shares outstanding 33,093,370 30,309,439 30,245,283 14,873,948 The accompanying notes are an integral part of these consolidated financial statements. F-4Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Issuance ofcommonstock forcash on12/28/95 — $— — $— 2,285,291 $2,285 $(1,465) — $— $— $— $820 Issuance ofcommonstock forcash on11/7/96 — — — — 11,149 11 49,989 — — — — 50,000 Issuance ofcommonstock forcash on11/29/96 — — — — 2,230 2 9,998 — — — — 10,000 Issuance ofcommonstock forcash on12/19/96 — — — — 6,690 7 29,993 — — — — 30,000 Issuance ofcommonstock forcash on12/26/96 — — — — 11,148 11 49,989 — — — — 50,000 Net loss — — — — — — — — — — (270,468) (270,468)Balance,12/31/96 — $— — $— 2,316,508 $2,316 $138,504 — $— $— $(270,468) $(129,648)Issuance ofcommonstock forcash on12/27/97 — — — — 21,182 21 94,979 — — — — 95,000 Issuance ofcommonstock forservices on9/1/97 — — — — 11,148 11 36,249 — — — — 36,260 Issuance ofcommonstock forservices on12/28/97 — — — — 287,193 287 9,968 — — — — 10,255 Net loss — — — — — — — — — — (52,550) (52,550)Balance,12/31/97 — $— — $— 2,636,031 $2,635 $279,700 — $— $— $(323,018) $(40,683)The accompanying notes are an integral part of these consolidated financial statements. F-5Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Issuance ofcommonstock for cashon 8/23/98 — $— — $— 4,459 $4 $20,063 — $— $— $— $20,067 Repurchase ofcommonstock on9/29/98 — — — — — — — 2,400 (50,280) — — (50,280)Net loss — — — — — — — — — — (195,675) (195,675)Balance,12/31/98 — $— — $— 2,640,490 $2,639 $299,763 2,400 $(50,280) $— $(518,693) $(266,571)Issuance ofcommonstock forcash on9/10/99 — — — — 52,506 53 149,947 — — — — 150,000 Net loss — — — — — — — — — — (1,306,778) (1,306,778)Balance,12/31/99 — $— — $— 2,692,996 $2,692 $449,710 2,400 $(50,280) $— $(1,825,471) $(1,423,349)Issuance ofcommonstock forcash on1/18/00 — — — — 53,583 54 1,869 — — — — 1,923 Issuance ofcommonstock forservices on3/1/00 — — — — 68,698 69 (44) — — — — 25 Issuance ofcommonstock forservices on4/4/00 — — — — 27,768 28 (18) — — — — 10 Net loss — — — — — — — — — — (807,076) (807,076)Balance,12/31/00 — $— — $— 2,843,045 $2,843 $451,517 2,400 $(50,280) $— $(2,632,547) $(2,228,467)The accompanying notes are an integral part of these consolidated financial statements. F-6Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Issuance ofcommon stockfor services on7/1/01 — $— — $— 156,960 $157 $(101) — $— $— $— $56 Issuance ofcommon stockfor services on7/1/01 — — — — 125,000 125 (80) — — — — 45 Issuance ofcommon stockforcapitalizationof accruedsalaries on8/10/01 — — — — 70,000 70 328,055 — — — — 328,125 Issuance ofcommon stockfor conversionof convertibledebt on8/10/01 — — — — 1,750,000 1,750 1,609,596 — — — — 1,611,346 Issuance ofcommon stockfor conversionof convertibleshareholdernotes payableon 8/10/01 — — — — 208,972 209 135,458 — — — — 135,667 Issuance ofcommon stockfor bridgefinancing on8/10/01 — — — — 300,000 300 (192) — — — — 108 Retirement oftreasury stockon 8/10/01 — — — — — — (50,280) (2,400) 50,280 — — — Issuance ofcommon stockfor net assetsof Gemini on8/10/01 — — — — 3,942,400 3,942 (3,942) — — — — — Issuance ofcommon stockfor net assetsof AFH on8/10/01 — — — — 3,899,547 3,900 (3,900) — — — — — Issuance ofcommon stockfor cash on8/10/01 — — — — 1,346,669 1,347 2,018,653 — — — — 2,020,000 Transaction andfund raisingexpenses on8/10/01 — — — — — — (48,547) — — — — (48,547)Issuance ofcommon stockfor services on8/10/01 — — — — 60,000 60 — — — — — 60 Issuance ofcommon stockfor cash on8/28/01 — — — — 26,667 27 39,973 — — — — 40,000 Issuance ofcommon stockfor services on9/30/01 — — — — 314,370 314 471,241 — — — — 471,555 The accompanying notes are an integral part of these consolidated financial statements. F-7Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Uncompensatedcontribution ofservices—3rdquarter — $— — $— — $— $55,556 — $— $— $— $55,556 Issuance ofcommon stockfor services on11/1/01 — — — — 145,933 146 218,754 — — — — 218,900 Uncompensatedcontribution ofservices—4thquarter — — — — — — 100,000 — — — — 100,000 Net loss — — — — — — — — — — (1,652,004) (1,652,004)Balance, 12/31/01 — $— — $— 15,189,563 $15,190 $5,321,761 — $— $— $(4,284,551) $1,052,400 Uncompensatedcontribution ofservices—1stquarter — — — — — — 100,000 — — — — 100,000 Issuance ofpreferred stockfor cash on4/26/02 905,000 905 — — — — 2,817,331 — — — — 2,818,236 Issuance ofpreferred stockfor cash on5/16/02 890,250 890 — — — — 2,772,239 — — — — 2,773,129 Issuance ofpreferred stockfor cash on5/31/02 795,000 795 — — — — 2,473,380 — — — — 2,474,175 Issuance ofpreferred stockfor cash on6/28/02 229,642 230 — — — — 712,991 — — — — 713,221 Uncompensatedcontribution ofservices—2ndquarter — — — — — — 100,000 — — — — 100,000 Issuance ofpreferred stockfor cash on7/15/02 75,108 75 — — — — 233,886 — — — — 233,961 Issuance ofcommon stockfor cash on8/1/02 — — — — 38,400 38 57,562 — — — — 57,600 Issuance ofwarrants forservices on9/06/02 — — — — — — 103,388 — — — — 103,388 Uncompensatedcontribution ofservices—3rdquarter — — — — — — 100,000 — — — — 100,000 Uncompensatedcontribution ofservices—4thquarter — — — — — — 100,000 — — — — 100,000 Issuance ofpreferred stockfor dividends 143,507 144 — — — — 502,517 — — — (502,661) — Deemed dividendassociated withbeneficialconversion ofpreferred stock — — — — — — 10,178,944 — — — (10,178,944) — Comprehensiveincome: Net loss — — — — — — — — — — (5,433,055) (5,433,055)Othercomprehensiveincome, foreigncurrencytranslationadjustment — — — — — — — — — 13,875 — 13,875 Comprehensive loss — — — — — — — — — — — (5,419,180)Balance, 12/31/02 3,038,507 $3,039 — $— 15,227,963 $15,228 $25,573,999 — $— $13,875 $(20,399,211) $5,206,930 The accompanying notes are an integral part of these consolidated financial statements. F-8Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Issuance ofcommon stockfor cash on1/7/03 — $— — $— 61,600 $62 $92,338 — $— $— $— $92,400 Issuance ofcommon stockfor patentpendingacquisition on3/31/03 — — — — 100,000 100 539,900 — — — — 540,000 Cancellation ofcommon stockon 3/31/03 — — — — (79,382) (79) (119,380) — — — — (119,459)Uncompensatedcontribution ofservices—1stquarter — — — — — — 100,000 — — — — 100,000 Issuance ofpreferred stockfor cash on5/9/03 — — 110,250 110 — — 2,773,218 — — — — 2,773,328 Issuance ofpreferred stockfor cash on5/16/03 — — 45,500 46 — — 1,145,704 — — — — 1,145,750 Conversion ofpreferred stockinto commonstock—2nd qtr (70,954) (72) — — 147,062 147 40,626 — — — — 40,701 Conversion ofwarrants intocommon stock—2nd qtr — — — — 114,598 114 (114) — — — — — Uncompensatedcontribution ofservices—2ndquarter — — — — — — 100,000 — — — — 100,000 Issuance ofpreferred stockdividends — — — — — — — — — — (1,087,200) (1,087,200)Deemed dividendassociated withbeneficialconversion ofpreferred stock — — — — — — 1,244,880 — — — (1,244,880) — Issuance ofcommon stockfor cash—3rdqtr — — — — 202,500 202 309,798 — — — — 310,000 Issuance ofcommon stockfor cash on8/27/03 — — — — 3,359,331 3,359 18,452,202 — — — — 18,455,561 Conversion ofpreferred stockinto commonstock—3rd qtr (2,967,553) (2,967) (155,750) (156) 7,188,793 7,189 (82,875) — — — — (78,809)Conversion ofwarrants intocommon stock—3rd qtr — — — — 212,834 213 (213) — — — — — Compensationexpense onwarrants issuedto non-employees — — — — — — 412,812 — — — — 412,812 Issuance ofcommon stockfor cash—4thqtr — — — — 136,500 137 279,363 — — — — 279,500 Conversion ofwarrants intocommon stock—4th qtr — — — — 393 — — — — — — — Comprehensiveincome: Net loss — — — — — — — — — — (11,268,294) (11,268,294)Othercomprehensiveincome, foreigncurrencytranslationadjustment — — — — — — — — — 360,505 — 360,505 Comprehensiveloss — — — — — — — — — — — (10,907,789)Balance, 12/31/03 — $— — $— 26,672,192 $26,672 $50,862,258 — $— $374,380 $(33,999,585) $17,263,725 The accompanying notes are an integral part of these consolidated financial statements. F-9Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Conversion ofwarrants intocommon stock—1st qtr — — — — 78,526 $79 $(79) — $— $— $— $— Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—1stqtr — — — — 15,000 15 94,985 — — — — 95,000 Issuance ofcommon stockfor cash inconnectionwith exerciseof warrants—1st qtr — — — — 4,000 4 7,716 — — — — 7,720 Compensationexpense onoptions andwarrants issuedto non-employees anddirectors—1stqtr — — — — — — 1,410,498 — — — — 1,410,498 Issuance ofcommon stockin connectionwith exerciseof warrants—2nd qtr — — — — 51,828 52 (52) — — — — — Issuance ofcommon stockfor cash—2ndqtr — — — — 7,200,000 7,200 56,810,234 — — — — 56,817,434 Compensationexpense onoptions andwarrants issuedto non-employees anddirectors—2ndqtr — — — — — — 143,462 — — — — 143,462 Issuance ofcommon stockin connectionwith exerciseof warrants—3rd qtr — — — — 7,431 7 (7) — — — — — Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—3rdqtr — — — — 110,000 110 189,890 — — — — 190,000 Issuance ofcommon stockfor cash inconnectionwith exerciseof warrants—3rd qtr — — — — 28,270 28 59,667 — — — — 59,695 Compensationexpense onoptions andwarrants issuedto non-employees anddirectors—3rdqtr — — — — — — 229,133 — — — — 229,133 Issuance ofcommon stockin connectionwith exerciseof warrants—4th qtr — — — — 27,652 28 (28) — — — — — Compensationexpense onoptions andwarrants issuedto non-employees,employees, anddirectors—4thqtr — — — — — — 127,497 — — — — 127,497 Purchase oftreasury stock—4th qtr — — — — — — — 4,000,000 (25,974,000) — — (25,974,000)Comprehensiveincome: Net loss — — — — — — — — — — (21,474,469) (21,474,469)Othercomprehensiveincome,foreigncurrencytranslationadjustment — — — — — — — — — 79,725 — 79,725 Othercomprehensiveincome, netunrealized gainon available-for-saleinvestments — — — — — — — — — 10,005 — 10,005 Comprehensiveloss — — — — — — — — — — — (21,384,739)Balance, 12/31/04 — $— — $— 34,194,899 $34,195 $109,935,174 4,000,000 $(25,974,000) $464,110 $(55,474,054) $28,985,425 The accompanying notes are an integral part of these consolidated financial statements. F-10Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income (Loss) Stage (Deficit) Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—1stqtr — $— — $— 25,000 $25 $74,975 — $— $— $— $75,000 Compensationexpense onoptions andwarrants issuedto non-employees—1st qtr — — — — — — 33,565 — — — — 33,565 Conversion ofwarrants intocommon stock—2nd qtr — — — — 27,785 28 (28) — — — — — Compensationexpense onoptions andwarrants issuedto non-employees—2nd qtr — — — — — — (61,762) — — — — (61,762)Compensationexpense onoptions andwarrants issuedto non-employees—3rd qtr — — — — — — (137,187) — — — — (137,187)Conversion ofwarrants intocommon stock—3rd qtr — — — — 12,605 12 (12) — — — — — Compensationexpense onoptions andwarrants issuedto non-employees—4th qtr — — — — — — 18,844 — — — — 18,844 Compensationexpense onacceleration ofoptions—4thqtr — — — — — — 14,950 — — — — 14,950 Compensationexpense onrestricted stockaward issued toemployee—4thqtr — — — — — — 606 — — — — 606 Conversion ofpredecessorcompanyshares — — — — 94 — — — — — — — Comprehensiveloss: Net loss — — — — — — — — — — (35,777,584) (35,777,584)Othercomprehensiveloss, foreigncurrencytranslationadjustment — — — — — — — — — (1,372,600) — (1,372,600)Foreign exchangegain onsubstantialliquidation offoreign entity 133,851 133,851 Othercomprehensiveloss, netunrealized gainon available-for-saleinvestments — — — — — — — — — (10,005) — (10,005)Comprehensiveloss — — — — — — — — — — — (37,026,338)Balance, 12/31/05 — $— — $— 34,260,383 $34,260 $109,879,125 4,000,000 $(25,974,000) $(784,644) $(91,251,638) $(8,096,897)The accompanying notes are an integral part of these consolidated financial statements. F-11Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income Stage (Deficit) Compensationexpense onoptions andwarrants issuedto non-employees—1st qtr — $— — $— — $— $42,810 — $— $— $— $42,810 Compensationexpense onoption awardsissued toemployee anddirectors—1stqtr — — — — — — 46,336 — — — — 46,336 Compensationexpense onrestricted stockissued toemployees—1st qtr — — — — 128,750 129 23,368 — — — — 23,497 Compensationexpense onoptions andwarrants issuedto non-employees—2nd qtr — — — — — — 96,177 — — — — 96,177 Compensationexpense onoption awardsissued toemployee anddirectors—2ndqtr — — — — — — 407,012 — — — — 407,012 Compensationexpense onrestricted stockto employees—2nd qtr — — — — — — 4,210 — — — — 4,210 Cancellation ofunvestedrestricted stock— 2nd qtr — — — — (97,400) (97) 97 — — — — — Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—2ndqtr — — — — 10,000 10 16,490 — — — — 16,500 Compensationexpense onoptions andwarrants issuedto non-employees—3rd qtr — — — — — — 25,627 — — — — 25,627 Compensationexpense onoption awardsissued toemployee anddirectors—3rdqtr — — — — — — 389,458 — — — — 389,458 Compensationexpense onrestricted stockto employees—3rd qtr — — — — — — 3,605 — — — — 3,605 Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—3rdqtr — — — — 76,000 76 156,824 — — — — 156,900 Compensationexpense onoptions andwarrants issuedto non-employees—4th qtr — — — — — — 34,772 — — — — 34,772 Compensationexpense onoption awardsissued toemployee anddirectors—4thqtr — — — — — — 390,547 — — — — 390,547 Compensationexpense onrestricted stockto employees—4th qtr — — — — — — 88 — — — — 88 Cancellation ofunvestedrestricted stockaward— 4th qtr — — — — (15,002) (15) 15 — — — — — Comprehensiveloss: Net loss — — — — — — — — — — (35,821,406) (35,821,406)Othercomprehensivegain, foreigncurrencytranslationadjustment — — — — — — — — — 657,182 — 657,182 Comprehensiveloss — — — — — — — — — — — (35,164,224)Balance 12/31/06 — $— — $— 34,362,731 $34,363 $111,516,561 4,000,000 $(25,974,000) $(127,462) $(127,073,044) $(41,623,582)The accompanying notes are an integral part of these consolidated financial statements. F-12Table of Contents Accumulated Series A Series B Accumulated Deficit Total Preferred Stock Preferred Stock Common Stock Additional Treasury Stock Other During Shareholders’ Number of Number of Number of Paid-In Number of Comprehensive Development Equity Shares Amount Shares Amount Shares Amount Capital Shares Amount Income (Loss) Stage (Deficit) Compensationexpense onoptions andwarrants issuedto non-employees—1st qtr — $— — $— — $— $39,742 — $— $— $— $39,742 Compensationexpense onoption awardsissued toemployee anddirectors—1stqtr — — — — — — 448,067 — — — — 448,067 Compensationexpense onrestricted stockissued toemployees—1st qtr — — — — — — 88 — — — — 88 Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—1stqtr — — — — 15,000 15 23,085 — — — — 23,100 Expense inconnectionwithmodification ofemployee stockoptions —1stqtr — — — — — — 1,178,483 — — — — 1,178,483 Compensationexpense onoptions andwarrants issuedto non-employees—2nd qtr — — — — — — 39,981 — — — — 39,981 Compensationexpense onoption awardsissued toemployee anddirectors—2ndqtr — — — — — — 462,363 — — — — 462,363 Compensationexpense onrestricted stockissued toemployees—2nd qtr — — — — — — 88 — — — — 88 Compensationexpense onoption awardsissued toemployee anddirectors—3rdqtr — — — — — — 478,795 — — — — 478,795 Compensationexpense onrestricted stockissued toemployees—3rd qtr — — — — — — 88 — — — — 88 Issuance ofcommon stockupon exerciseof warrants—3rd qtr — — — — 492,613 493 893,811 — — — — 894,304 Issuance ofcommon stockfor cash, net ofoffering costs—3rd qtr — — — — 6,767,647 6,767 13,745,400 — — — — 13,752,167 Issuance ofcommon stockfor cash inconnectionwith exerciseof stockoptions—3rdqtr — — — — 1,666 2 3,164 — — — — 3,166 Compensationexpense onoption awardsissued toemployee anddirectors—4thqtr — — — — — — 378,827 — — — — 378,827 Compensationexpense onrestricted stockissued toemployees—4th qtr — — — — — — 88 — — — — 88 Comprehensiveloss: Net loss — — — — — — — — — — (35,573,114) (35,573,114)Othercomprehensivegain, foreigncurrencytranslationadjustment — — — — — — — — — 846,388 — 846,388 Comprehensiveloss — — — — — — — — — — — (34,726,726)Balance 12/31/07 — $— — $— 41,639,657 $41,640 $129,208,631 4,000,000 $(25,974,000) $718,926 $(162,646,158) $(58,650,961)The accompanying notes are an integral part of these consolidated financial statements. F-13Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Statements of Cash Flows Cumulative Period from December 28, 1995 (date of inception) to For the Year Ended December 31, December 31, 2007 2007 2006 2005 (Unaudited) Cash flows from operating activities: Net loss $(35,573,114) $(35,821,406) $(35,777,584) $(149,632,473)Adjustments to reconcile net loss to net cashused in operating activities: Equity awards issued for services 3,026,610 1,464,139 (130,984) 7,892,949 Uncompensated contribution of services — — — 755,556 Depreciation and amortization 1,505,218 2,202,229 1,701,423 7,715,127 Provision for doubtful accounts 11,803 134,370 133,412 330,118 Amortization of debt issue costs 749,239 749,240 749,239 2,372,591 Amortization of debt discounts oninvestments — — (508,983) (508,983)Loss on disposal or impairment of propertyand equipment 59,871 2,603,843 1,369,527 4,609,102 Foreign exchange gain on substantialliquidation of foreign entity — — (133,851) (133,851)Minority interest (246,347) (78,132) — (324,479)Change in operating assets and liabilities,excluding effects of acquisition: Decrease (increase) in restricted cash 1,031,815 976,259 (2,459,456) (451,383)Decrease (increase) in accountsreceivable (187,603) 1,033,975 489,961 (156,795)Decrease (increase) in other receivables 268,912 (43,862) 252,854 148,476 Decrease (increase) in inventory (393,778) 228,345 556,184 (596,355)Decrease (increase) in prepaid expenses 431,390 (185,739) (159,046) (658,218)Decrease (increase) in other assets 122,149 (13,248) 320,404 140,504 Increase (decrease) in accounts payable (898,831) (771,715) (336,103) 294,261 Increase in accrued expenses and otherliabilities 704,436 5,136 340,577 4,317,908 Decrease in deferred revenue (348,642) (2,095,914) (398,008) (50,096)Net cash used in operating activities (29,736,872) (29,612,480) (33,990,434) (123,936,041)Cash flows from investing activities: Acquisition of Agera, net of cash acquired — (2,009,841) — (2,009,841)Purchase of property and equipment (184,538) (1,243,036) (17,712,723) (25,481,833)Proceeds from the sale of property andequipment 57,153 6,595 — 98,048 Purchase of investments — (2,700,000) (77,498,313) (152,998,313)Proceeds from sales and maturities ofinvestments — 25,700,000 106,807,000 153,507,000 Net cash provided by (used in) investingactivities (127,385) 19,753,718 11,595,964 (26,884,939)Cash flows from financing activities: Proceeds from convertible debt — — — 91,450,000 Offering costs associated with the issuance ofconvertible debt — — — (3,746,193)Proceeds from notes payable to shareholders,net — — — 135667 Proceeds from the issuance of preferred stock,net — — — 12,931,800 Proceeds from the issuance of common stock,net 14,672,737 173,400 75,000 93,753,857 Cash dividends paid on preferred stock — — — (1,087,200)Cash paid for fractional shares of preferredstock — — — (38,108)Merger and acquisition expenses — — — (48,547)Repurchase of common stock — — — (26,024,280)Net cash provided by financing activities 14,672,737 173,400 75,000 167,326,996 Effect of exchange rate changes on cash balances (1,305) (85,296) (455,683) 84,704 Net increase (decrease) in cash and cashequivalents (15,192,825) (9,770,658) (22,775,153) 16,590,720 Cash and cash equivalents, beginning of period 31,783,545 41,554,203 64,329,356 — Cash and cash equivalents, end of period $16,590,720 $31,783,545 $41,554,203 $16,590,720 Supplemental disclosures of cash flowinformation: Cash paid for interest $3,150,000 $3,150,000 $3,115,000 $9,565,283 Non-cash investing and financing activities: Deemed dividend associated with beneficialconversion of preferred stock — — — $11,423,824 Preferred stock dividend — — — 1,589,861 Uncompensated contribution of services — — — 755,556 Common stock issued for intangible assets — — — 540,000 Equipment acquired through capital lease — — — $167,154 The accompanying notes are an integral part of these consolidated financial statements. F-14Table of ContentsIsolagen, Inc.(A Development Stage Company)Notes to Consolidated Financial StatementsNote 1—Basis of Presentation, Business and OrganizationIsolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware corporation (“Isolagen”) is the parent company ofIsolagen Technologies, Inc., a Delaware corporation (“Isolagen Technologies”) and Agera Laboratories, Inc., a Delawarecorporation (“Agera”). Isolagen Technologies is the parent company of Isolagen Europe Limited, a company organized underthe laws of the United Kingdom (“Isolagen Europe”), Isolagen Australia Pty Limited, a company organized under the laws ofAustralia (“Isolagen Australia”), and Isolagen International, S.A., a company organized under the laws of Switzerland (“IsolagenSwitzerland”). The common stock of the Company, par value $0.001 per share, (“Common Stock”) is traded on the AmericanStock Exchange (“AMEX”) under the symbol “ILE.”The Company is an aesthetic and therapeutic company focused on developing novel skin and tissue rejuvenationproducts. The Company’s clinical development product candidates are designed to improve the appearance of skin injured bythe effects of aging, sun exposure, acne and burns with a patient’s own, or autologous, fibroblast cells produced in theCompany’s proprietary Isolagen Process. The Company also develops and markets an advanced skin care line with broadapplication in core target markets through its Agera subsidiary.The Company acquired 57% of the outstanding common shares of Agera on August 10, 2006. Agera offers a complete lineof skincare systems based on a wide array of proprietary formulations, trademarks and nano-peptide technology. Thesetechnologically advanced skincare products can be packaged to offer anti-aging, anti-pigmentary and acne treatment systems.Agera markets its product in both the United States and Europe (primarily the United Kingdom). The results of Agera’soperations and cash flows have been included in the consolidated financial statements from the date of the acquisition. Theassets and liabilities of Agera have been included in the consolidated balance sheet since the date of the acquisition.In October 2006, the Company reached an agreement with the FDA on the design of a Phase III pivotal study protocol forthe treatment of nasolabial folds. The randomized, double-blind protocol was submitted to the FDA under the agency’s SpecialProtocol Assessment (“SPA”) regulations. Pursuant to this assessment process, the FDA has agreed that the Company’s studydesign for two identical trials, including patient numbers, clinical endpoints, and statistical analyses, is acceptable to the FDAto form the basis of an efficacy claim for a marketing application. The randomized, double-blind, pivotal Phase III trials willevaluate the efficacy and safety of Isolagen Therapy against placebo in approximately 400 patients with approximately 200patients enrolled in each trial. The Company completed enrollment of the study and commenced injection of subjects in early2007.In March 2004, the Company announced positive results of a first Phase III exploratory clinical trial for the Company’slead facial aesthetics product candidate, and in July 2004 we commenced a 200 patient Phase III study of Isolagen Therapy forfacial wrinkles consisting of two identical, simultaneous trials. The study was concluded during the second half of 2005. InAugust 2005 we announced that results of this study failed to meet co-primary endpoints. Based on the results of this study, theCompany commenced preparations for our second Phase III pivotal study discussed in the preceding paragraph.During 2006, 2005 and 2004, the Company sold its aesthetic product primarily in the United Kingdom. However, duringthe fourth quarter of fiscal 2006, the Company decided to close the United Kingdom operation. The Company completed theclosure of the United Kingdom operation on March 31, 2007, and as of March 31, 2007, the United Kingdom, Swiss andAustralian operations were presented as discontinued operations for all periods presented, as more fully discussed in Note 5.Through December 31, 2007, the Company has been primarily engaged in developing its initial product technology andrecruiting personnel. In the course of its development activities, the Company has sustained losses and expects such losses tocontinue through at least 2008. The Company expects to finance its operations primarily through its existing cash and anyfuture financing. However, as described in Note 2, there exists substantial doubt about the Company’s ability to continue as agoing concern. The Company’s ability to operate profitably is largely contingent upon its success in obtaining financing,obtaining regulatory approval to sell one or a variety of applications of the Isolagen Therapy, upon its successful developmentof markets for its products and upon the development of profitable scaleable manufacturing processes. The Company will berequired to obtain additional capital in the future to continue and expand its operations. No assurance can be given that theCompany will be able to obtain such regulatory approvals, successfully develop the markets for its products or developprofitable manufacturing methods. There is no assurance that the Company will be able to obtain any such additional capital asit needs to finance these efforts, through asset sales, equity or debt financing, or any combination thereof, or on satisfactoryterms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet theCompany’s ultimate capital needs and to support the Company’s growth. If adequate capital cannot be obtained on a timelybasis and on satisfactory terms, the Company’s operations would be materially negatively impacted. F-15Table of ContentsIf the Company achieves growth in its operations in the next few years, such growth could place a strain on itsmanagement, administrative, operational and financial infrastructure. The Company may find it necessary to hire additionalmanagement, financial and sales and marketing personnel to manage the Company’s expanding operations. In addition, theCompany’s ability to manage its current operations and future growth requires the continued improvement of operational,financial and management controls, reporting systems and procedures. If the Company is unable to manage this growtheffectively and successfully, the Company’s business, operating results and financial condition may be materially adverselyaffected.Acquisition and merger and basis of presentationOn August 10, 2001, Isolagen Technologies consummated a merger with American Financial Holdings, Inc. (“AFH”) andGemini IX, Inc. (“Gemini”). Pursuant to an Agreement and Plan of Merger, dated August 1, 2001, by and among AFH, ISOAcquisition Corp, a Delaware corporation and wholly-owned subsidiary of AFH (“Merger Sub”), Isolagen Technologies,Gemini, a Delaware corporation, and William J. Boss, Jr., Olga Marko and Dennis McGill, stockholders of IsolagenTechnologies (the “Merger Agreement”), AFH (i) issued 5,453,977 shares of its common stock, par value $0.001 to acquire, in aprivately negotiated transaction, 100% of the issued and outstanding common stock (195,707 shares, par value $0.01,including the shares issued immediately prior to the Merger for the conversion of certain liabilities, as discussed below) ofIsolagen Technologies, and (ii) issued 3,942,400 shares of its common stock to acquire 100% of the issued and outstandingcommon stock of Gemini. Pursuant to the terms of the Merger Agreement, Merger Sub, together with Gemini, merged with andinto Isolagen Technologies (the “Merger”), and AFH was the surviving corporation. AFH subsequently changed its name toIsolagen, Inc. on November 13, 2001. Prior to the Merger, Isolagen Technologies had no active business and was seekingfunding to begin FDA trials of the Isolagen Therapy. AFH was a non-operating, public shell company with limited assets.Gemini was a non-operating private company with limited assets and was unaffiliated with AFH.The consolidated financial statements presented include Isolagen, Inc., its wholly-owned subsidiaries and its majority-owned subsidiary. All significant intercompany transactions and balances have been eliminated. Isolagen Technologies was, foraccounting purposes, the surviving entity of the Merger, and accordingly for the periods prior to the Merger, the financialstatements reflect the financial position, results of operations and cash flows of Isolagen Technologies. The assets, liabilities,operations and cash flows of AFH and Gemini are included in the consolidated financial statements from August 10, 2001onward.Unless the context requires otherwise, the “Company” refers to Isolagen, Inc. and all of its consolidated subsidiaries,“Isolagen” refers to Isolagen, Isolagen Technologies, Isolagen Europe, Isolagen Australia and Isolagen Switzerland, and“Agera” refers to Agera Laboratories, Inc.Note 2—Going ConcernAt December 31, 2007, the Company had cash, cash equivalents and restricted cash of $17.0 million and working capitalof $13.8 million (including our cash, cash equivalents and restricted cash). The Company believes that its existing capitalresources are adequate to finance its operations through at least September 1, 2008. The Company estimates that it will requireadditional cash resources during the third quarter of 2008 based upon its current operating plan and condition. This estimateexcludes any proceeds that would be realized upon the sale of the Swiss campus (see further discussion below and at Note 3).Through December 31, 2007, the Company has been primarily engaged in developing its initial product technology andrecruiting personnel. In the course of its development activities, the Company has sustained losses and expects such losses tocontinue through at least 2008. The Company expects to finance its operations primarily through its existing cash and anyfuture financing, including the sale of assets. However, there exists substantial doubt about the Company’s ability to continueas a going concern. The Company will be required to obtain additional capital in the future to continue its operations. There isno assurance that the Company will be able to obtain any such additional capital as it needs to finance these efforts, throughasset sales, equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Additionally, no assurancecan be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to supportthe Company’s growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’soperations would be materially negatively impacted. Further, if the Company does not obtain additional funding prior to orduring the third quarter of 2008, it may enter into bankruptcy during 2008 and possibly cease operations thereafter. F-16Table of ContentsThe Company filed a shelf registration statement on Form S-3 during June 2007, which was subsequently declaredeffective by the SEC. The shelf registration allows the Company the flexibility to offer and sell, from time to time, up to anoriginal amount of $50 million of common stock, preferred stock, debt securities, warrants or any combination of the foregoingin one or more future public offerings. In August 2007, the Company sold under this shelf registration statement 6,746,647shares of common stock to institutional investors, raising proceeds of $13.8 million, net of offering costs. The Company mayoffer and sell up to an additional $36.2 million of common stock pursuant to this shelf registration.The Company’s ability to complete additional offerings, including any additional offerings under its shelf registrationstatement, is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’sreception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependenton the status of its clinical trials, and in particular, the status of its Phase III clinical trial for the treatment of wrinkles, whichcannot be predicted. The Company is also continuing its efforts to sell its Swiss campus (see Note 3). The Company will addany proceeds from the sale of the Swiss campus to its working capital, which would partially alleviate the Company’s need toobtain financing from other sources. There is no assurance that capital in any form would be available to the Company, and ifavailable, on terms and conditions that are acceptable.As a result of the above discussed conditions, and in accordance with generally accepted accounting principles in theUnited States, there exists substantial doubt about the Company’s ability to continue as a going concern, and the Company’sability to continue as a going concern is contingent upon its ability to secure additional adequate financing or capital prior toor during the third quarter of 2008. If the Company is unable to obtain additional sufficient funds during this time, theCompany will be required to terminate or delay its efforts to obtain regulatory approval of one, more than one, or all of itsproduct candidates, curtail or delay the implementation of manufacturing process improvements and/or delay the expansion ofits sales and marketing capabilities. Any of these actions would have an adverse effect on the Company’s operations, therealization of its assets and the timely satisfaction of its liabilities. The Company’s financial statements are presented on a goingconcern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Thefinancial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification ofliabilities that may be necessary should it be determined that the Company is unable to continue as a going concern.Note 3—Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Examples include provisions for bad debts and inventory obsolescence, useful lives ofproperty and equipment and intangible assets, impairment of property and equipment and intangible assets, deferred taxes, theprovision for and disclosure of litigation and loss contingencies (see Note 11) and estimates and assumptions related to equity-based compensation expense (see Note 13). Actual results may differ materially from those estimates.Foreign Currency TranslationThe financial position and results of operations of the Company’s foreign subsidiaries are determined using the localcurrency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect ateach period-end. Income statement accounts are translated at the average rate of exchange prevailing during the period.Adjustments arising from the use of differing exchange rates from period to period are included in accumulated othercomprehensive income in shareholders’ equity. Gains and losses resulting from foreign currency transactions are included inearnings and have not been material in any one period. F-17Table of ContentsBalances of related after-tax components comprising accumulated other comprehensive income (loss) included inshareholders’ equity at December 31, 2007 and December 31, 2006 are as follows: December 31, 2007 2006 Foreign currency translation adjustment $718,926 $(127,462)Accumulated other comprehensive income (loss) $718,926 $(127,462)Upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the amountattributable to that entity and accumulated in the translation adjustment component of equity is removed from the separatecomponent of equity and is reported as gain or loss for the period during which the sale or liquidation occurs. DuringDecember 2005, the Company substantially completed the liquidation of the Company’s Australian entity. As such, theaccumulated translation adjustment component was removed from equity by recording $0.1 million as other income in the 2005consolidated statement of operations.Statement of cash flowsFor purposes of the statements of cash flows, the Company considers all highly liquid investments (i.e., investments which,when purchased, have original maturities of three months or less) to be cash equivalents. At December 31, 2007 andDecember 31, 2006, the Company had $0.5 million and $1.5 million of cash restricted for the payment of the non-cancelableportion of the Exton, Pennsylvania facility lease, due monthly through March 2008.Concentration of credit riskThe Company maintains its cash primarily with major U.S. domestic banks. The amounts held in these banks generallyexceed the insured limit of $100,000. The terms of these deposits are on demand to minimize risk. The Company has notincurred losses related to these deposits. Cash equivalents are maintained in two financial institutions. The Company investsthese funds primarily in government securities.Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed tohave a high risk of collectibility. Management reviews its accounts receivable on a monthly basis to determine if anyreceivables will potentially be uncollectible. Management analyzes historical collection trends and changes in its customerpayment patterns, customer concentration, and creditworthiness when evaluating the adequacy of its allowance for doubtfulaccounts. In its overall allowance for doubtful accounts, the Company includes any receivable balances that are determined tobe uncollectible. Based on the information available, management believes the allowance for doubtful accounts is adequate;however, actual write-offs might exceed the recorded allowance.The following is a rollforward of the allowance for doubtful accounts, which includes that related to both continuingoperations and discontinued operations, for the years ended December 31, 2007 and 2006. Balance, as of December 31, 2005 $100,639 Provision during 2006 134,370 Charges to the allowance account (159,200)Balance, as of December 31, 2006 $75,809 Provision during 2007 13,143 Charges to the allowance account — Balance, as of December 31, 2007 $88,952 The allowance for doubtful accounts related to continuing operations was $18,112 and $0 at December 31, 2007 and 2006,respectively. The allowance for doubtful accounts related to discontinued operations was $70,840 and $75,809 at December 31,2007 and 2006, respectively. F-18Table of ContentsInventoryAgera purchases the large majority of its inventory from one contract manufacturer. Agera accounts for its inventory on thefirst-in-first-out method. At December 31, 2007, Agera’s inventory of $0.7 million consisted of $0.1 million of raw materials and$0.6 million of finished goods. At December 31, 2006, Agera’s inventory included $0.2 million of finished goods.Asset of discontinued operations held for saleIn April 2005, the Company acquired land and a two-building, 100,000 square foot campus in Bevaix, Canton ofNeuchâtel, Switzerland for $10 million. The Company subsequently spent approximately $1.8 million on the first phase of arenovation. In April 2006, management decided to place the Swiss campus on the market for sale in order to conserve capital.The Company commenced its selling efforts during June of 2006. As of December 31, 2007, the net book value of the Swisscampus was $11.2 million, reflecting the fair value of the corporate campus. Fair value is defined as the price at which an assetwould change hands in a transaction between a willing buyer and willing seller in an unforced transaction. However, if theCompany were to sell the Swiss campus in a forced transaction or a distress sale, it is likely that the price it would receive wouldbe less, and the Company would recognize a loss, which may be significant, upon such sale. As the result of the cash position ofthe Company at December 31, 2007 and its need for funding, it is possible that the Company will choose or be required to sellthe Swiss campus under such conditions. The corporate campus is included in assets of discontinued operations held for sale onthe consolidated balance sheets for all periods presented.Although the corporate campus was not being actively marketed for sale as of March 31, 2006, at that date managementassessed whether the book value of the corporate campus was impaired based on its estimate of the realizable value of thecorporate campus, and made a determination to write down the corporate campus by $0.7 million. The Company subsequentlyrecorded a further impairment charge of $0.4 million during the fourth quarter of 2006 to reflect management’s estimate of therealizable value of the corporate campus at December 31, 2006. Accordingly, total impairment charges of $1.1 million havebeen recorded related to the Switzerland corporate campus, which charges are reflected in the loss from discontinuingoperations in the consolidated statement of operations.In March 2007, the Company completed the closing of its United Kingdom manufacturing facility. As described in Note 5,the Company recorded a fixed asset impairment charge related to its United Kingdom operation of $1.4 million during thefourth quarter of 2006, which is included in loss from discontinued operations in the consolidated statement of operations. Thecarrying value of the impaired United Kingdom fixed assets was $0.2 million at December 31, 2006, reflecting management’sestimate of realizable value. The United Kingdom fixed assets are included in assets of discontinued operations held for sale onthe accompanying consolidated balance sheets for all periods presented (see Note 5 for further discussion of the Company’sdiscontinued operations).Property and equipmentProperty and equipment is carried at cost less accumulated depreciation and amortization. Generally, depreciation andamortization for financial reporting purposes is provided by the straight-line method over the estimated useful life of threeyears, except for leasehold improvements which are amortized using the straight-line method over the remaining lease term orthe life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an expense as incurred.Intangible assetsIntangible assets primarily include proprietary formulations and trademarks, which were acquired in connection with theacquisition of Agera (see Note 4), as well as certain in-process patents. Proprietary formulations and trademarks are amortized ona straight-line basis over their estimated useful lives, generally for periods ranging from 13 to 18 years. Amortization ofintangible assets is expected to be approximately $0.3 million each year over the next five fiscal years. The Companycontinually evaluates the reasonableness of the useful lives of these assets. Intangibles are tested for recoverability wheneverevents or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss, if any, would bemeasured as the excess of the carrying value over the fair value determined by discounted cash flows. F-19Table of ContentsIntangible assets are comprised as follows: December 31, 2007 2006 Proprietary formulations $3,101,100 $3,101,100 Trademarks 1,511,400 1,511,400 Other intangibles 705,800 705,800 5,318,300 5,318,300 Less: Accumulated amortization (718,762) (381,795)Intangible assets, net $4,599,538 $4,936,505 Debt Issue CostsThe costs incurred in issuing the Company’s 3.5% Convertible Subordinated Notes, including placement agent fees, legaland accounting costs and other direct costs are included in other assets and are being amortized to expense using the effectiveinterest method over five years, through November 2009. Debt issuance costs, net of amortization, were approximately$1.4 million at December 31, 2007 and approximately $2.1 million at December 31, 2006 and were included in other assets, net,in the accompanying consolidated balance sheets.The Company filed registration statements on Form S-3 and Form S-4 (the “Combined Registration Statements”) duringJuly 2007. The Combined Registration Statements related to (1) a proposed exchange offer of new 3.5% convertible seniornotes due 2024 to the holders of the currently outstanding $90 million, in principal amount, 3.5% convertible subordinatednotes due 2024 and (2) a proposed offer to the public of an additional $30 million, in principal amount, of new 3.5%convertible senior notes due 2024. In August, 2007 the Company decided not to proceed with the offerings covered by theCombined Registration Statements, and the Combined Registration Statements were subsequently withdrawn by the Companyin August 2007 prior to being declared effective by the SEC. During the year ended December 31, 2007, the Company incurred$0.8 million of costs related to the Combined Registration Statements. As a result of the Company’s withdrawal of theCombined Registration Statements in August 2007, such $0.8 million of costs were expensed and are included in selling,general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2007.Treasury StockThe Company utilizes the cost method for accounting for its treasury stock acquisitions and dispositions.Revenue recognitionThe Company recognizes revenue over the period the service is performed in accordance with SEC Staff AccountingBulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In general, SAB 104 requires that four basiccriteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery hasoccurred or services rendered, (3) the fee is fixed and determinable and (4) collectibility is reasonably assured.Continuing operations: Revenue from the sale of Agera’s products is recognized upon transfer of title, which is uponshipment of the product to the customer. The Company believes that the requirements of SAB 104 are met when the orderedproduct is shipped, as the risk of loss transfers to our customer at that time, the fee is fixed and determinable and collection isreasonably assured. Any advanced payments are deferred until shipment.Discontinued operations: The Isolagen Therapy was administered, in the United Kingdom, to each patient using arecommended regimen of injections. Due to the short shelf life, each injection is cultured on an as needed basis and shippedprior to the individual injection being administered by the physician. The Company believes each injection had stand alonevalue to the patient. The Company invoiced the attending physician when the physician sent his or her patient’s tissue sampleto the Company which created a contractual arrangement between the Company and the medical professional. The amountinvoiced varied directly with the dose and number of injections requested. Generally, orders were paid in advance by thephysician prior to the first injection. There was no performance provision under any arrangement with any physician, and thereis no right to refund or returns for unused injections. F-20Table of ContentsAs a result, the Company believes that the requirements of SAB 104 were met as each injection was shipped, as the risk ofloss transferred to our physician customer at that time, the fee was fixed and determinable and collection was reasonablyassured. Advance payments were deferred until shipment of the injection(s). The amount of the revenue deferred represented thefair value of the remaining undelivered injections measured in accordance with Emerging Issues Task Force Issue (“EITF”) 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which addresses the issue of accounting forarrangements that involve the delivery of multiple products or services. Should the physician discontinue the regimenprematurely all remaining deferred revenue is recognized.Shipping and handling costsAgera charges its customers for shipping and handling costs. Such charges to customers are presented net of the costs ofshipping and handling, as selling, general and administrative expense, and are not significant to the consolidated statements ofoperations.Advertising costAgera advertising costs are expensed as incurred and include the costs of public relations and certain marketing relatedactivities. These costs are included in selling, general and administrative expenses in the accompanying consolidatedstatements of operations.Research and development expensesResearch and development costs are expensed as incurred and include salaries and benefits, costs paid to third-partycontractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and aportion of facilities cost. Research and development costs also include costs to develop manufacturing, cell collection andlogistical process improvements.Clinical trial costs are a significant component of research and development expenses and include costs associated withthird-party contractors. Invoicing from third-party contractors for services performed can lag several months. The Companyaccrues the costs of services rendered in connection with third-party contractor activities based on its estimate of managementfees, site management and monitoring costs and data management costs. Actual clinical trial costs may differ from estimatedclinical trial costs and are adjusted for in the period in which they become known.Stock-based compensationEffective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, “Accountingfor Stock-Based Compensation”, supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”),and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires entities to recognize compensation expense forall share-based payments to employees and directors, including grants of employee stock options, based on the grant-date fairvalue of those share-based payments, adjusted for expected forfeitures. The Company adopted SFAS No. 123(R) using themodified prospective application method. Under the modified prospective application method, the fair value measurementrequirements of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after January 1,2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that wereoutstanding as of January 1, 2006 is recognized as the requisite service is rendered on or after January 1, 2006. Thecompensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro formadisclosures under SFAS No. 123. Changes to the grant-date fair value of equity awards granted before January 1, 2006 areprecluded.Prior to the adoption of SFAS No. 123(R), the Company followed the intrinsic value method in accordance with APBNo. 25 to account for its employee stock options. Historically, substantially all stock options have been granted with anexercise price equal to the fair market value of the common stock on the date of grant. Accordingly, no compensation expensewas recognized from substantially all option grants to employees and directors. Compensation expense was recognized inconnection with the issuance of stock options to non-employee consultants in accordance with EITF 96-18, “Accounting forEquity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services.”SFAS No. 123(R) did not change the accounting for stock-based compensation related to non-employees in connection withequity based incentive arrangements. F-21Table of ContentsIncome taxesAn asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arisefrom temporary differences between income tax and financial reporting and principally relate to recognition of revenue andexpenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates andlaws. In addition, a deferred tax asset can be generated by net operating loss carryforwards (“NOLs”). If it is more likely than notthat some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.In the event the Company is charged interest or penalties related to income tax matters, the Company would record suchinterest as interest expense and would record such penalties as other expense in the consolidated statement of operations. Nosuch charges have been incurred by the Company. As of December 31, 2007, the Company has no accrued interest related touncertain tax positions.The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting forUncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. Nomaterial adjustment in the liability for unrecognized income tax benefits was recognized as a result of the adoption of FIN 48.At the adoption date of January 1, 2007, we had $40.4 million of unrecognized tax benefits, all of which would affect theCompany’s effective tax rate if recognized. At December 31, 2007, the Company has $54.8 million of unrecognized taxbenefits, the large majority of which relates to loss carryforwards for which we have provided a full valuation allowance. The taxyears 2004 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject. Refer to Note10 for further discussion of income tax related matters.Loss per share dataBasic loss per share is calculated based on the weighted average common shares outstanding during the period, aftergiving effect to the manner in which the merger was accounted for as described in Note 1. Diluted earnings per share also giveseffect to the dilutive effect of stock options, warrants (calculated based on the treasury stock method) and convertible notes andconvertible preferred stock. The Company does not present diluted earnings per share for years in which it incurred net losses asthe effect is antidilutive.At December 31, 2007, options and warrants to purchase 7.9 million shares of common stock at exercise prices rangingfrom $1.50 to $9.81 per share were outstanding, but were not included in the computation of diluted earnings per share as theireffect would be antidilutive. Also, 9.8 million shares issuable upon the conversion of the Company’s convertible notes, at aconversion price of approximately $9.16, were not included as their effect would be antidilutive.At December 31, 2006, options and warrants to purchase 11.2 million shares of common stock at exercise prices rangingfrom $1.50 to $11.38 per share were outstanding, but were not included in the computation of diluted earnings per share as theireffect would be antidilutive. Also, 9.8 million shares issuable upon the conversion of the Company’s convertible notes, at aconversion price of approximately $9.16, were not included as their effect would be antidilutive.Fair Value of Financial InstrumentsThe Company’s financial instruments consist of accounts receivable, marketable debt securities, accounts payable andconvertible subordinated debentures. The fair values of the Company’s accounts receivable and accounts payable approximate,in the Company’s opinion, their respective carrying amounts. The Company’s marketable debt security investments are carriedat fair value. The Company’s convertible subordinated debentures were quoted at approximately 74% and 73% of par value atDecember 31, 2007 and 2006, respectively. Accordingly, the fair value of our convertible subordinated debentures wasapproximately $66.6 million and $65.7 million at December 31, 2007 and 2006, respectively.Recently Issued Accounting Standards Not Yet EffectiveIn September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurement,”effective for the Company’s fiscal year beginning January 1, 2008. SFAS No. 157 defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair valuemeasurements, but simplifies and codifies related guidance within GAAP. This Statement applies under other accountingpronouncements that require or permit fair value measurements. In November 2007, FASB agreed to a one-year deferral of theeffective date for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. TheCompany is currently assessing the impact the adoption of this pronouncement will have on the financial statements. F-22Table of ContentsIn February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”.SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Suchelection, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. TheCompany is currently assessing the impact the adoption of this pronouncement will have on the financial statements.In December 2007, the Financial Accounting Standards Board released SFAS No. 141-R, “Business Combinations.” ThisStatement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the firstannual reporting period beginning on or after December 15, 2008, which is business combinations in the year endingDecember 31, 2009 for the Company. SFAS No. 141-R makes changes to the manner in which purchase business combinations,and in particular partial and step acquisitions, and minority interests, are measured and recorded. The objective of thisStatement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entityprovides in its financial reports about a business combination and its effects. The Company is currently assessing the impact theadoption of this pronouncement will have on the financial statements.In December 2007, the Financial Accounting Standards Board released SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51”. This Statement is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15, 2008, which for the Company is the year endingDecember 31, 2009 and the interim periods within that fiscal year. SFAS No. 160 changes the manner in which minorityinterests are classified in consolidated financial statements, and the accounting for changes in minority interests. The objectiveof this pronouncement is to improve the relevance, comparability and transparency of the financial information that a reportingentity provides in its consolidated financial statements. This pronouncement currently does not impact the Company as it hasfull controlling interest of all of its subsidiaries.Note 4—Acquisition of Agera Laboratories, Inc.On August 10, 2006, the Company acquired 57% of the outstanding common shares of Agera Laboratories, Inc. (“Agera”).Agera is a skincare company that has proprietary rights to a scientifically-based advanced line of skincare products. Ageramarkets its product in both the United States and Europe. The Company believes that the acquisition of Agera will complementthe Company’s Isolagen Therapy and will broaden the Company’s position in the skincare market as Agera has acomprehensive range of technologically advanced skincare products that can be packaged to offer anti-aging, anti-pigmentaryand acne treatment systems.The acquisition has been accounted for as a purchase. Accordingly, the bases in Agera’s assets and liabilities have beenadjusted to reflect the allocation of the purchase price to the 57% interest the Company acquired (with the remaining 43%interest, and the minority interest in Agera’ net assets, recorded at Agera’s historical book values), and the results of Agera’soperations and cash flows have been included in the consolidated financial statements from the date of the acquisition.The Company paid $2.7 million in cash to acquire the 57% interest in Agera and in connection with the acquisitioncontributed $0.3 million to the working capital of Agera. Included in the purchase price was an option to acquire an additional8% of Agera’s outstanding common shares for an exercise price of $0.5 million in cash. This option expired unexercised inFebruary 2007. In addition, the acquisition agreement includes future contingent payments up to a maximum of $8.0 million.Such additional purchase price is based upon certain percentages of Agera’s cost of sales incurred after June 30, 2007.Accordingly, based upon the financial performance of Agera, up to an additional $8.0 million of purchase price may be due theselling shareholder in future periods. No amounts have yet been paid with respect to the additional purchase price. F-23Table of ContentsThe following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition. These assets and liabilities were included in the consolidated balance sheet as ofthe acquisition date. Current assets $1,531,926 Intangible assets 4,522,120 Total assets acquired 6,054,046 Current liabilities 30,284 Deferred tax liability, net 190,754 Other long—term liabilities 695,503 Minority interest 2,182,505 Total liabilities assumed and minority interest 3,099,046 Net assets acquired $2,955,000 Of the $4.5 million, net, of acquired intangible assets, $4.4 million, net, was assigned to product formulations andtrademarks, which have a weighted average useful life of approximately 16 years. No amount of the purchase price was assignedto goodwill.The unaudited pro forma financial information below assumes that the Agera acquisition occurred on January 1 of theperiods presented and includes the effect of amortization of intangibles from that date. The unaudited pro forma results ofoperations are being furnished solely for informational purposes and are not intended to represent or be indicative of theconsolidated results of operations that would have been reported had these transactions been completed as of the dates and forthe periods presented, nor are they necessarily indicative of future results. (in millions, except per share data) 2006 2005 Pro forma revenue $1.2 $1.0 Pro forma net loss (35.8) (36.0)Pro forma basic and diluted loss per share $(1.18) $(1.19)Note 5—Discontinued Operations and Exit CostsAs part of the Company’s continuing efforts to evaluate the best uses of its resources, in the fourth quarter of 2006 theCompany’s Board of Directors approved the proposed closing of the Company’s United Kingdom operation. On March 31,2007, the Company completed the closure of its United Kingdom manufacturing facility. The United Kingdom operation waslocated in London, England with two locations; a manufacturing site and an administrative site. Both sites are under operatingleases. The manufacturing site lease expires February 2010 and, as of December 31, 2007, the remaining lease obligationapproximated $0.5 million. The administrative site lease expired in April 2007. The Company believes that substantially allcosts related to the closure of the United Kingdom operation have been incurred by December 31, 2007, excluding theremaining lease obligation discussed above and any potential claims or contingencies unknown or which cannot be estimatedat this time (see Note 11).As a result of the closure of the Company’s United Kingdom operation, the operations that the Company previouslyconducted in Switzerland and Australia, which when closed had been absorbed into the United Kingdom operation, were alsoclassified as discontinued operations as of March 31, 2007.The Company recorded a fixed asset impairment charge related to its United Kingdom operation of $1.4 million during2006, which is included in loss from discontinued operations in the consolidated statement of operations. All assets, liabilitiesand results of operations of the United Kingdom, Switzerland and Australian operations are reflected as discontinued operationsin the accompanying consolidated financial statements. All prior period information has been restated to reflect the presentationof discontinued operations. F-24Table of ContentsThe following sets forth the components of assets and liabilities of discontinued operations as of December 31, 2007 andDecember 31, 2006: December 31, December 31, (in millions) 2007 2006 Accounts receivable, net $— $— Inventory — 0.1 Value-added tax refund due — 0.3 Other current assets — 0.3 Total current assets — 0.7 Assets held for sale 11.2 10.5 Long term assets 0.1 0.2 Total assets $11.3 $11.4 Accounts payable $— $0.5 Accrued expenses and other current liabilities 0.2 1.4 Total current liabilities 0.2 1.9 Long term liabilities 0.1 0.2 Total liabilities $0.3 $2.1 The following sets forth the results of operations of discontinued operations for the years ended December 31, 2007,December 31, 2006 and December 31, 2005: December 31, December 31, December 31, (in millions) 2007 2006 2005 Net revenue $0.2 $5.7 $8.8 Gross loss (0.3) (1.2) (0.5)Operating loss (2.0) (13.0) (10.4)Other income 0.3 0.3 0.3 Loss from discontinued operations $(1.7) $(12.7) $(10.1)The following sets forth information about the major components of the United Kingdom operation exit costs incurredduring 2007 and 2006: Costs Incurred for Costs Incurred for the Year Ended the Year Ended Cumulative Costs December 31, 2006 December 31, 2007 Incurred to Date Employee severance $284,096 $183,222 $467,318 Fixed asset impairment 1,445,647 — 1,445,647 Total $1,729,743 $183,222 $1,912,965 The following sets forth information about the changes in the United Kingdom accrued exit costs for the year endedDecember 31, 2006: Accrued Liability Costs Charged Costs Paid Accrued Liability at January 1, 2006 to Expense or Settled December 31, 2006 Employee severance $— $284,096 $— $284,096 Fixed asset impairment — 1,445,647 1,445,647 — Total $— $1,729,743 $1,445,647 $284,096 The following sets forth information about the changes in the United Kingdom accrued exit costs for the year endedDecember 31, 2007: Accrued Liability Costs Charged Costs Paid Accrued Liability at January 1, 2007 to Expense or Settled December 31, 2007 Employee severance $284,096 $183,222 $467,318 $— Total $284,906 $183,222 $467,318 $— F-25Table of ContentsHouston, Texas. On March 28, 2006, the Company’s board of directors approved the shut-down of the Houston, Texasfacility. The Houston, Texas facility was used primarily for research and development purposes and is maintained under anoperating lease which ends on April 30, 2008. The research and development activities conducted in Houston were transferredto the Company’s facilities located in Exton, Pennsylvania. An exit plan was communicated to the affected employees duringthe three months ended June 30, 2006. There were approximately 15 employees at the Houston, Texas facility at March 31,2006 and the large majority of these employees had been terminated by June 30, 2006 at a severance cost of less than$0.1 million. The Company currently subleases approximately 50% of the facility to an unrelated third party. As ofDecember 31, 2007, the remaining lease payments and common operating expenses due under the Houston, Texas leaseagreement were less than $0.1 million.Note 6—Available-for-Sale InvestmentsThe Company had no available-for-sale investments at December 31, 2007 or 2006. Proceeds from the sale of available-for-sale marketable debt securities were $0.0 million, $25.7 million and $106.8 million for the years ended December 31, 2007,2006 and 2005, respectively, and no realized gains and losses based on specific identification, were included in the results ofoperations upon those sales.Note 7—Property and EquipmentProperty and equipment is comprised of: December 31, 2007 2006 Leasehold improvements $3,751,030 $3,747,561 Lab equipment 1,423,840 1,304,813 Computer equipment and software 1,101,097 1,059,205 Office furniture and fixtures 41,407 36,151 6,317,374 6,147,730 Less: Accumulated depreciation and amortization (2,921,651) (1,816,125)Property and equipment, net $3,395,723 $4,331,605 The amounts of depreciation and amortization expense for the above property and equipment included in the statement ofoperations are as follows: Year ended December 31, 2007 2006 2005 Depreciation expense related to continuing operations: Selling, general,administrative, research and development expenses $1,168,251 $1,174,404 $649,505 During the third quarter of 2005, the Company determined that a certain third-party developed software system (the “MES”system) was impaired and, accordingly, recorded a charge of $1.3 million to selling, general and administrative expense in orderto remove the related cost of the asset and associated depreciation. Previous to this charge, certain components of the MESsystem had been placed in use and certain components were still in development. The gross balance and accumulateddepreciation related to the MES system components placed in use were $0.6 million and $0.1 million, respectively, at the timeof the impairment charge and was being depreciated over five years. The balance related to the MES system components still indevelopment, for which amortization had not commenced at the time of the impairment charge, was $0.9 million. F-26Table of ContentsNote 8—Accrued ExpensesAccrued expenses are comprised of the following: December 31, 2007 2006 Accrued professional fees $2,243,319 $1,057,110 Accrued compensation 840,641 916,172 Accrued severance 379,402 146,827 Accrued interest 525,000 525,000 Accrued other 359,894 240,932 Accrued expenses $4,348,256 $2,886,041 Note 9—Convertible Subordinated NotesOn November 3, 2004, the Company completed the private placement of $75.0 million aggregate principal amount of3.5% Convertible Subordinated Notes Due 2024 (the “3.5% Subordinated Notes”). The 3.5% Subordinated Notes could be duesooner than 2024, as discussed below. The Company received net proceeds of approximately $71.7 million after the deductionof commissions and offering expenses. The Company also granted the purchasers of the 3.5% Subordinated Notes the option topurchase up to $15.0 million of additional 3.5% Subordinated Notes through December 2, 2004. On November 5, 2004, theCompany completed the private placement of the additional $15.0 million aggregate principal amount of 3.5% SubordinatedNotes. The Company received net proceeds of approximately $14.5 million after the deduction of discounts, commissions andoffering expenses. The total net proceeds to the Company were approximately $86.2 million after the deduction of commissionsand offering expenses.The Company used approximately $26 million of the net proceeds to repurchase 4,000,000 shares of its common stock, ofwhich 2,000,000 shares were repurchased from Frank DeLape, who was then the Chairman of the Board of Directors, MichaelMacaluso, a former director and the former President and Chief Executive Officer, Olga Marko, the former Senior Vice Presidentand Director of Research, Michael Avignon, the former Manager of International Operations, and Timothy J. Till, a shareholder.The purchase price from the insiders, affiliates and founders of the Company listed above was $6.33 per share which representeda 5% discount from the closing price of the Company’s common stock on the American Stock Exchange on October 28, 2004,the date the offering of the 3.5% Subordinated Notes was priced. The purchase of the shares from the insiders was approved by aspecial committee of independent directors in partial reliance on a fairness opinion issued by an investment bank. Theremaining 2,000,000 shares were repurchased in private transactions at a price of $6.66 per share. The remaining net proceeds ofapproximately $60.2 million were added to the Company’s general working capital.The 3.5% Subordinated Notes are unsecured obligations and are subordinated in right of payment to all of the Company’sexisting and future senior indebtedness. The 3.5% Subordinated Notes are also effectively subordinated to all indebtedness andother liabilities of the Company’s subsidiaries.The 3.5% Subordinated Notes require the semi-annual payment of interest, on May 1 and November 1 of each yearbeginning May 1, 2005, at 3.5% interest per annum on the principal amount outstanding. The 3.5% Subordinated Notes willmature on November 1, 2024. Prior to maturity the holders may convert their 3.5% Subordinated Notes into shares of theCompany’s common stock. The initial conversion rate is 109.2001 shares per $1,000 principal amount of 3.5% SubordinatedNotes, which is equivalent to an initial conversion price of approximately $9.16 per share.On or after November 1, 2009, the Company may at its option redeem the 3.5% Subordinated Notes, in whole or in part, forcash, at a redemption price equal to 100% of the principal amount of the 3.5% Subordinated Notes to be redeemed plus accruedand unpaid interest.On each of November 1, 2009, November 1, 2014 and November 1, 2019, the holders may require the Company topurchase all or a portion of their 3.5% Subordinated Notes at a purchase price in cash equal to 100% of the principal amount of3.5% Subordinated Notes to be purchased plus accrued and unpaid interest. The holders of the 3.5% Subordinated Notes mayalso require the Company to repurchase their 3.5% Subordinated Notes in the event its common stock (or other common stockinto which the 3.5% Convertible Subordinated Notes are then convertible) ceases to be listed for trading on a U.S. nationalsecurities exchange or approved for trading on an established automated over-the-counter market in the United States. F-27Table of ContentsIn the event a change in control occurs on or before November 9, 2009, the holders of the 3.5% Subordinated Notes mayrequire the Company to purchase all or a portion of their notes at a purchase price equal to 100% of the principal amount of the3.5% Subordinated Notes to be purchased plus accrued and unpaid interest and the payment of a “make-whole” payment whichis based on the date on which the change in control occurs and the price per share paid for the Company’s common stock insuch change in control transaction. The Company will be allowed to pay for the repurchase of the 3.5% Subordinated Notes andaccrued and unpaid interest in cash or, at its option, shares of its common stock, and the Company will be allowed to make themake-whole payment in cash or, at its option, such other form of consideration as is paid to its common stockholders in thechange in control transaction. In addition, in the event a change in control occurs on or before November 9, 2009, the holders ofthe 3.5% Subordinated Notes that convert their 3.5% Subordinated Notes into shares of the Company’s common stock inconnection with such change in control transaction will also be entitled to receive the make-whole payment.The 3.5% Subordinated Notes were issued in an offering not registered under the Securities Act of 1933, as amended (“theSecurities Act”). However, the Company was obligated to file with the SEC a shelf registration statement covering resales of the3.5% Subordinated Notes and the shares of the Company’s common stock issuable upon the conversion of the 3.5%Subordinated Notes. The shelf registration statement was subsequently declared effective on May 2, 2005. As of December 31,2007, the Company has recorded $90.0 million of long-term debt as a long-term liability on the accompanying consolidatedbalance sheet.Note 10—Income TaxesIsolagen, Inc. and Isolagen Technologies, Inc. file a consolidated U.S. Federal income tax return. During the third quarter of2006, the Company acquired a 57% interest in Agera (see Note 4). Agera files a separate U.S. Federal income tax return. TheCompany’s foreign subsidiaries, which comprise loss from discontinued operations, file income tax returns in their respectivejurisdictions. The geographic source of loss from continuing operations is the United States.The components of the income tax benefit below, which relate solely to continuing operations, are as follows: Year ended December 31, 2007 2006 2005 United States Current $— $— $— Deferred — 190,754 — Foreign Current — — — Deferred — — — Total income tax benefit $— $190,754 $— The reconciliation between income tax expense (benefit) at the U.S. federal statutory rate and the amount recorded in theaccompanying consolidated financial statements is as follows: Year ended December 31, 2007 2006 2005 Tax at U.S. federal statutory rate $(11,860,007) $(8,169,068) $(8,993,907)Increase in domestic valuation allowance 13,833,925 10,112,079 10,124,461 State income taxes before valuation allowance, net of federal benefit (1,694,287) (1,336,884) (1,284,798)Other (279,631) (796,881) 154,244 $— $(190,754) $— As discussed in Note 4, the purchase accounting for the acquisition of Agera’s resulted in the recording of a deferred taxliability of $0.2 million related to the difference between the tax and financial reporting bases (after the allocation of thepurchase price) of Agera’s assets and liabilities. Agera recorded a deferred tax benefit during the three months endedDecember 31, 2006 related to its net operating losses during that period. Such deferred tax benefit was limited to the initialdeferred tax liability recorded upon acquisition. F-28Table of ContentsThe components of the Company’s deferred tax assets (liabilities) at December 31, 2007 and 2006 are as follows: December 31, 2007 2006 Deferred tax assets and liabilities: Loss carryforwards $50,360,697 $37,251,873 Accrued expenses and other 1,568,776 1,160,496 Stock option compensation 2,039,475 1,316,388 Property and equipment 814,503 646,808 54,783,451 40,375,565 Less: Valuation allowance (54,783,451) (40,375,565) $— $— As of December 31, 2007, the Company had generated U.S. net operating loss carryforwards of approximately $108.4million which expire from 2011 to 2026 and net loss carryforwards in certain non-US jurisdictions of approximately$29.9 million. These net operating loss carryforwards are available to reduce future taxable income. However, a, change inownership, as defined by federal income tax regulations, could significantly limit the Company’s ability to utilize its U.S. netoperating loss carryforwards. Additionally, because federal tax laws limit the time during which the net operating losscarryforwards may be applied against future taxes, if the Company fails to generate taxable income prior to the expiration datesit may not be able to fully utilize the net operating loss carryforwards to reduce future income taxes. As the Company has hadcumulative losses and there is no assurance of future taxable income, valuation allowances have been recorded to fully offsetthe deferred tax asset at December 31, 2007 and 2006. The valuation allowance increased $14.4 million, $13.4 million and$12.7 million during 2007, 2006 and 2005, respectively, due primarily to the Company’s 2007, 2006 and 2005 net losses,respectively.Note 11—Commitments and ContingenciesFederal Securities LitigationThe Company and certain of its current and former officers and directors are defendants in class action cases pending in theUnited States District Court for the Eastern District of Pennsylvania.In August 2005 and September 2005, various lawsuits were filed alleging securities fraud and asserting claims on behalf ofa putative class of purchasers of publicly traded Isolagen securities between March 3, 2004 and August 1, 2005. These lawsuitswere Elliot Liff v. Isolagen, Inc. et al., C.A. No. H-05-2887, filed in the United States District Court for the Southern District ofTexas; Michael Cummiskey v. Isolagen, Inc. et al., C.A. No. 05-cv-03105, filed in the United States District Court for theSouthern District of Texas; Ronald A. Gargiulo v. Isolagen, Inc. et al., C.A. No. 05-cv-4983, filed in the United States DistrictCourt for the Eastern District of Pennsylvania, and Gregory J. Newman v. Frank M. DeLape, et al., C.A. No. 05-cv-5090, filed inthe United States District Court for the Eastern District of Pennsylvania.The Liff and Cummiskey actions were consolidated on October 7, 2005. The Gargiolo and Newman actions wereconsolidated on November 29, 2005. On November 18, 2005, the Company filed a motion with the Judicial Panel onMultidistrict Litigation (the “MDL Motion”) to transfer the Federal Securities Actions and the Keene derivative case (describedbelow) to the United States District Court for the Eastern District of Pennsylvania. The Liff and Cummiskey actions were stayedon November 23, 2005 pending resolution of the MDL Motion. The Gargiulo and Newman actions were stayed on December 7,2005 pending resolution of the MDL Motion. On February 23, 2006, the MDL Motion was granted and the actions pending inthe Southern District of Texas were transferred to the Eastern District of Pennsylvania, where they have been captioned In reIsolagen, Inc. Securities & Derivative Litigation, MDL No. 1741 (the “Federal Securities Litigation”).On April 4, 2006, the United States District Court for the Eastern District of Pennsylvania appointed Silverback AssetManagement, LLC, Silverback Master, Ltd., Silverback Life Sciences Master Fund, Ltd., Context Capital Management, LLCand Michael F. McNulty as Lead Plaintiffs, and the law firms of Bernstein Litowitz Berger & Grossman LLP and KirbyMcInerney & Squire LLP as Lead Counsel in the Federal Securities Litigation. F-29Table of ContentsOn July 14, 2006, Lead Plaintiffs filed a Consolidated Class Action Complaint in the Federal Securities Litigation onbehalf of a putative class of persons or entities who purchased or otherwise acquired Isolagen common stock or convertible debtsecurities between March 3, 2004 and August 9, 2005. The complaint purports to assert claims for securities fraud in violationof Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Isolagen and certain of its former officers anddirectors. The complaint also purports to assert claims for violations of Section 11 and 12 of the Securities Act of 1933 againstthe Company and certain of its current and former directors and officers in connection with the registration and sale of certainshares of Isolagen common stock and certain convertible debt securities. The complaint also purports to assert claims againstCIBC World Markets Corp., Legg Mason Wood Walker, Inc., Canaccord Adams, Inc. and UBS Securities LLC as underwriters inconnection with an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. On November 1,2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied the Company’s motions todismiss the complaint. On November 6, 2007, the court entered a scheduling order that provides for discovery to be complete byJune 8, 2009.The Company intends to defend these lawsuits vigorously. However, the Company cannot currently estimate the amountof loss, if any, that may result from the resolution of these actions, and no provision has been recorded in the consolidatedfinancial statements. The Company will expense its legal costs as they are incurred and will record any insurance recoveries onsuch legal costs in the period the recoveries are received.Derivative ActionsThe Company is the nominal defendant in derivative actions (the “Derivative Actions”) pending in State District Court inHarris County, Texas, the United States District Court for the Eastern District of Pennsylvania, and the Court of Common Pleasof Chester County, Pennsylvania.On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840, Carmine Vitale v. Frank DeLape, etal. in the 55th Judicial District Court of Harris County, Texas and in February 2006 Mr. Vitale filed an amended petition. In thisaction, the plaintiff purports to bring a shareholder derivative action on behalf of the Company against certain of theCompany’s current and former officers and directors. The Plaintiff alleges that the individual defendants breached theirfiduciary duties to the Company and engaged in other wrongful conduct. Jeffrey Tomz, who formerly served as Isolagen’s ChiefFinancial Officer, was accused of engaging in insider trading of Isolagen stock through a proxy. The plaintiff did not make ademand on the Board of Isolagen prior to bringing the action and plaintiff alleges that a demand was excused under the law asfutile.On December 2, 2005, the Company filed its answer and special exceptions pursuant to Rule 91 of the Texas Rules of CivilProcedure based on pleading defects inherent in the Vitale petition. The plaintiff filed an amended petition on February 15,2006, to which the defendants renewed their special exceptions. On September 6, 2006, the Court granted the specialexceptions and permitted the plaintiff thirty days to attempt to replead. Thereafter the plaintiff moved the Court for an ordercompelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the Court entered an order explainingits grounds for granting the special exceptions. On November 3, 2006, the plaintiff filed a second amended petition. OnFebruary 8, 2007, the Company filed its answer and special exceptions to the second amended petition. On August 9, 2007, theCourt granted the special exceptions and dismissed the second amended petition with prejudice. On September 4, 2007, theplaintiff moved for reconsideration of the dismissal with prejudice of the second amended petition, for a new trial, and for leaveto further amend the petition, and the defendants opposed that motion on September 20, 2007. On October 23, 2007, thatmotion was deemed denied by operation of law because the court had not acted on it by that date.On October 8, 2005, Richard Keene filed an action styled, C.A. No. H-05-3441, Richard Keene v. Frank M. DeLape et al.,in the United States District Court for the Southern District of Texas. This action makes substantially similar allegations as theoriginal complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior to filingthe action is excused as futile.The Company sought to transfer the Keene action to the United States District Court for the Eastern District ofPennsylvania as part of the MDL Motion. On January 21, 2006, the court stayed the Keene action pending resolution of theMDL Motion. On February 23, 2006, the Keene action was transferred with the Federal Securities Actions from the SouthernDistrict of Texas to the Eastern District of Pennsylvania. Thereafter, on May 15, 2006, the plaintiff filed an amended complaint,and on June 5, 2006, the defendants moved to dismiss the amended complaint. On August 21, 2006, the plaintiff moved forleave to file a second amended complaint, and on September 15, 2006, defendants filed an opposition to that motion. OnJanuary 24, 2007, the court denied the plaintiff’s motion to file a second amended complaint, and on April 10, 2007 the courtgranted the defendants’ motion to dismiss and dismissed the amended complaint without prejudice. On May 9, 2007, plaintifffiled a notice of appeal from the January 24, 2007 order denying plaintiff’s motion to file a second amended complaint, andfrom the April 10, 2007 order dismissing plaintiff’s amended complaint without prejudice. The appeal is fully briefed. F-30Table of ContentsOn October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432, William Thomas Fordyce v.Frank M. DeLape, et al., in the Court of Common Pleas of Chester County, Pennsylvania. This action makes substantiallysimilar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand onthe Board prior to filing the action is excused as futile.On January 20, 2006, the Company filed its preliminary objections to the complaint. On August 31, 2006, the Court ofCommon Pleas entered an opinion and order sustaining the preliminary objections and dismissing the complaint with prejudice.On September 19, 2006, Fordyce filed a motion for reconsideration, which the Court of Common Pleas denied. OnSeptember 28, 2006, Fordyce filed a notice of appeal to the Superior Court of Pennsylvania. On July 27, 2007, the SuperiorCourt affirmed the decision of the Court of Common Pleas.On February 14, 2008, Ronald Beattie filed an action styled C.A. No. 08-724, Ronald Beattie v. Michael Macaluso, et al.,in the United States District Court for the Eastern District of Pennsylvania. This action makes substantially similar allegations asthe original complaint in the Vitale action. The complaint has not yet been served on the Company.The Derivative Actions are purportedly being prosecuted on behalf of the Company and any recovery obtained, less anyattorneys’ fees awarded, will go to the Company. The Company is advancing legal expenses to certain current and formerdirectors and officers of the Company who are named as defendants in the Derivative Actions and expects to receivereimbursement for those advances from its insurance carriers. The Company will expense its legal costs as they are incurred andwill record any insurance recoveries on such legal costs in the period the recoveries are received. The Company cannotcurrently estimate the amount of loss, if any, that may result from the resolution of these actions, and no provision has beenrecorded in the consolidated financial statements.Indemnity DemandsMr. Jeffrey TomzAfter the above referenced litigations were commenced, Mr. Jeffrey Tomz, who formerly served as Isolagen’s ChiefFinancial Officer, demanded reimbursement of his costs of defense, and reimbursement for the costs of responding to a Securitiesand Exchange Commission investigation of his alleged insider trading in Isolagen stock. It is understood that Tomz’s defensecosts to date amount to approximately $0.3 million.As the Vitale matter has now been resolved in favor of all defendants, including Mr. Tomz, the Company is presentlyobligated to reimburse him for the reasonable and necessary costs of defending all claims asserted therein other than the insidertrading allegations. Although decided on jurisdictional grounds, it is likely the Company is also obligated to reimburseMr. Tomz for the reasonable and necessary costs incurred in defending the Fordyce matter given that it has also been resolved infavor of all defendants. The Company would be liable to reimburse Mr. Tomz for the reasonable and necessary costs of defensein the Keene case if it is affirmed on appeal and in the putative securities cases should he prevail in that action. The Companyhas refused to pay the amount of fees and expenses for which Mr. Tomz has sought reimbursement because it believes they areexcessive, duplicative and have not been properly segregated between reimbursable and non-reimbursable claims. TheCompany has negotiated an acceptable compromise for the amounts billed by Mr. Tomz’s local Pennsylvania counsel for anamount less than $0.1 million.Prior to the resolution of the various derivative actions, Mr. Tomz filed a demand for arbitration seeking advancement ofhis defense costs. He subsequently agreed to stay those proceedings. At present, Mr. Tomz has not sought to lift this stay and itis uncertain whether he will attempt to do so in the future.The Company has accrued less than $0.1 million in the accompanying Consolidated Financial Statements as ofDecember 31, 2007 with respect to Mr. Tomz’s existing defense costs in dispute. The Company intends to seek reimbursementunder its directors and officers liability policy for any amounts paid to reimburse Mr. Tomz for his defense costs, which includesless than $0.1 million paid to date.UnderwritersThe Underwriters have each demanded that the Company indemnify, hold harmless and defend them with respect to theclaims asserted in the putative securities actions. The total amount demanded to date is less than $0.3 million, however, webelieve that cumulative future amounts of these defense costs are likely to be significant, although these cumulative futureamounts cannot be estimated at this time. F-31Table of ContentsIsolagen has denied this demand on numerous grounds, including that: (i) as to the November 2004 convertible notesoffering, it only agreed to indemnify the Underwriters for any losses resulting from any untrue statement, or alleged untruestatement, of material fact in the offering documents provided by the Company to a holder or prospective purchaser ofsecurities, and plaintiffs’ claims in the securities action are not based upon alleged untrue statements in any such documents;(ii) as to the June 2004 secondary offering, it only agreed to indemnify the Underwriters for untrue statements, or alleged untruestatements, of material fact, in the preliminary prospectus, registration statement, prospectus or any amendment thereof, andthere were no such untrue statements in any such document; (iii) Isolagen assumed no duty to defend or advance defense costs;and (iv) Isolagen satisfied whatever duty to defend it may have to the Underwriters by offering to assume the Underwriters’defense. Accordingly, the Company has have not accrued any amounts related to the Underwriters’ defense costs in ourConsolidated Financial Statements.Dispute with Former President and Member of the Board of DirectorsOn March 16, 2007, the Company disclosed in its Form 10-K for the year ended December 31, 2006 (the “Form 10-K”),that the Company and Susan Ciallella had reached an understanding pursuant to which Ms. Ciallella would resign from theCompany in all capacities. The understanding, which was described in the Form 10-K, was subject to the negotiation andexecution of a definitive agreement. On May 10, 2007, the Company disclosed in its Form 10-Q for the quarter ended March 31,2007, that no such definitive agreement had been concluded with Ms. Ciallella, and that Ms. Ciallella was asserting claimsagainst the Company in connection with her separation from the Company. On June 8, 2007, the Company and Ms. Ciallellaparticipated in a voluntary mediation before a former federal judge. Upon conclusion of the mediation, the Company andMs. Ciallella entered into a Settlement Agreement and Release (the “Settlement Agreement”) pursuant to which the partiesagreed to settle and resolve all claims that Ms. Ciallella may have against the Company as well as all aspects of Ms. Ciallella’sseparation from the Company. The Settlement Agreement provided Ms. Ciallella the following:(i) severance payments as follows: (a) $450,000, which was paid by June 2007; (b) $240,000 paid on September 17, 2007;and (c) $40,000 per month to be paid each month beginning October 17, 2007 through July 15, 2008 with a $20,000 paymentto be made on July 30, 2008;(ii) $1,745,000, which was paid during June 2007 in satisfaction and settlement of Ms. Ciallella’s legal claims relating toher termination;(iii) $5,000 paid during June 2007 in connection with Ms. Ciallella’s release of claims under the Age Discrimination inEmployment Act;(iv) $159,245 paid during June 2007 for the reimbursement of Ms. Ciallella’s legal fees in connection with the negotiationand execution of the Settlement Agreement;(v) $198,950 related to Ms. Ciallella’s legal support services to be provided to the Company, of which approximately$158,000 had been paid as of December 31, 2007;(vi) Ms. Ciallella retained 300,000 of the 400,000 performance options issued to her in June 2006, which expire inJune 2016; Ms. Ciallella retained 160,000 of the options issued to her in April 2006, which expire in April 2016 and whichwere fully vested; and Ms. Ciallella retained her vested 300,000 options, which were issued to her in April 2005 and expire inApril 2015 (see Note 13).Each of the Company and Ms. Ciallella released the other party from any and all claims that it/she may have; andMs. Ciallella agreed to resign from all officer and director positions she held with the Company or any of its subsidiaries.During the three months ended March 31, 2007, the Company recorded termination costs aggregating $2.6 million toreflect the March 16, 2007 understanding between the parties, which were included in selling, general, and administrativeexpenses. As a result of the June 2007 Settlement Agreement, during the three months ended June 30, 2007 the Companyrecorded an additional $2.0 million of termination costs, which are also included in selling, general, and administrativeexpenses. No such expenses were incurred during the three months ended September 30, 2007. Accordingly, during the yearended December 31, 2007, the Company recorded total termination costs of approximately $4.6 million, as follows: F-32Table of Contents Year ended (in millions) December 31, 2007 Salary and severance $2.8 Consulting fee 0.2 Legal fee reimbursement to Ms. Ciallella 0.2 Company legal fees 0.3 Stock option modifications (see Note 13) 1.1 $4.6 Of the $0.3 million of Company legal fees discussed above, approximately $133,000 related to the Board of Directors’Special Committee legal counsel retained in connection with the Ciallella matter and was paid directly by the Company. Lessthan $10,000 related to the legal fees of one the Company’s Board members in connection with the Ciallella matter was paiddirectly by the Company. Also, less than $10,000 related to the legal fees of our Chief Executive Officer in connection with theCiallella matter was paid directly by the Company. The Company is pursuing reimbursement of the amounts paid in excess ofMs. Ciallella’s contractual severance, plus defense costs, from its insurance carriers. There can be, however, no assurance thatthere will be a recovery or if there is, of the amount thereof. As of December 31, 2007, $0.3 million remains due to Ms. Ciallellaand is recorded in accrued expenses on the consolidated balance sheet.United Kingdom Customer SettlementDuring 2005, the Company began an informal study and surveyed a number of patients who had previously received theIsolagen treatment to assess patient satisfaction. Some patients surveyed reported sub-optimal results from treatment. Onehundred forty-nine patients who claimed to have received sub-optimal results were retreated for the purpose of determining thereasons for sub-optimal results. Only those patients who completed the survey, provided adequate medical records includingbefore and after photographs and who were deemed both to have received a sub-optimal result from a first treatmentadministered according to the Isolagen protocol and who were considered to be appropriate patients for treatment with theIsolagen Therapy received re-treatment. No one completing the survey was offered re-treatment unless they agreed to theseconditions. Following re-treatment, a number of patients reported better results than first obtained through the initial treatmentby their initial treating physician.During the first quarter of 2006, the Company received a number of complaints from certain patients who had learned ofthe limited re-treatment program and also learned that a number of physicians with dissatisfied patients were generating publicill-will as a result of the Company’s decision to limit the number of patients offered re-treatment and were encouragingdissatisfied patients to seek recourse against the Company. In response, in March 2006 the Company decided that it was in itsbest interest to address these complaints to foster goodwill in the marketplace and avoid the cost of any potential patient claims.Accordingly, the Company agreed to resolve any properly documented and substantiated patient complaints by offering toretreat the patient pursuant to the same criteria stated above or pay £1,000 (approximately US$1,750) to the patients identifiedto the Company as having received a sub-optimal result. In order to qualify for re-treatment and in addition to the criteria setforth above, the patient will be treated by a physician identified by the Company who will treat these patients pursuant to aprotocol. In addition, these patients must have agreed to follow-up visits and assessments of their response to treatment. Nopatient unlikely to benefit from Isolagen Therapy has been or will be retreated.The Company made this offer to approximately 290 patients during late March 2006. Accordingly, the Company believedits range of liability was between £290,000 (or approximately $0.5 million), assuming all 290 patients were to choose the£1,000 payment, and approximately £580,000 (or approximately $1.0 million), assuming all 290 patients elected to beretreated. The estimated costs for retreatment include the cost of treatment, physician fees and other ancillary costs. TheCompany estimated that 60% of the patients would elect the £1,000 offer and 40% would elect to be retreated. Accordingly, theCompany recorded a charge reflected under loss from discontinued operations for the three months ended March 31, 2006 of$0.7 million. During the three months ended June 30, 2006, an additional 31 patients were entered into the settlement program,resulting in an additional charge reflected under loss from discontinued operations of $0.1 million.During the year ended December 31, 2006, payments to patients and retreatments reduced the accrual by $0.6 million.During the three months ended March 31, 2007 and June 30, 2007, payments and retreatments to patients reduced the accrualby approximately $0.1 million and $0.0 million, respectively. As of December 31, 2007, the accrual, which is included incurrent liabilities of discontinued operations in the consolidated balance sheet, was $0.1 million. The estimates related to thisliability may change in future periods and the effects of any changes will be accounted for in the period in which the estimatechanges. F-33Table of ContentsSubsequent to the Company’s public announcement regarding the closure of the United Kingdom operation, the Companyreceived negative publicity and negative correspondence from former patients in the United Kingdom that previously receivedour treatment. More recently, the Company received a written demand by an attorney representing approximately 82 formerpatients each claiming negligent misstatements were made and each claiming, on average, £3,500 (or approximately $7,000),plus unquantified interest and incidental expenses. The Company is in the process of evaluating the merits of the claims madein the demand. To date, no formal legal action has been brought by the attorney against the Company, and no provision hasbeen recorded in the consolidated financial statements related to this matter.Other LitigationThe Company is involved in various other legal matters that are being defended and handled in the ordinary course ofbusiness. Although it is not possible to predict the outcome of these other matters, management currently believes that theresults will not have a material impact on the Company’s financial statements.LeasesThe Company has entered into leases for office, warehouse and laboratory facilities in Exton, Pennsylvania, Houston,Texas, Santa Barbara, California and London, England under third party non-cancelable operating leases through 2010. Futureminimum lease commitments at December 31, 2007 are as follows: Year Ending December 31, 2008 $1,350,058 2009 1,329,907 2010 1,154,411 2011 1,119,312 2012 1,119,312 Thereafter 279,828 Total $6,352,828 For the years ended December 31, 2007, 2006 and 2005, rental expense totaled $1.7 million, $1.8 million and $1.8million, respectively (which includes rent expense related to discontinued operations of $0.4 million, $0.7 million and$0.7 million for the years ended December 31, 2007, 2006 and 2005, respectively).In August 2006, the Company entered into a non-cancelable two year operating lease for approximately 2,200 square feetin Santa Barbara, California. This office space houses certain members of our senior management team.In April 2005, the Company entered into a non-cancelable three year operating lease for approximately 86,500 square feetin Exton, Pennsylvania. This facility houses members of our senior management team, quality and manufacturing personnel,and the corporate finance department. The Company began constructing a production line in a portion of this facility inanticipation of eventual FDA approval. The facility was completed during September 2005. This production line is expected tobe utilized for the production of clinical supplies. The non-cancelable portion of the lease expires on March 31, 2008, providedhowever that if the lease is not cancelled by the Company prior to March 31, 2007, at least one year prior to the end of the non-cancelable portion of the lease, then the lease shall end on March 31, 2013. The Company would then have the option toextend the term of the lease for five years, beginning on April 1, 2013. During 2007, the Company extended the lease throughMarch 31, 2013, and accordingly, the Company amortizes its leasehold improvements related to this facility through March 31,2013. Lease expense is recognized on a straight-line basis through March 31, 2013. The Exton, Pennsylvania minimum leasepayments have been included in the future minimum lease commitments table above through March 31, 2013.Certain former officers of the Company had previously provided office space and laboratory facilities in Houston, Texas atno charge until August 2003. Beginning September 2003, the lease rate was approximately $1.80 per month per square foot.During the first quarter of 2005, this lease with certain former officers of the Company was terminated. CommencingMarch 2005, the Company entered into a new lease with a third-party for approximately 14,850 square feet lease of office andlaboratory space in Houston, Texas. The lease term is through April 2008. The Company no longer leases or occupies officespace or laboratory facilities from related parties.As discussed in Note 5, in September 2004 the Company adopted a plan to close its Australia facility. The lease related tothe Company’s Australia facility was originally due to expire on December, 31, 2004. The Company terminated this lease inOctober 2005. F-34Table of ContentsAs discussed in Note 3, in April 2005 the Company acquired a two-building corporate campus in Bevaix, Canton ofNeuchâtel, Switzerland, which is reflected as assets of discontinued operations held for sale on the accompanying consolidatedbalance sheets. The Company leases one of these buildings to a third party for approximately $0.3 million per year. This leasebegan April 15, 2005 and concludes on December 31, 2010.Distribution agreementIn April 2003, the Company entered into a distribution agreement with Equipmed Pty. Ltd (“Equipmed”). Equipmed hadthe exclusive right as the Company’s distributor in Australia and New Zealand of services utilizing the Company’s technologyfor its autologous cellular system for soft tissue regeneration and other therapies in the cosmetic dermatological surgery markets(i.e., exclusively for wrinkle and acne reduction) within Australia and New Zealand. The Company terminated this agreement inexchange for a payment to Equipmed of approximately $0.4 million during 2005. Approximately $0.1 million of this paymentwas charged to loss from discontinued operations in the consolidated statement of operations during the year endedDecember 31, 2005.Departure of Former Chief Executive OfficersEffective October 27, 2005 Mr. Frank DeLape also resigned as Chairman of the Board and member of the Board ofDirectors. In connection with Mr. DeLape’s resignation, Mr. DeLape and the Company entered into a Separation and ReleaseAgreement (the “Agreement”). Pursuant to the Agreement, Mr. DeLape agreed, among other things, to (a) resign all positionswith the Company and all of its subsidiaries and to terminate his employment with the Company, (b) certain lock-up andstandstill restrictions in respect of shares of the Company’s common stock he and his affiliates own through July 2006, and(c) execute a release for the benefit of the Company and its subsidiaries. The Company agreed, among other things, to pay aseparation payment in the amount of $210,000, beginning on Mr. DeLape’s resignation date through March 15, 2006.Mr. DeLape also retained options to purchase (a) 650,000 shares of the Company’s common stock granted on September 1,2001 at an exercise price of $6.00, which were fully vested as of his resignation date and will be exercisable for a period of twoyears following his resignation date, (b) 400,000 shares of the Company’s common stock granted on February 25, 2003 at anexercise price of $4.50, which were fully vested as of his resignation date and will be exercisable for a period of five yearsfollowing his resignation date and (c) 150,000 shares of the Company’s common stock granted on September 5, 2003 at anexercise price of $9.81, which were fully vested as of his resignation date and will be exercisable for a period of three yearsfollowing his resignation date. All other unexercised options granted to Mr. DeLape to purchase shares of the Company’scommon stock were cancelled as of Mr. DeLape’s resignation date. The Amended and Restated Employment Agreement ofJune 2005 between Mr. DeLape and the Company was terminated. Any options to purchase stock under the 2005 Agreementwere cancelled. The separation payment pursuant to the Separation and Release Agreement reflects the amount that wouldotherwise be owed under Mr. DeLape’s 2003 Employment Agreement reduced by the amount of certain office expensereimbursements paid to him pursuant to the 2005 Agreement.Mr. Michael Macaluso, former Chief Executive Officer and former Director, entered into an employment agreement datedSeptember 5, 2003, with an initial term ending July 31, 2006 and providing for a base salary of $300,000, subject to the right ofthe Board of Directors to increase his salary from time to time. Mr. Macaluso resigned from Chief Executive Officer andPresident effective September 1, 2004. Mr. Macaluso was paid his base salary until July 2006, which was fully accrued at thetime of his resignation.Note 12—EquitySignificant Common Stock TransactionsIn August 2003, the Company sold in a private offering 3,359,331 shares of Common Stock, par value $0.001 per share, atan offering price of $6 per share. After deducting the costs and expenses associated with the sale, the Company received netcash totaling $18.5 million.In June 2004, the Company issued a) 7,200,000 shares of common stock, at $8.50 per share, for cash totaling net$56.8 million in connection with the secondary offering completed in June 2004; and b) 51,828 shares of common stock inexchange for cashless exercise of warrants.In June 2007, the Company filed a shelf registration statement on Form S-3, which was subsequently declared effective bythe SEC. The shelf registration allowed the Company the flexibility to offer and sell, from time to time, up to an original amountof $50 million of common stock, preferred stock, debt securities, warrants or any combination of the foregoing in one or morefuture public offerings. In August 2007, the Company sold under this shelf registration statement 6,767,647 shares of commonstock to institutional investors, raising proceeds of $13.8 million, net of offering costs. The Company may offer and sell up toan additional $36.2 million of common stock pursuant to this shelf registration. F-35Table of ContentsRefer to the consolidated statement of shareholders’ equity (deficit) and comprehensive loss for common stock transactionsfrom the period December 28, 1995 through December 31, 2007.Treasury StockIn November 2004, the Company repurchased 4,000,000 shares of its common stock for an aggregate of approximately$26.0 million, of which 2,000,000 shares were repurchased from Frank DeLape, who was then the Chairman of the Board ofDirectors, Michael Macaluso, a former director and the former President and Chief Executive Officer, Olga Marko, the formerSenior Vice President and Director of Research, Michael Avignon, the former Manager of International Operations, and TimothyJ. Till, a shareholder. The purchase price from the insiders, affiliates and founders of the Company listed above was $6.33 pershare which represented a 5% discount from the closing price of the Company’s common stock on the American StockExchange on October 28, 2004, the date the offering of the 3.5% Subordinated Notes was priced. The purchase of the sharesfrom the insiders was approved by a special committee of independent directors in partial reliance on a fairness opinion issuedby an investment bank.2003 Conversion of Series A Convertible Preferred Stock and Series B Convertible Preferred StockIn July 2002, the Company completed a private offering of 2,895,000 shares of Series A Convertible Preferred Stock, parvalue $0.001 per share, at an offering price of $3.50 per share. Each share of Series A Preferred Stock was convertible into twoshares of common stock at any time after issuance and accrued dividends at 8% per annum payable in cash or additional sharesof Series A Preferred Stock. In conjunction with this private offering, the Company issued to the placement agent warrants topurchase 1,158,000 shares of common stock with an exercise price of $1.93 per share. The warrants were exercisableimmediately after grant and expire five years thereafter. The fair market of the warrants granted to the placement agent, based onthe Black-Scholes valuation model, is estimated to be $1.57 per warrant. The value of the warrants granted were offset againstthe proceeds received from the sale of the Series A Preferred Stock. During the year ended December 31, 2002, the Companyissued an additional 143,507 shares of Series A Preferred Stock in lieu of cash for payment of dividends on the Series APreferred Stock totaling approximately $0.5 million.The price of the preferred stock sold was $3.50 per share. The market value of the Company’s common stock sold on thedates that the preferred stock sold or was issued as a dividend had a range of $2.30 — $5.40 per common share. In accordancewith EITF 00-27 this created a beneficial conversion to the holders of the preferred stock and a deemed dividend to the preferredstockholders totaling $10.2 million was recorded by the Company with a corresponding amount recorded as additional paid-incapital. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value ofthe underlying common stock less the proceeds that have been received for the Series A Preferred Stock limited to the value ofthe proceeds received.In May 2003, the Company sold in a private offering 155,750 shares of Series B Convertible Preferred Stock, par value$0.001 per share, at an offering price of $28 per share. Each share of Series B preferred stock is convertible into 8 shares ofcommon stock at any time after issuance and accrues dividends at 6% per annum payable in cash or additional shares ofSeries B Preferred Stock. After deducting the costs and expenses associated with the sale, the Company received cash totaling$3.9 million. In conjunction with the private offering, the Company issued to the placement agent warrants to purchase 124,600shares of common stock with an exercise price of $3.50 per share. The warrants are exercisable immediately after grant andexpire five years thereafter. The fair value of the warrants granted to the placement agent, based on the Black-Scholes valuationmodel is estimated to be $2.77 per warrant. The value of the warrants granted has been offset from the proceeds received fromthe sale of the Series B Preferred Stock and recorded as additional paid in capital.The price of the preferred stock sold was $28 per share. The market value of the Company’s common stock sold on thedates that the preferred stock was sold had a range of $4.40 — $4.54 per common share. In accordance with EITF 00-27 thiscreated a beneficial conversion to the holders of the preferred stock and a deemed dividend to the preferred stockholderstotaling approximately $1.2 million was recorded by the Company with a corresponding amount recorded as additional paid-incapital. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value ofthe underlying common stock less the proceeds that have been received for the Series B Preferred Stock limited to the value ofthe proceeds received.In 2003, all outstanding shares of Series A and Series B Convertible Preferred Stock were converted into 7.3 million sharesof common stock. F-36Table of ContentsStockholder Rights PlanIn May 2006, the Board of Directors of the Company adopted a Stockholder Rights Plan, as set forth in the RightsAgreement, dated as of May 12, 2006, by and between the Company and American Stock Transfer & Trust Company, a trustcompany organized under the laws of the State of New York (the “Rights Agent”). Pursuant to the Rights Agreement,stockholders of record at the close of business on May 22, 2006 received one right (“Right”) for each share of Isolagen commonstock held on that date. The Rights, which will initially trade with the common stock and represent the right to purchase oneten-thousandth of a share of the Company’s newly created Series C Preferred Stock at $35 per Right, become exercisable when aperson or group acquires 15% or more of the Company’s common stock (20% in the case of certain institutional stockholders)or announces a tender offer for 15% or more of the common stock. In that event, in lieu of purchasing the Series C PreferredStock, the Rights permit the Company’s stockholders, other than the acquiror, to purchase Isolagen common stock having amarket value of twice the exercise price of the Rights. In addition, in the event of certain business combinations, the Rightspermit holders to purchase the common stock of the acquiror at a 50% discount. Rights held by the acquiror will become nulland void in each case.The Rights have certain anti-takeover effects, in that they would cause substantial dilution to a person or group thatattempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. In the event that theBoard of Directors determines a transaction to be in the best interests of the Company and its stockholders, the Board ofDirectors will be entitled to redeem the Rights for $.001 per Right at any time before the tenth business day after the Company’sannouncement that a person or group has acquired ownership of 15% or the tenth business day after commencement of a tenderor exchange offer for more than 15% of the outstanding common stock. The Rights expire on May 12, 2016.Note 13—Equity-based CompensationIn December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No.123, “Accounting for Stock-Based Compensation”, supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB No. 25”), and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires entities torecognize compensation expense for all share-based payments to employees and directors, including grants of employee stockoptions, based on the grant-date fair value of those share-based payments, adjusted for expected forfeitures. The Companyadopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective application method. Under the modifiedprospective application method, the fair value measurement requirements of SFAS No. 123(R) is applied to new awards and toawards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards forwhich the requisite service has not been rendered that were outstanding as of January 1, 2006 is recognized as the requisiteservice is rendered on or after January 1, 2006. The compensation cost for that portion of awards is based on the grant-date fairvalue of those awards as calculated for pro forma disclosures under SFAS No. 123. Changes to the grant-date fair value of equityawards granted before January 1, 2006 are precluded.Prior to the adoption of SFAS No. 123(R), the Company followed the intrinsic value method in accordance with APBNo. 25 to account for its employee stock options. Historically, substantially all stock options have been granted with anexercise price equal to the fair market value of the common stock on the date of grant. Accordingly, no compensation expensewas recognized from substantially all option grants to employees and directors. Compensation expense was recognized inconnection with the issuance of stock options to non-employee consultants in accordance with EITF 96-18, “Accounting forEquity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services.”SFAS No. 123(R) did not change the accounting for stock-based compensation related to non-employees in connection withequity based incentive arrangements.The Company utilizes the straight-line attribution method for recognizing stock-based compensation expense under SFASNo. 123(R). The Company recorded $1.8 million and $1.1 million of compensation expense, net of tax, during the years endedDecember 31, 2007 and 2006, respectively, for stock option awards to employees and directors based on the estimated fairvalues, at the grant dates, of the awards. Further, in connection with the separation agreement with the Company’s formerPresident and related modification of the former President’s stock options (see Note 11), the Company recorded $1.1 million instock option modification expense during the three months ended March 31, 2007, as discussed further below. F-37Table of ContentsResults for the years ended December 31, 2005 have not been restated. Had compensation expense for employee anddirector stock options been determined based on fair value at the grant date consistent with SFAS No. 123(R), with stockoptions expensed using the straight-line attribution method, the Company’s net loss and loss per share would have beenincreased to the pro forma amounts indicated below: Year Ended December 31, 2005 Net loss—as reported $(35,777,584)Plus: stock-based employee compensation expense included in reported net loss, net of related taxeffects of $0 44,329 Less: total stock based employee compensation determined under fair value based method for all awardsgranted to employees, net of related tax effect of $0 (5,967,467)Net loss—pro forma $(41,700,722)Net loss per share—as reported Basic and diluted $(1.18)Net loss per share—pro forma Basic and diluted $(1.38)The weighted average fair market value using the Black-Scholes option-pricing model of the options granted was $1.91,$1.42 and $2.90 for the years ended December 31, 2007, 2006 and 2005, respectively. The fair market value of the stockoptions at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted averageassumptions: Year Ended December 31, 2007 2006 2005 Expected life (years) 4.1 5.3 5.0 Interest rate 4.8% 4.9% 4.0%Dividend yield — — — Volatility 76% 79% 78%The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with theexpected life of the stock options. Expected volatility is based on the Company’s historical experience. Expected life representsthe period of time that options are expected to be outstanding and is based on the Company’s historical experience or thesimplified method, as permitted by SEC Staff Accounting Bulletin No. 107 where appropriate. Expected dividend yield was notconsidered in the option pricing formula since the Company does not pay dividends and has no current plans to do so in thefuture. The forfeiture rate used was based upon historical experience. As required by SFAS No. 123(R), the Company will adjustthe estimated forfeiture rate based upon actual experience.During December 2005, the Company’s Board of Directors approved the full vesting of all unvested, outstanding stockoptions issued to current employees and directors. The Board decided to take this action (“the acceleration event”) inanticipation of the adoption of SFAS No. 123(R). As a result of this acceleration event, approximately 1.4 million stock optionswere vested that would have otherwise vested during 2006 and later periods. At the time of the acceleration event, theunamortized grant date fair value of the affected options was approximately $3.6 million (for SFAS No. 123 and SFAS No. 148pro forma disclosure purposes), which was charged to pro forma expense in the fourth quarter of 2005. As the Companyaccelerated the vesting of outstanding employee and director stock options during December 2005, there was no remainingexpense related to such options to be recognized in the Company’s statements of operations in future periods.There were 16,666 stock options exercised during the year ended December 31, 2007, resulting in cash proceeds to theCompany of less than $0.1 million. There were 86,000 stock options exercised during the year ended December 31, 2006,resulting in cash proceeds to the Company of $0.2 million. There were 25,000 stock options exercised during the year endedDecember 31, 2005, resulting in cash proceeds to the Company of $0.1 million. These exercised options in 2007, 2006 and2005, respectively, had an intrinsic value of less than $0.1 million, $0.2 million and less than $0.1 million. A summary ofoption activity for the year ended December 31, 2007 is as follows: F-38Table of Contents Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term Value Outstanding at January 1, 2007 10,474,833 $4.17 Granted 717,500 3.26 Exercised (16,666) 1.58 Forfeited (3,451,668) 5.61 Outstanding at December 31, 2007 7,723,999 3.45 5.67 $2,365,230 Options exercisable at December 31, 2007 5,177,161 $4.06 5.04 $1,093,007 The following table summarizes the status of the Company’s non-vested stock options since January 1, 2007: Non-vested Options Weighted- Number of Average Fair Shares Value Non-vested at January 1, 2007 3,571,089 $1.41 Granted 717,500 1.91 Vested (1,345,083) 1.55 Forfeited (396,668) 1.77 Non-vested at December 31, 2007 2,546,838 $1.43 The total fair value of shares vested during the years ended December 31, 2007, 2006 and 2005 was $2.1 million,$1.2 million and $10.6 million, respectively. As discussed above, in December 2005 the Company’s Board of Directorsapproved the full vesting of all unvested, outstanding stock options issued to current employees and directors. As ofDecember 31, 2007, there was $1.8 million of total unrecognized compensation cost related to non-vested director andemployee stock options which vest over time. That cost is expected to be recognized over a weighted-average period of1.6 years. As of December 31, 2007, there was $0.8 million of total unrecognized compensation cost related to performance-based, non-vested employee stock options. That cost will begin to be recognized when the performance criteria within therespective performance-base option grants become probable of achievement.2001 Stock Option and Stock Appreciation Rights PlanEffective August 10, 2001, the Company adopted the Isolagen, Inc. 2001 Stock Option and Stock Appreciation RightsPlan (the “2001 Stock Plan”). The 2001 Stock Plan is discretionary and allows for an aggregate of up to 5,000,000 shares of theCompany’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The2001 Stock Plan is administered by the Company’s Board of Directors, who has exclusive discretion to select participants whowill receive the awards and to determine the type, size and terms of each award granted. As of December 31, 2007, there were1,984,000 options outstanding under the Stock Plan and 2,390,334 options are available to be issued under the Stock Plan.During the three months ended March 31, 2007, the Company issued, under the 2001 Stock Plan, 395,000 options toemployees and Board of Director members, with exercise prices ranging from $2.37 to $3.10 and with contractual lives of5 years for employees and 10 years for Board members.During the three months ended June 30, 2007, the Company issued, under the 2001 Stock Plan, 140,000 options to threeemployees, with exercise prices ranging from $4.20 to $4.55 and with contractual lives of 5 years.During the three months ended September 30, 2007, the Company issued, under the 2001 Stock Plan, (1) a total of 102,500options to four employees with an exercise price of $3.38 per share, which have a five year maximum contractual life and whichvest annually over a three year period from the date of grant and (2) a total of 50,000 performance-based options to oneemployee with an exercise price of $3.38 per share and which have a maximum contractual life of five years. With respect tothese 50,000 performance-based stock options, no compensation expense will be recorded until the performance-based vestingevent is probable of occurrence. The grant date fair value of this award was less than $0.1 million. F-39Table of ContentsDuring the three months ended December 31, 2007, the Company issued, under the 2001 Stock Plan, 30,000 options toone newly appointed board member, with exercise price of $3.14, with a contractual life of 10 years and a cliff-vesting period ofone year.2003 Stock Option and Stock Appreciation Rights PlanOn January 29, 2003, the Company’s Board of Directors approved the 2003 Stock Option and Appreciation Rights Plan(the “2003 Stock Plan”). The 2003 Stock Plan is discretionary and allows for an aggregate of up to 2,250,000 shares of theCompany’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The2003 Stock Plan is administered by the Company’s Board of Directors, who has exclusive discretion to select participants whowill receive the awards and to determine the type, size and terms of each award granted. As of December 31, 2007, there were1,866,666 options outstanding under the 2003 Stock Plan and 383,334 shares were available for issuance under the 2003 StockPlan. No options were granted under the 2003 Stock Plan during the year ended December 31, 2007.2005 Equity Incentive PlanOn April 26, 2005, the Company’s Board of Directors approved the 2005 Equity Incentive Plan (the “2005 Stock Plan”).The 2005 Stock Plan is discretionary and allows for an aggregate of up to 2,100,000 shares of the Company’s common stock tobe awarded through incentive and non-qualified stock options, stock units, stock awards, stock appreciation rights and otherstock-based awards. The 2005 Stock Plan is administered by the Compensation Committee of the Company’s Board ofDirectors, who has exclusive discretion to select participants who will receive the awards and to determine the type, size andterms of each award granted. As of December 31, 2007, there were 305,000 options outstanding and 1,712,652 shares wereavailable for issuance under the 2005 Stock Plan.During the three months ended March 31, 2007, the Company modified a 400,000 share performance option grant, asdiscussed below under Modification of Stock Options. This 400,000 share performance option grant was issued during the threemonths ended June 30, 2006 to purchase common stock with an exercise price of $1.88 per share to the Company’s President.These options had a ten year maximum contractual life and the options were to vest, and no longer be subject to forfeiture, uponthe occurrence of any of the following events: (i) upon the closing of the sale of substantially all of the assets of the Company orthe reorganization, consolidation or the merger of the Company; provided that the event results in the payment or distributionof consideration valued in good faith by the Board of Directors at $25 per share or more; or (ii) upon the closing of a tender offeror exchange offer to purchase 50% or more of the issued and outstanding shares of common stock of the Company at a price pershare valued in good faith by the Board of Directors at $25 or more; or (iii) immediately following a “Stock Acquisition Date,”as that term is defined in the Rights Plan adopted by the Company on May 12, 2006 (provided that said rights are notsubsequently redeemed by the Company or that the Rights Plan is not subsequently amended to preclude exercise of the rightsissued thereunder, prior to the Distribution Date, as that term is defined in the Rights Pan), or (iv) at such other time as the Boardof Directors, in its sole discretion, deems appropriate; provided in each case that the President is employed by the Company atthe time of said event. The 400,000 share option grant was considered a grant of a performance stock option. No compensationcost was recorded during 2006 for this grant as the Company did not believe that the vesting events were probable ofoccurrence. The 2006 grant date fair value of the award was approximately $0.6 million. Subsequently, this 400,000 shareoption grant was modified during the three months ended March 31, 2007, as discussed below under Modification of StockOptions.Modification of Stock OptionsIn connection with the separation of the Company’s President (see Note 11), the Company agreed on March 16, 2007 tomodify certain of the President’s stock options such that (1) 120,000 unvested, time-based stock options would vestimmediately and (2) of 400,000 performance based stock options, 100,000 would be cancelled and the remaining 300,000would be extended such that the 300,000 options would expire 10 years from the original grant date, as opposed to expiringupon termination of employment. The 300,000 performance based stock options would continue to be subject to the sameperformance based vesting requirements. The 120,000 modified stock options were valued using the Black-Scholes valuationmodel, and resulted in $0.3 million charge to selling, general and administrative expense during the months ended March 31,2007. The 300,000 modified performance stock options were valued using the Black-Scholes valuation model, and resulted in$0.8 million charge to selling, general and administrative expense in the year ended December 31, 2007. Two other employeestock option modifications resulted in less than $0.1 million charge to selling, general and administrative expense in the yearended 2007.During the year ended December 31, 2006, the Company modified 100,000 stock options previously granted to the formerCFO of the Company during 2005, such that the options will expire five years from the date of grant, as opposed to 90 days aftertermination. In connection with this modification, the Company recorded a charge of $0.1 million to selling, general andadministrative expenses in the consolidated statement of operations in the year ended December 31, 2006. F-40Table of ContentsAlso, refer to Note 17, Subsequent Event, for a discussion of the stock options modifications, which occurred inJanuary 2008, related to our former Chief Executive Officer.Restricted StockDuring the three months ended March 31, 2006, the Company issued 126,750 shares of restricted stock awards to variousemployees. The restricted common stock vested quarterly over three years, beginning on March 31, 2006 and ending onDecember 31, 2008. On March 31, 2006, 10,557 shares of the 126,750 shares of restricted stock vested.During the three months ended June 30, 2006, 2,752 shares of the restricted stock were cancelled due to terminations,94,648 shares of restricted stock were cancelled in a Board approved exchange for 206,500 stock options (which were issuedunder the 2001 Plan) and 3,707 shares of restricted stock vested.During the three months ended September 30, 2006, 1,708 shares of restricted stock vested. During the three months endedDecember 31, 2006, 15,002 shares were cancelled due to terminations and 42 shares of restricted stock vested. Compensationexpense related to the restricted stock was less than $0.1 million for the year ended December 31, 2007 and less than$0.1 million for the year ended December 31, 2006. As of December 31, 2007, 166 shares of unvested restricted stock wereoutstanding, which vest quarterly through March 31, 2009.Other Stock OptionsDuring the year ended December 31, 2007, the Company did not issue any options outside the 2001 Stock Plan, the 2003Stock Plan or the 2005 Stock Plan. As of December 31, 2007, there were 3,568,333 nonqualified stock options outstandingoutside of the shareholder approved plans discussed above.During the year ended December 31, 2006, the Company issued (1) 2,000,000 options to purchase its common stock withan exercise price of $1.88 per share to the Company’s CEO, which have a ten year maximum contractual life and which vesteach fiscal quarter end over a three year period from the date of grant, (2) 325,000 options to purchase its common stock with anexercise price of $1.87 per share to the Company’s CFO, with a five year maximum contractual life and which vest annuallyover a three year period from the date of grant and (3) 200,000 options to purchase its common stock with an exercise price of$1.87 per share to a separate employee, with a five year maximum contractual life and which vest annually over a three yearperiod from the date of grant.In addition, during the year ended December 31, 2006 the Company issued 500,000 options to purchase its common stockwith an exercise price of $1.88 per share to the Company’s CEO. These options have a ten year maximum contractual life andthe options have identical vesting terms to the Performance Stock Option Grant issued to the Company’s President under the2005 Stock Plan as described above. No compensation cost has been recorded for this grant as the Company does not currentlybelieve that the vesting events are probable of occurrence. The grant date fair value of the award was approximately$0.7 million. This fair value of $0.7 million, or any portion thereof, will not be recognized as compensation expense until thevesting of the award becomes probable.Equity Instruments Issued for ServicesAs of December 31, 2007, the Company had outstanding 603,600 warrants and options issued to non-employees underconsulting agreements. The following sets forth certain information concerning these warrants and options: VestedWarrants and options outstanding 603,600Range of exercise prices $1.50-6.00Weighted average exercise price $4.17Expiration dates 2009-2013 F-41Table of ContentsExpense related to these contracts was less than $0.1 million, $0.2 million and $(0.2) million for the years endedDecember 31, 2007, 2006 and 2005, respectively. The expense was calculated using the Black Scholes option-pricing modelbased on the following weighted average assumptions: Expected life (years) 4-5 YearsInterest rate 4.0-4.97%Dividend yield —Volatility 71-83%Further, there were 168,246 and 688,256 warrants outstanding as of December 31, 2007 and as of December 31, 2006,which were primarily issued in connection with past equity offerings. During the years ended December 31, 2007, 2006 and2005, there were 520,010, 0 and 60,000 warrants exercised, respectively. Of the warrants exercised during the year endedDecember 31, 2007, 463,370 were exercised via cash payment of the $1.93 exercise price, and the remaining 56,640 warrantswere exercised via net share exercise. In total, 492,613 shares of common stock were issued during 2007 as a result of thesewarrants exercised and $0.9 million of cash proceeds were received by the Company in connection with the payment of therelated warrant exercise price. The intrinsic value of the warrants exercised during the years ended December 31, 2007 and 2005were $1.1 million and $0.4 million, respectively. There were no warrants converted or forfeited during the year endedDecember 31, 2006.Note 14—Certain Relationships and Related TransactionsAs discussed in Notes 9 and 12, in November 2004 the Company repurchased 2,000,000 shares of its common stock fromFrank DeLape, who was then the Chairman of the Board of Directors, Michael Macaluso, a former director and the formerPresident and Chief Executive Officer, Olga Marko, the former Senior Vice President and Director of Research, MichaelAvignon, the former Manager of International Operations, and Timothy J. Till, a shareholder. The purchase price from theinsiders, affiliates and founders of the Company listed above was $6.33 per share which represented a 5% discount from theclosing price of the Company’s common stock on the American Stock Exchange on October 28, 2004, the date the offering ofthe 3.5% Subordinated Notes was priced. The purchase of the shares from the insiders was approved by a special committee ofindependent directors in partial reliance on a fairness opinion issued by an investment bank.Five of the Company’s current Board members and seven of the Company’s former officers and directors are nameddefendants in certain pending class action and derivative legal proceedings discussed in Note 11 above. During 2007, theCompany advanced an aggregate of $0.8 million, or approximately $0.1 million per person, for legal expenses incurred onbehalf of those five Board members and seven former officers and directors in connection with their defense in thoseproceedings. During 2006, the Company advanced an aggregate of $0.9 million, or approximately $0.1 million per person, forlegal expenses incurred on behalf of those five Board members and seven former officers and directors in connection with theirdefense in those proceedings. As of December 31, 2007, $1.5 million of the advanced amounts (approximately $0.1 per person)have been reimbursed to the Company by the Company’s insurance carriers.Since June 2005, Mr. Ralph De Martino, a member of the Company’s Board of Directors, has been a member of the law firmCozen O’Connor in the firm’s Washington, DC office. From January 2003 until June 2005, Mr. De Martino was the managingpartner of the Washington, DC office of the law firm Dilworth Paxson LLP. Fees paid by the Company to Cozen O’Connorduring 2007, 2006 and 2005 were $0.7 million, $0.4 million and $0.2 million, respectively. Fees paid by the Company toDilworth Paxson LLP during 2007, 2006 and 2005 were $0.0 million, $0.0 million and $0.4 million, respectively.See Note 11, Dispute with Former President and Member of the Board of Directors and Departure of Former ChiefExecutive Officers, for discussion of severance arrangements with former senior employees. See Note 17, Subsequent Event, fordiscussion of the January 2008 departure of our former Chief Executive Officer. F-42Table of ContentsNote 15—Segment Information and Geographical informationWith the acquisition of Agera on August 10, 2006 (see Note 4), the Company now has two reportable segments: IsolagenTherapy and Agera. Prior to the acquisition of Agera, the Company reported one reportable segment. The Isolagen Therapysegment specializes in the development and commercialization of autologous cellular therapies for soft tissue regeneration. TheAgera segment maintains proprietary rights to a scientifically-based advanced line of skincare products. The following tableprovides operating financial information for the continuing operations of the Company’s two reportable segments: Segment Year Ended December 31, 2007 Isolagen Therapy Agera Consolidated External revenue $— $1,400,986 $1,400,986 Intersegment revenue — — — Total operating revenue — 1,400,986 1,400,986 Cost of revenue — 656,029 656,029 Selling, general and administrative expense 17,429,016 1,301,847 18,730,863 Research and development expense 13,278,796 19,542 13,298,338 Management fee (600,000) 600,000 — Total operating expenses 30,107,812 1,921,389 32,029,201 Operating loss (30,107,812) (1,176,432) (31,284,244)Interest income 897,731 3,531 901,262 Other income 150,138 — 150,138 Interest expense (3,899,239) — (3,899,239)Minority interest — 246,347 246,347 Segment loss $(32,959,182) $(926,554) $(33,885,736) Supplemental information related to continuing operations Depreciation and amortization expense $1,178,376 $326,842 $1,505,218 Capital expenditures 184,538 — 184,538 Equity awards issued for services 3,026,609 — 3,026,609 Amortization of debt issuance costs 749,239 — 749,239 Total assets, including assets from discontinued operations 34,162,693 5,328,497 39,491,190 Property and equipment, net 3,395,723 — 3,395,723 Intangible assets, net 529,875 4,069,663 4,599,538 An intercompany receivable of $1.1 million, due from the Agera segment to the Isolagen Therapy segment, is eliminated inconsolidation. This intercompany receivable is primarily due to the intercompany management fee charge to Agera byIsolagen, as well as Agera working capital needs provided by Isolagen, and has been excluded from total assets of theIsolagen Therapy segment in the above table. Total assets on the consolidated balance sheet at December 31, 2007 areapproximately $39.5 million, which includes assets of continuing operations of $28.2 million and assets of discontinuedoperations of $11.3 million. F-43Table of Contents Segment Year Ended December 31, 2006 Isolagen Therapy Agera Consolidated External revenue $— $384,389 $384,389 Intersegment revenue — — — Total operating revenue — 384,389 384,389 Cost of revenue — 194,197 194,197 Selling, general and administrative expense 12,600,305 574,655 13,174,960 Research and development expense 8,796,219 — 8,796,219 Management fee (278,136) 278,136 — Total operating expenses 21,118,388 852,791 21,971,179 Operating loss (21,118,388) (662,599) (21,780,987)Interest income 2,249,892 12,007 2,261,899 Interest expense (3,899,239) — (3,899,239)Minority interest — 78,132 78,132 Income tax benefit — 190,754 190,754 Segment loss $(22,767,735) $(381,706) $(23,149,441) Supplemental information related to continuing operations Depreciation and amortization expense $1,174,404 $125,616 $1,300,020 Capital expenditures 917,811 — 917,811 Equity awards issued for services 1,464,139 — 1,464,139 Amortization of debt issuance costs 749,240 — 749,240 Total assets, including assets from discontinued operations 51,269,373 6,017,502 57,286,875 Property and equipment, net 4,331,605 — 4,331,605 Intangible assets, net 540,000 4,396,505 4,936,505 An intercompany receivable of $0.3 million, due from the Agera segment to the Isolagen Therapy segment, is eliminatedduring consolidation. This intercompany receivable is primarily due to the intercompany management fee charge and hasbeen excluded from total assets of the Isolagen Therapy segment in the above table. Total assets on the consolidatedbalance sheet at December 31, 2006 are approximately $57.3 million, which includes assets of continuing operations of$45.9 million and assets of discontinued operations of $11.4 million.Geographical information concerning the Company’s continuing operations and assets is as follows: Revenue Year ended December 31, 2007 2006 2005 United States $368,784 $150,945 $— United Kingdom 967,313 217,340 — Other 64,889 16,104 — $1,400,986 $384,389 $— F-44Table of ContentsDuring 2007, revenue from one foreign customer and one domestic customer represented 69% and 16% of consolidatedrevenue, respectively. Property and Equipment, net As of December 31, 2007 2006 United States $3,395,723 $4,331,605 Intangible Assets, net As of December 31, 2007 2006 United States $4,599,538 $4,936,505 Note 16—Summarized Quarterly Financial Data (unaudited) (in millions, except net loss per share amounts) For the following three-month periods ended March 31 June 30 September 30 December 31 2007 Revenue $313,622 $346,716 $331,115 $409,533 Cost of sales 159,087 157,373 158,096 181,473 Operating loss (9,271,841) (8,889,214) (6,930,287) (6,192,902)Net loss from discontinued operations (1,092,926) (318,952) (128,111) (147,389)Net loss (10,941,393) (9,740,860) (7,798,473) (7,092,388)Net loss per share $(0.36) $(0.32) $(0.23) $(0.19) For the following three-month periods ended March 31 June 30 September 30 December 31 2006 Revenue $— $— $141,428 $242,961 Cost of sales — — 72,444 121,753 Operating loss (5,696,305) (4,958,515) (4,478,833) (6,647,334)Net loss from discontinued operations (3,888,686) (2,817,271) (1,797,416) (4,168,592)Net loss (9,917,451) (8,131,714) (6,671,880) (11,100,361)Net loss per share $(0.33) $(0.27) $(0.22) $(0.37)Quarterly and year to date computations of per share amounts are made independently; therefore, the sum of per shareamounts for the quarters may not equal per share amounts for the year.Note 17—Subsequent EventOn January 7, 2008, the Company and Mr. Nicholas L. Teti, Jr. entered into a consulting and non-competition agreement(the “Consulting Agreement”), pursuant to which Mr. Teti agreed to continue as the Company’s non-executive Chairman of theBoard and to become a consultant to the Company, and Mr. Teti resigned his position as Chief Executive Officer and Presidentof the Company. Mr. Teti agreed to provide consulting services to the Company until June 30, 2009, subject to the priortermination of the Consulting Agreement, which may occur upon 30 days notice by either party. Mr. Teti will receive an annualconsulting fee of $100,000 for his services. Pursuant to the Consulting Agreement, Mr. Teti’s original employment agreement,dated June 5, 2006, was terminated and the parties agreed that he was owed no severance payments under the originalemployment agreement. Mr. Teti will retain his previously issued stock options, which will continue to vest in accordance withtheir original terms. In connection with Mr. Teti’s service as non-executive Chairman of the Board, Mr. Teti will receive anannual retainer of $60,000.As a result of the modifications to Mr. Teti’s stock options set forth in the Consulting Agreement, the Company will berequired to record a non-cash compensation charge during the three months ended March 31, 2008 of approximately$1.3 million related to Mr. Teti’s 1,166,665 vested stock options, even though the number of shares, the vesting schedules andthe exercise price of the stock options previously granted to Mr. Teti have not changed. Further, related to Mr. Teti’s 833,335unvested stock options, the Company estimates that a non-cash charge of approximately $1.4 million will be recorded ratablyover five fiscal quarters, beginning with the three months ended March 31, 2008. This estimate is based on certain stock optionvaluation assumptions as of January 2008. However, the ultimate charge will be based on the future valuation assumptions ineffect upon the vesting dates of these currently unvested stock options. F-45Table of ContentsOn January 7, 2008, the Company and Mr. Declan Daly entered into an employment agreement (the “Agreement”)pursuant to which Mr. Daly agreed to serve as Chief Executive Officer of the Company until December 31, 2010, subject to theautomatic renewal of the Agreement for an additional one-year term unless the Company notifies Mr. Daly 180 days prior to theexpiration of the Agreement of its intention not to renew the Agreement. The Agreement supersedes the current employmentagreement between the Company and Mr. Daly, effective June 5, 2006, which was terminated. In addition, Mr. Daly agreed tocontinue in his current role as Chief Financial Officer of the Company, but has resigned as Chief Operating Officer of theCompany. The Agreement provides Mr. Daly with an annual base salary of $430,000, which will be periodically reviewed andmay be increased at the Board’s discretion. Under the Agreement, Mr. Daly was granted the following ten-year option grants:(a) an option to purchase 350,000 shares of common stock at an exercise price equal to the closing of the common stock on thelast trading day preceding execution of the Agreement, which vests in twelve equal quarterly installments commencingMarch 31, 2008; and (b) a performance stock option to purchase 100,000 shares of common stock at an exercise price equal tothe closing of the common stock on the last trading day preceding execution of the Agreement that shall vest as follows:(i) 50% of performance stock option shall vest upon the Company’s accepted filing of a Biologics License Application by theFDA and (ii) the remaining 50% of the performance stock option shall vest upon the FDA’s approval of the Company’sBiologics License Application filing; provided in each case that Mr. Daly is the Company’s Chief Executive Officer at the timeof said event. F-46Table of ContentsEXHIBIT INDEX EXHIBIT NO. IDENTIFICATION OF EXHIBIT2 Agreement and Plan of Merger by and among American Financial Holding, Inc., ISO Acquisition Corp., IsolagenTechnologies, Inc., Gemini IX, Inc., and William K. Boss, Jr., Olga Marko and Dennis McGill dated August 1,2001(1)3(i) Amended Certificate of Incorporation(17)3(ii) Third Amended and Restated Bylaws(25)4.1 Specimen of Common Stock certificate(2)4.2 Certificate of Designations of Series A Convertible Preferred Stock(7)4.3 Certificate of Designations of Series B Convertible Preferred Stock(5)4.4 Indenture, dated November 3, 2004, between the Company and The Bank of New York Trust Company, N.A., astrustee(11)4.5 Rights Agreement, dated as of May 12, 2006, by and between the registrant and American Stock Transfer & TrustCompany, including the Form of Certificate of Designation, Preferences and Rights of Series C Junior ParticipatingPreferred Stock attached as Exhibit A thereto, the Form of Rights Certificate attached as Exhibit B thereto and theSummary of Rights to Purchase Preferred Stock attached as Exhibit C thereto. (21)10.1 2003 Stock Option and Stock Appreciation Rights Plan(3)*10.2 2001 Stock Option and Appreciation Rights Plan(4)*10.3 Lease Agreement dated March 24, 2002 by and between the Registrant as Lessee and Claire O Aceti Gbmh asLessor(7)10.4 Intellectual Property Purchase Agreement between Isolagen Technologies, Inc., Gregory M. Keller, and PacGenPartners(8)10.5 Purchase Agreement among CIBC World Market Corp., UBS Securities LLC, and Adams, Harkness & Hill, Inc.dated October 28, 2004(11)10.6 Registration Rights Agreement among CIBC World Market Corp., UBS Securities LLC, and Adams, Harkness &Hill, Inc. dated November 3, 2004(11)10.7 Lease Agreement between Isolagen Technologies, Inc. and Beltway 8 Service Center Investors Ltd. datedFebruary 16, 2005(13)10.8 Lease Agreement between Isolagen, Inc and The Hankin Group dates April 7, 2005(15)10.9 Purchase Option Agreement between Isolagen, Inc and 405 Eagleview Associates dated April 7, 2005(15)10.10 2005 Equity Incentive Plan, as amended(18)10.11 Separation and Release Agreement, dated October 27, 2005, among Isolagen, Inc., Isolagen Technologies, Inc. andFrank DeLape(19)10.12 Amended Employment Agreement between Isolagen, Inc. and Susan Ciallella(20)*10.13 Employment Agreement between Isolagen, Inc. and Todd Greenspan(20)*10.14 Employment Agreement dated June 5, 2006 between Isolagen, Inc. and Nicholas L. Teti(22)*10.15 Employment Agreement dated March 12, 2007 between Isolagen, Inc. and Declan Daly(23)*10.16 Employment Agreement dated March 12, 2007 between Isolagen, Inc. and Steven Trider(23)*10.17 Settlement Agreement and Release between Susan Stranahan Ciallella and Isolagen, Inc. dated June 8, 2007 (24)10.18 Consulting and Non-Competition Agreement dated January 7, 2008 between Isolagen, Inc. and Nicholas L.Teti * (26)10.19 Employment Agreement dated January 7, 2008 between Isolagen, Inc. and Declan Daly * (26)14 Code of Ethics(9)21 List of Subsidiaries(23)23 BDO Seidman, LLP Consent(26)31 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of2002(26)32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002(26) Table of Contents * Indicates a management contract or a compensatory plan or arrangement. (1) Previously filed as an exhibit to the company’s Form 8-K, filed on August 22, 2001, and is incorporated by referencehereto. (2) Previously filed as an exhibit to the company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2001, and is incorporated by reference hereto. (3) Previously filed as an appendix to the company’s Definitive Proxy Statement, as filed on May 6, 2003, in connection withthe 2003 Annual Stockholder Meeting, and is incorporated by reference hereto. (4) Previously filed as an appendix to the company’s Definitive Proxy Statement, as filed on October 23, 2001, in connectionwith the 2001 Annual Stockholder Meeting, and is incorporated by reference hereto. (5) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended March 31, 2003, as filed on May 15,2003, and is incorporated by reference hereto. (6) Previously filed as an exhibit to the company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2002, and is incorporated by reference hereto. (7) Previously filed as an exhibit to the company’s Form S-1, as filed on September 12, 2003, and is incorporated by referencehereto. (8) Previously filed as an exhibit to the company’s amended Form S-1, as filed on October 24, 2003, and is incorporated byreference hereto. (9) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003,and is incorporated by reference hereto. (10) Previously filed as an exhibit to the company’s Annual Report on Form 10-K/A for the fiscal year ended December 31,2003, and is incorporated by reference hereto. (11) Previously filed as an exhibit to the company’s Current Report on Form 8-K dated November 4, 2004, and is incorporatedby reference hereto. (12) Reserved. (13) Previously filed as an exhibit to the company’s Form 8-K, filed on February 23, 2005, and is incorporated by referencehereto. (14) Reserved. (15) Previously filed as an exhibit to the company’s Form 8-K, filed on April 12, 2005, and is incorporated by reference hereto. (16) Reserved. (17) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended June 30, 2005, as filed on August 9,2005, and is incorporated by reference hereto. (18) Previously filed as an exhibit to the company’s Form S-8, filed on February 13, 2006, and is incorporated by referencehereto. (19) Previously filed as an exhibit to the company’s Form 8-K, filed on November 2, 2005, and is incorporated by referencehereto. (20) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005,and is incorporated by reference hereto. (21) Previously filed as an exhibit to the company’s Form 8-K, filed on May 15, 2006, and is incorporated by reference hereto. (22) Previously filed as an exhibit to the company’s Form 8-K, filed on June 9, 2006, and is incorporated by reference hereto. (23) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007,and is incorporated by reference hereto. (24) Previously filed as an exhibit to the company’s Form 8-K, filed on June 13, 2007, and is incorporated by reference hereto. (25) Previously filed as an exhibit to the company’s Form 8-K, filed on January 8, 2007, and is incorporated by referencehereto. (26) Filed herewith. Exhibit 10.18EXECUTION COPYCONSULTING AND NON-COMPETITION AGREEMENTThis Consulting Agreement (this “Agreement”) is entered into as of January _____, 2008 (the “Effective Date”), byand between Isolagen, Inc., a Delaware corporation (the “Company”), and Nicholas L. Teti (the “Consultant”).WHEREAS, the Consultant currently serves as the Company’s Chairman and Chief Executive Officer pursuant to thatcertain Employment Agreement, dated as of June 5, 2006 between the Company and the Consultant (the “EmploymentAgreement”); andWHEREAS, the Company desires that the Consultant serve as the Company’s Non-Executive Chairman of the Boardand member of its Board of Directors, and provide additional services to the Company as an independent contractor; andWHEREAS, the Consultant desires to serve as the Company’s Non-Executive Chairman of the Board and member ofits Board of Directors, and provide such additional services as an independent contractor; andWHEREAS, the Company and the Consultant desire that the Employment Agreement be terminated and superseded;andNOW, THEREFORE, in consideration of the mutual representations, promises and agreements contained herein, theadequacy and sufficiency of which are hereby acknowledged, the Company and the Consultant hereby agree as follows:1. Term of Agreement. The Company hereby engages the Consultant as a consultant, subject to the terms andconditions hereof, for the period commencing as of the Effective Date and ending on June 30, 2009 (the “Term”), except as theTerm may be extended by mutual written agreement of the parties hereto. The period during which the Consultant is performingservices under this Agreement shall be referred to herein as the “Consulting Period.”2. Consulting Services. During the Consulting Period, the Consultant shall perform consulting services for theCompany and its subsidiaries. Such consulting services are anticipated to include working with Company management at astrategic level with respect to the Company’s development and product acquisition activities, capital structures, investorrelations and reduction of production costs, and to follow up on clinical trials. The Consultant will devote such business time asis necessary or desirable to accomplish his duties and responsibilities under this Agreement. 3. Independent Contractor.(a) The Consultant shall perform the consulting services described inSection 2 as an independent contractor without the power to bind or represent the Company for any purposewhatsoever. Nothing herein contained shall be construed to constitute the parties hereto as partners or as joint venturers, oreither as agent of the other, or as employer and employee. The Consultant shall not present himself as an employee of theCompany or any of its affiliates.(b) The Consultant shall not be entitled to participate in any employee benefit plans maintained by on behalf ofthe Company or any of its affiliates during the Consulting Period. The Consultant hereby acknowledges his separateresponsibility for all federal and state withholding taxes, Federal Insurance Contribution Act taxes, workers’ compensation andunemployment compensation taxes and business license fees, if applicable.(c) Subject only to such specific limitations as are contained in this Agreement, the manner, means, details ormethods by which the Consultant performs his obligations under this Agreement shall be solely within the discretion of theConsultant. The Company shall not have the authority to, nor shall it, supervise, direct or control the manner, means, details ormethods utilized by the Consultant to perform his obligations under this Agreement and nothing in this Agreement shall beconstrued to grant the Company any such authority.4. Compensation.(a) Consulting Fee. In remuneration for the consulting services to be performed under this Agreement by theConsultant during the Consulting Period, the Consultant shall receive an annual consulting fee equal to one hundred thousanddollars ($100,000) (the “Consulting Fee”), payable no less frequently than monthly in arrears. The Consulting Fee shall be inaddition to, and not in lieu of, those fees or other remuneration to which the Consultant may be entitled pursuant to Companypolicies in his position of Non-Executive Chairman and member of the Board of Directors.(b) Outstanding Equity Awards. The Company and the Consultant acknowledge and agree that (x) the stockoption grant relating to an aggregate of 2,000,000 shares of the Company’s Common Stock and (y) the stock option grantrelating to an aggregate of 500,000 shares of the Company’s Common Stock, in each case previously awarded by the Companyto the Consultant effective June 5, 2006, shall (i) remain in full force and effect, (ii) continue to be governed by the originalterms of the applicable stock option grant agreements between the Company and the Consultant, and (iii) continue to vest inaccordance with the original terms of such agreements. (c) Severance Pay. The Consultant acknowledges and agrees that he is not entitled to any severance ortermination pay or benefits under Section 4 of the Employment Agreement.(d) 2007 Bonus. The Company agrees that notwithstanding the termination of the Employment Agreement, theConsultant remains eligible for an Annual Bonus (as defined in Section 2(c) of the Employment Agreement) with respect to theCompany’s 2007 fiscal year.5. Expenses. The Company shall pay or reimburse the Consultant for all reasonable expenses incurred by theConsultant in connection with the performance of his services under this Agreement including, without limitation, travel andlodging expenses, consistent with Company expense policies following receipt of appropriate documentation; provided,however, for all periods commencing as of the Effective Date the Company shall not provide, or reimburse the Consultant for,the use of an automobile or membership fees or dues payable in respect of the Consultant’s members in private clubs orprofessional associations or organizations.6. Santa Barbara Office. The Company and the Consultant acknowledge and agree that the office currentlymaintained by the Company in Santa Barbara, California area shall be sublet as soon as practicable following the Effective Dateand each party agrees to cooperate fully with the other to effect such sublease.7. Termination. During the Term, this Agreement and the Consulting Period may be terminated at any time by theCompany or the Consultant upon 30 days’ prior written notice to the other party. In the event of the termination of thisAgreement pursuant to this Section 7, the Company’s obligations under Section 4(a) shall cease, effective on the effective dateof such termination. Following the termination of this Agreement and the Consulting Period for any reason, the Consultant shallbe entitled to purchase any or all of the vested stock options described in Section 4(b) on the terms and conditions set forth inthe applicable stock option agreements between the parties. The Consultant agrees that as of or following the termination of thisAgreement and the Consulting Period for any reason or for no reason, he shall immediately resign as Non-Executive Chairmanof the Company and member of the Company’s Board of Directors if so requested by the Company. 8. Non-Competition. During the period of the Consultant’s services hereunder, the Consultant shall not, within anystate or foreign jurisdiction in which the Company or any subsidiary of the Company is then providing services or products ormarketing its services or products (or engaged in active discussions to provide such services), or within a 50-mile radius of anysuch state or foreign jurisdiction, directly or indirectly own any interest in, manage, control, participate in, consult with, renderservices for, or in any manner engage in any business engaged in by the Company (unless the Board of Directors shall haveauthorized such activity and the Company shall have consented thereto in writing). The term “business engaged in by theCompany” shall mean the development and commercialization of autologous fibroblast system technology for application in,among other therapies, dermatology, surgical and post-traumatic scarring, skin ulcers, cosmetic surgery, periodontal disease,reconstructive dentistry, vocal chord injuries, urinary incontinence, and digestive and gastroenterological disorders and otherapplications relating to the market for autologous fibroblast or UMC cells and the five derivative cell lines: osteoblast,chondroblast, fibroblast, adipocyte, and neuroectoderm. Investments in less than five percent of the outstanding securities ofany class of a corporation subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, as amended, shall not be prohibited by this Section 8. The Company understands and acknowledges that the Consultantwill become employed by Den-Mat Holdings, LLC as its Chief Executive Officer at or about the commencement of theConsulting Period and agrees that, as of the Effective Date, such employment is not in violation of this Section 8.9. Confidential Information; Non-Solicitation. The parties hereto recognize that a major need of the Company is topreserve its specialized knowledge, trade secrets, and confidential information. The strength and good will of the Company isderived from the specialized knowledge, trade secrets, and confidential information generated from experience with theactivities undertaken by the Company and its subsidiaries. The disclosure of this information and knowledge to competitorswould be beneficial to them and detrimental to the Company, as would the disclosure of information about the marketingpractices, pricing practices, costs, profit margins, design specifications, analytical techniques, and similar items of the Companyand its subsidiaries. The Consultant acknowledges that the proprietary information, observations and data obtained by himwhile employed by the Company and during the Consulting Period concerning the business or affairs of the Company are theproperty of the Company. By reason of his having been a senior executive of the Company and through his providing servicesunder this Agreement, the Consultant has or will have access to, and has obtained or will obtain, specialized knowledge, tradesecrets and confidential information about the Company’s operations and the operations of its subsidiaries, which operationsextend throughout the United States. For purposes of this Section 9, “the Company” shall mean the Company and each of itscontrolled subsidiaries. Therefore, the Consultant hereby agrees as follows, recognizing that the Company is relying on theseagreements in entering into this Agreement: (a) The Consultant will not use, disclose to others, or publish or otherwise make available to any other party anyinventions or any confidential business information about the affairs of the Company, including but not limited to confidentialinformation concerning the Company’s products. “Confidential Information” shall include commercial or trade secrets aboutCompany’s products, methods, engineering designs and standards, analytical techniques, technical information, customerinformation, employee information, or financial and business records, any of which contains proprietary information created oracquired by the Company and which information is held in confidence by Company. Confidential Information does not includeinformation which: (x) becomes generally available to the public, unless said Confidential Information was disclosed inviolation of a confidentiality agreement; or (y) becomes available to the Consultant on a non-confidential basis from a sourceother than the Company or its agents, provided that such source is not bound by a confidentiality agreement with the Company.(b) During the Term and for 12 months thereafter, the Consultant will not directly or indirectly through anotherentity (x) induce any employee of the Company to leave the Company’s employ (unless the Board of Directors shall haveauthorized such employment and the Company shall have consented thereto in writing) or in any way interfere with therelationship between the Company and any employee thereof or (y) tortiously interfere with the Company’s businessrelationship with any customer, supplier, licensee, licensor or other business relation of the Company.10. Representations.(a) The Consultant hereby represents and warrants to the Company that as of the Effective Date: (x) theexecution, delivery and performance of this Agreement by the Consultant do not and shall not conflict with, breach, violate orcause a default under any contract, agreement, instrument, order, judgment or decree to which the Consultant is a party or bywhich he is bound, and (y) upon the execution and delivery of this Agreement by the Company, this Agreement shall be thevalid and binding obligation of the Consultant, enforceable in accordance with its terms. The Consultant hereby acknowledgesand represents that he has consulted with legal counsel regarding his rights and obligations under this Agreement and that hefully understands the terms and conditions contained herein.(b) The Company hereby represents and warrants to the Consultant that (x) the execution, delivery andperformance of this Agreement by the Company do not and shall not conflict with, breach, violate or cause a default under anycontract, agreement, instrument, order, judgment or decree to which the Company is a party or by which it is bound; and(y) upon the execution and delivery of this Agreement by the Consultant, this Agreement shall be the valid and bindingobligation of the Company, enforceable in accordance with its terms. 11. Indemnification. The Company will indemnify (and advance the costs of defense of) and hold harmless theConsultant (and his legal representatives) to the fullest extent permitted by the laws of the state in which the Company isincorporated, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and Bylaws of theCompany, as in effect at such time or on the date of this Agreement, whichever affords greater protection to the Consultant, andthe Consultant shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for thebenefit of its executive officers and directors, against all judgments, damages, liabilities, costs, charges and expenseswhatsoever incurred or sustained by him or his legal representative in connection with any action, suit or proceeding to whichhe (or his legal representatives or other successors) may be made a party by reason of his performing services under thisAgreement or having been an officer or director of the Company or any of its subsidiaries except that the Company shall haveno obligation to indemnify Consultant for liabilities resulting from conduct of the Consultant with respect to which a court ofcompetent jurisdiction has made a final determination that Consultant committed gross negligence or willful misconduct to theextent such a determination was made by the court in determining liability.12. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto withrespect to the matters covered hereby and supersedes any prior agreement or understanding, including without limitation theEmployment Agreement, which is as of the Effective Date terminated and of no further legal force or effect, provided that theCompany shall pay or provide the Consultant any accrued but unpaid compensation earned pursuant to the EmploymentAgreement through the Effective Date (such as accrued and unpaid salary) and the Employee’s vested benefits under Companyemployee benefit plans, programs, and policies other than equity or cash incentive programs, in each case in accordance withthe terms of such plans, programs and policies and the Employment Agreement.13. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by theConsultant and by his personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees andby the Company and its respective successors and assigns.14. Notices. All notices and other communications required or permitted under this Agreement shall be in writing andshall be deemed to have been duly given when personally delivered, when delivered by courier or overnight express service orfive days after having been sent by certified or registered mail, postage prepaid, addressed (x) if to the Consultant, to theConsultant’s address set forth in the records of the Company, or if to the Company to Office of the General Counsel, Isolagen,Inc., 405 Eagleview Blvd., Exton, Pennsylvania 19341 or (y) to such other address as any party may have furnished to the otherparties in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt thereof. 15. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by andconstrued and enforced in accordance with the internal laws of the State of California without regard to any conflict of lawsprinciples.16. Severability. In case any one or more of the provisions or part of a provision contained in this Agreement shall forany reason be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality orunenforceability shall be deemed not to affect any other jurisdiction or any other provision or part of a provision of thisAgreement, nor shall such invalidity, illegality or unenforceability affect the validity, legality or enforceability of thisAgreement or any provision or provisions hereof in any other jurisdiction; and this Agreement shall be reformed and construedin such jurisdiction as if such provision or part of a provision held to be invalid or illegal or unenforceable had never beencontained herein and such provision or part reformed so that it would be valid, legal and enforceable in such jurisdiction to themaximum extent possible. In furtherance and not in limitation of the foregoing, the Company and the Consultant each intendthat the covenants contained in Sections 8 and 9 shall be deemed to be a series of separate covenants, one for each and everystate of the United States and any foreign country set forth therein. If, in any judicial proceeding, a court shall refuse to enforceany of such separate covenants, then such unenforceable covenants shall be deemed eliminated from the provisions hereof forthe purpose of such proceedings to the extent necessary to permit the remaining separate covenants to be enforced in suchproceedings. If, in any judicial proceeding, a court shall refuse to enforce any one or more of such separate covenants becausethe total time, scope or area thereof is deemed to be excessive or unreasonable, then it is the intent of the parties hereto that suchcovenants, which would otherwise be unenforceable due to such excessive or unreasonable period of time, scope or area, beenforced for such lesser period of time, scope or area as shall be deemed reasonable and not excessive by such court.17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to bean original and all of which together shall constitute one and the same instrument.18. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver isagreed to in writing and executed by the Consultant and by a duly authorized officer of the Company. No waiver by any partyhereto at any time of any breach by another party hereto of, or failure to comply with, any condition or provision of thisAgreement to be performed or complied with by such other party shall be deemed a waiver of any similar or dissimilarconditions or provisions at the same or at any prior or subsequent time. Failure by the Consultant or the Company to insist uponstrict compliance with any provision of this Agreement or to assert any right which the Consultant or the Company may havehereunder shall not be deemed to be a waiver of such provision or right or any other provision of or right under this Agreement.* * * remainder of page intentionally left blank * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ISOLAGEN, INC. By Title: CONSULTANT NICHOLAS L. TETI Exhibit 10.19EXECUTION COPYEMPLOYMENT AGREEMENTTHIS EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”) dated as of January 7, 2008 (the “Effective Date”),is by and between Isolagen, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “Isolagen”), andDeclan Daly, an individual residing in Ireland (the “Executive”).WITNESSETH:WHEREAS, the Executive has served the Company as Executive Vice President — Europe and Chief Financial Officersince June 5, 2006 pursuant to an employment agreement with the Company dated March 2007 (the “2007 EmploymentAgreement”) and the Executive has served the Company as Chief Operating Officer since June 27, 2007; andWHEREAS, the Company now desires to employ the Executive as the Company’s Chief Executive Officer; andWHEREAS, the Executive desires to serve as the Chief Executive Officer; andWHEREAS, the Company and the Executive desire that the 2007 Employment Agreement be terminated and supersededand that Executive resign as Chief Operating Officer effective as of the Effective Date; andNOW THEREFORE, in consideration of the mutual benefits to be derived from this Agreement, and other good andvaluable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive herebyagree as follows:1. Term of Employment; Office and Duties.(a) Commencing on the Effective Date (the “Employment Date”), and for an initial term ending on December 31,2010 (the “Initial Term”), the Company shall employ the Executive as a senior executive of the Company with the title of ChiefExecutive Officer. As Chief Executive Officer Executive shall perform all duties and responsibilities which are consistent withthe positions and such additional duties and responsibilities consistent with such positions as may from time to time beassigned to the Executive by the Board of Directors. Executive agrees to perform such duties and discharge such responsibilitiesin accordance with the terms of this Agreement. Executive also agrees to continue to serve the Company as Chief FinancialOfficer until such time as the Company selects, in consultation with Executive, a qualified individual to assume that position.This Agreement shall be automatically renewed for an additional one (1) year term (the “Renewal Period”) unless the Companynotifies the Executive one hundred eighty (180) days prior to the expiration of the Agreement of the Company’s intention notto renew the Agreement. The Initial Term and any Renewal Period that has commenced shall be collectively referred to herein asthe “Term” in effect as of the relevant time. The Executive will continue to work out of Ireland; provided that it is part of theessence of this Agreement from the perspective of the Company that the Executive will physically be on the premises of theCompany’s facility in Exton, Pennsylvania and in the United States when and as appropriate and reasonable to effectivelydischarge his duties and responsibilities under this Agreement. (b) The Executive shall devote substantially all of his working time to the business and affairs of the Company otherthan during vacations of four weeks per year and periods of illness or incapacity; provided, however, that nothing in thisAgreement shall preclude the Executive from devoting time required: (i) for serving as a director or officer of any organizationor entity not in a competing business with the Company, and any other businesses in which the Company becomes involved;(ii) delivering lectures, writing articles or books, or fulfilling speaking engagements; or (iii) engaging in charitable andcommunity activities provided that such activities do not interfere with the performance of his duties hereunder.(c) The Board of Directors shall nominate Executive to serve on the Board of Directors during the Term of thisAgreement, and shall first nominate Executive to serve on the Board of Directors at the first meeting of the Board of Directorsfollowing the Company’s filing of its Form 10-K with respect to the year ending December 31, 2007.2. Compensation and Benefits.For all services rendered by the Executive in any capacity during the period of Executive’s employment by the Company,including without limitation, services as an executive officer or member of any committee of the Board of Directors or anysubsidiary, affiliate or division thereof, from and after the Effective Date, the Executive shall be compensated as follows:(a) Base Salary. The Company shall pay the Executive a fixed salary (“Base Salary”) at a rate of Four Hundred ThirtyThousand United States Dollars (US $430,000) per year. The Board of Directors may periodically review the Executive’s BaseSalary and may determine to increase (but not decrease) the Executive’s salary, in accordance with such policies as theCompany may hereafter adopt from time to time, if it deems appropriate. Base Salary will be payable in accordance with thecustomary payroll practices of the Company.(b) Signing Bonus. Executive shall be entitled to a one-time bonus in the amount of Twenty-Five Thousand UnitedStates Dollars (US $25,000), payable to Executive within thirty (30) days of the Employment Date.(c) Bonus. Executive is entitled to receive an annual bonus (the “Annual Bonus”), payable each year subsequent tothe issuance of final audited financial statements, but in no case later than 120 days after the end of the Company’s mostrecently completed fiscal year. The final determination on the amount of the Annual Bonus will be made by the CompensationCommittee of the Board of Directors, based primarily on mutually agreed upon criteria, established with respect to the ensuingfiscal year, within thirty (30) days following the adoption by the Board of Directors of a budget relating to the ensuing year.Criteria for the Annual Bonus for 2008 shall be agreed upon prior to or within sixty (60) days after the execution of thisAgreement. The Compensation Committee may also consider other more subjective factors in making its determination. Thetargeted amount of the Annual Bonus shall be fifty percent (50%) of the Executive’s base salary. The actual Annual Bonus forany given period may be higher or lower than fifty percent (50%). For any fiscal year in which Executive is employed for lessthan the full year, Executive shall receive a bonus which is prorated based on the number of full months in the year which areworked. 2 (d) Fringe Benefits, Option Grants and Miscellaneous Employment Matters.(i) The Executive shall be entitled to participate in such disability, health and life insurance and other fringebenefit plans or programs offered to all employees of the Company, as well as to the key executive employees of Company,including a Section 401(k) and retirement plan of the Company as may be established from time to time by the Board ofDirectors, subject to the rules and regulations applicable thereto. At the Executive’s option, in lieu of providing group medicalbenefits, the Company will reimburse the Executive for health insurance premium payments made pursuant to a privatesupplemental health insurance policy in Ireland by the Executive (currently approximately US $500 per month). Upontermination of Executive’s coverage under such private supplemental health insurance policy, he shall have the option ofenrolling in the Company’s group plan or converting his prior coverage to an individual policy, at which time the Companywould reimburse him for an amount equal to its monthly cost of covering Executive under its plan, and Executive would payany additional amounts necessary to provide individual coverage. In addition, the Executive shall be entitled to the followingbenefits:(ii) Contemporaneous with the execution of this Employment Agreement, Executive received a grant (the “StockOption Grant”) of stock options (the “Stock Options”) to purchase 350,000 shares at an exercise price equal to the closingtransaction price of the Company’s Common Stock on the last trading day preceding execution of this Employment Agreement.The Stock Options shall have a term of ten (10) years, shall become exercisable when vested, and shall vest pro rata in twelveequal quarterly installments (1/12th each at the end of each fiscal quarter), with the first installment vesting on March 31, 2008.Notwithstanding the foregoing, the Stock Options shall terminate ninety (90) days following a termination of the Executive for“Cause” or upon the voluntary termination of service by the Executive that is not for “Good Reason.” However, if Executive’semployment with the Company is terminated (i) without “Cause” or (ii) “For Good Reason”, all unvested portions of the StockOption Grant shall vest immediately upon such termination.(iii) Contemporaneous with the execution of this Employment Agreement, the Executive received a grant (the“Performance Stock Option Grant”) of stock options to purchase 100,000 shares at an exercise price equal to the closingtransaction price of the Company’s Common Stock on the last trading day preceding execution of this Employment Agreement.The Performance Stock Option Grant shall have a term of ten (10) years, shall become exercisable when vested, shall terminateninety (90) days following a termination of the Executive for “Cause” or upon the voluntary termination of service by theExecutive that is not for “Good Reason.” Fifty percent (50%) of the Performance Stock Option Grant shall vest, and no longerbe subject to forfeiture, upon the Company’s accepted filing of a Biologics License Application by the U.S. Food and DrugAdministration (the “FDA”) and the remaining fifty percent (50%) of the Performance Stock Option Grant shall vest, and nolonger be subject to forfeiture, upon the FDA’s approval of the Company’s Biologics License Application filing; provided ineach case that Executive is the Company’s Chief Executive Officer at the time of said event. 3 (iv) The vesting of the Stock Options and the Performance Stock Option Grant shall accelerate and vestimmediately upon a change in control of the Company as defined in Rule 405 of the Securities Act of 1933 or upon sale ofsubstantially all of the assets of the Company or the merger out of existence of the Company.(e) Withholding and Employment Tax. Payment of all compensation hereunder shall be subject to customarywithholding tax and other employment taxes as may be required with respect to compensation paid by an employer/corporationto an employee.(f) Disability. The Company shall provide the Executive with a policy of disability insurance benefits of at least sixtypercent (60%) of his gross Base Salary per month. To the extent permitted by the Company’s existing disability policy, theExecutive’s disability policy will be a portable policy. The Executive agrees to pay for any additional premium paymentsresulting from providing a portable policy (in comparison to a group policy) and further agrees to have the additional premiumpayments deducted from his pay. In the event of the Executive’s Disability (as hereinafter defined), the Executive and his familyshall continue to be covered by all of the Company’s life, medical, health and dental plans, at the Company’s expense, to theextent such benefits can be obtained at a reasonable cost, for the lesser of the term of such Disability (as hereinafter defined) oreighteen (18) months, in accordance with the terms of such plans.(g) Death. The Company shall provide the Executive with a policy of term life insurance benefits in the amount of atleast One Million United States Dollars (US $1,000,000). To the extent permitted by the Company’s existing life insurancepolicy, the Executive’s life insurance policy will be a portable policy. The Executive agrees to pay for any additional premiumpayments resulting from providing a portable policy (in comparison to a group policy) and further agrees to have the additionalpremium payments deducted from his pay. In the event of the Executive’s death, the Executive’s family shall continue to becovered by all of the Company’s medical, health and dental plans, at the Company’s expense, to the extent such benefits can beobtained at a reasonable cost, for eighteen (18) months following the Executive’s death in accordance with the terms of suchplans.(h) Vacation. Executive shall receive four (4) weeks of vacation annually, administered in accordance with theCompany’s existing vacation policy.3. Business Expenses.The Company shall pay or reimburse all reasonable travel and entertainment expenses incurred by the Executive inconnection with the performance of his duties under this Agreement, including travel to the Company’s various offices andfacilities in the United States and abroad, reimbursement for attending out-of-town meetings of the Board of Directors, and suchother travel as may be required or appropriate in Executive’s discretion, consistent with duly approved Company budgets, tofulfill the responsibilities of his office, all in accordance with such policies and procedures as the Company may from time totime establish for senior officers and as required to preserve any deductions for federal income taxation purposes to which theCompany may be entitled and subject to the Company’s normal requirements with respect to reporting and documentation ofsuch expenses. The Company shall also pay or reimburse Executive for all membership fees and dues in appropriateprofessional associations and organizations utilized by Executive in the course of his service for the Company, as well as allexpenses incurred by the Executive for Executive’s cellular telephone and portable text messaging including monthly servicecharges, equipment maintenance and all other ancillary charges including, but not limited to, text messaging, paging, andwireless communications. 4 4. Termination of Employment.Notwithstanding any other provision of this Agreement, Executive’s employment with the Company may be terminatedupon written notice to the other party as follows:(a) By the Company, in the event of the Executive’s death or Disability (as hereinafter defined) or for Cause (ashereinafter defined). For purposes of this Agreement, “Cause” shall mean either: (i) the indictment of, or the bringing of formalcharges against Executive on charges involving criminal fraud or embezzlement; (ii) the conviction of Executive of a crimeinvolving an act or acts of dishonesty, fraud or moral turpitude by the Executive, which act or acts constitute a felony;(iii) Executive negligently or knowingly having caused the Company to violate the Company’s Bylaws; (iv) Executive havingcommitted acts or omissions constituting gross negligence or willful misconduct with respect to the Company, including withrespect to any valid contract to which the Company is a party; (v) Executive having committed acts or omissions constituting abreach of Executive’s duty of loyalty or fiduciary duty to the Company or any material act of dishonesty or fraud with respect tothe Company which are not cured or substantially cured to the satisfaction of the Board of Directors of the Company in areasonable time, which time shall be at least 30 days from receipt of written notice from the Company of such material breach;(vi) Executive’s failure to relocate his residence to a location in the United States within a reasonable proximity of theCompany’s headquarters within one hundred and eighty (180) days following a written determination of the Board of Directorsof the Company that Executive is unable to effectively discharge his duties and responsibilities under this Agreement withoutExecutive relocating his residence to the United States within a reasonable proximity of the Company’s headquarters, provided,however, Executive shall provide the Board of Directors with written notice of his decision to relocate his residence to theUnited States within thirty (30) days of his receipt of such written determination and, in the event the Executive decides not torelocate his residence, Executive shall continue to serve as Chief Executive Officer until the one hundred and twentieth (120th)day following the Board of Directors’ written determination as described above and his employment shall thereafter beterminated; or (vii) Executive having committed acts or omissions constituting a material breach of this Agreement which arenot cured or substantially cured to the satisfaction of the Board of Directors of the Company in a reasonable time, which timeshall be at least 30 days from receipt of written notice from the Company setting forth with specificity the particulars of anysuch material breach as well as the corrective actions required. A determination that Cause exists as defined in clauses (iv), (v),or (vii) (as to this Agreement) of the preceding sentence shall be made by at least a majority of the members of the Board ofDirectors. For purposes of this Agreement, “Disability” shall mean the inability of Executive, in the reasonable judgment of aphysician jointly appointed by the Executive and Board of Directors, to perform, even with reasonable accommodation, 5 his duties of employment for the Company or any of its subsidiaries because of any physical or mental disability or incapacity,where such disability shall exist for an aggregate period of more than 120 days in any 365-day period or for any period of 90consecutive days. The Company shall by written notice to the Executive specify the event relied upon for termination pursuantto this Section 4(a), and Executive’s employment hereunder shall be deemed terminated as of the date of such notice. In theevent of any termination under this Subsection 4(a), the Company shall pay all amounts then due to the Executive underSection 2 (a) of this Agreement for any portion of the payroll period worked but for which payment had not yet been made up tothe date of termination, and, if such termination was for Cause, the Company shall have no further obligations to Executiveunder this Agreement, and any and all options granted hereunder shall terminate according to their terms; provided, however,that in the event of a termination for Cause pursuant to clause (vi) above, the Company shall continue to pay to Executive theBase Salary (at a monthly rate equal to the rate in effect immediately prior to such termination) for six (6) months from the dateof termination, when, as and if such payments would have been made in the absence of Executive’s termination and any and alloptions granted hereunder shall terminate according to their terms. In the event of a termination due to Executive’s Disability ordeath, the Company shall comply with its obligations under Sections 2(f) and 2(g).(b) By the Company, in the absence of Cause, for any reason and in its sole and absolute discretion, provided that insuch event the Company shall, as liquidated damages or severance pay, or both, continue to pay to Executive the Base Salary(at a monthly rate equal to the rate in effect immediately prior to such termination) for the longer of (x) the remaining Term or(y) twelve (12) months from the date of termination (the “Termination Payments”), when, as and if such payments would havebeen made in the absence of Executive’s termination. The Termination Payments shall be made regardless of Executive’ssubsequent re-employment as long as any new employment is not in violation of Sections 5 or 6 of this Agreement.(c) By the Executive for “Good Reason,” (as the Executive shall reasonably determine in good faith) which shall bedeemed to exist: (i) if the Company’s Board of Directors or that of any successor entity of the Company fails to appoint orreappoint the Executive or removes the Executive from the title and/or office of Chief Executive Officer of the Company orfrom any successor entity operating the Company; (ii) if the Company’s Board of Directors or that of any successor entity of theCompany fails to appoint the Executive to serve on the Board of Directors within thirty (30) days of the Employment Date orfails to renominate the Executive to serve on the Board of Directors; (iii) if Executive is assigned any duties materiallyinconsistent with the duties or responsibilities of the Chief Executive Officer of the Company as contemplated by thisAgreement or any other action by the Company that results in a material diminution in such position, authority, duties, orresponsibilities, excluding an isolated, insubstantial, and inadvertent action not taken in bad faith and which is remedied by theCompany promptly after receipt of notice thereof given by Executive (but not excluding changes resulting from a sale of theCompany, whether by merger, tender offer or otherwise) provided that Executive shall act within 30 days of becoming aware ofany such diminution in the scope of his duties, responsibilities, authority or position; (iv) if the Company shall breach or shallhave continued to fail to comply with any material provision of this Agreement after a 30-day period to cure (if such failure iscurable) following written notice to the Company of such non-compliance; (v) if the Board of Directors requires Executivewithout his express written consent to relocate to any area outside of Ireland, other than pursuant to Section 4(a)(vi); or (vi)upon a change in control of the Company or within twelve (12) months of any such change in control (for these purposes theterm “change in control” shall have the meaning set forth in Rule 405 of the Securities Act of 1933), or within twelve(12) months of a sale of substantially all of the assets of the Company or the merger out of existence of the Company. In theevent of any termination for “Good Reason” under this Section 4(c), the Company shall, as liquidated damages or severancepay, or both, pay the Termination Payments, as defined in (b) of this Section 4, to Executive, when, as and if such paymentswould have been made in the absence of Executive’s termination. 6 (d) During any period in which Executive is obligated not to compete with the Company pursuant to Section 5 hereof(unless Executive was terminated for Cause as defined herein), Executive and his family shall continue to be covered by theCompany’s life, medical, health and death plans. Such coverage shall be at the Company’s expense to the same extent as ifExecutive were still employed by the Company. In the event of a termination pursuant to Sections 4(a)(vi), 4(b) or 4(c), theCompany shall provide to Executive the pro-rata share of his annual bonus, to the extent one is awarded by the CompensationCommittee the consideration of which shall be taken in good faith, giving a full month’s credit for any partial month worked inthat bonus year. Additionally, in the event of a termination pursuant to Sections 4(a)(vi), 4(b) or 4(c), the Company shallprovide to Executive, at the Company’s expense, outplacement services of a nature customarily provided to a senior executive.Notwithstanding the foregoing, the obligations of the Company pursuant to this Section 4(d) shall remain in effect no longerthan the term of the Termination Payments.(e) In the event that any amounts payable and/or any benefits provided to the Executive under the terms of thisAgreement and/or under any other plan, agreement or arrangement by which he is to receive payments or benefits in the natureof compensation would constitute “excess parachute payments” as that term is defined for purposes of Section 280G of theInternal Revenue Code of 1986, as amended (“Code”) and Treasury Regulations promulgated pursuant thereto, then theamounts payable under the terms of this Agreement and/or under any other plan, agreement or arrangement shall be reduced sothat no payments are deemed “excess parachute payments.” Any decisions regarding this requirement or implementation ofreductions shall be made by tax counsel selected by the Company.(f) If any payment to Executive under the terms of this Agreement is determined to constitute a payment ofnonqualified deferred compensation for purposes of Section 409A of the Code, such payment shall be delayed until the datethat is six months after the date of Executive’s separation from service with the Company, so as to comply with the special rulefor certain “specified employees” set forth in Code Section 409A(a)(2)(B)(i) unless it is determined that immediate distributionis permissible (and does not trigger any additional tax liability pursuant to Code Section 409A(a)(1)) pursuant to CodeSection 409A(a)(2)(A)(v) by reason of being payable in connection with a change in the ownership or effective control of theCompany or in the ownership of a substantial position of the assets of the Company.(g) The Executive agrees that as of or following the termination of the Executive’s employment for any reason or forno reason, he shall immediately resign as a member of the Company’s Board of Directors if so requested by the Company. 7 5. Non-Competition.During the period of Executive’s employment hereunder and during the period, if any, during which payments are requiredto be made to the Executive by the Company pursuant to Sections 4(a)(vi), 4(b) or 4(c), the Executive shall not, within any stateor foreign jurisdiction in which the Company or any subsidiary of the Company is then providing services or products ormarketing its services or products (or engaged in active discussions to provide such services), or within a fifty (50) mile radiusof any such state or foreign jurisdiction, directly or indirectly own any interest in, manage, control, participate in, consult with,render services for, or in any manner engage in any business engaged in by the Company (unless the Board of Directors shallhave authorized such activity and the Company shall have consented thereto in writing). The term “business engaged in by theCompany” shall mean the development and commercialization of autologous fibroblast system technology for application in,among other therapies, dermatology, surgical and post-traumatic scarring, skin ulcers, cosmetic surgery, periodontal disease,reconstructive dentistry, vocal chord injuries, urinary incontinence, and digestive and gastroenterological disorders and otherapplications relating to the market for autologous fibroblast or UMC cells and the five derivative cell lines: osteoblast,chondroblast, fibroblast, adipocyte, and neuroectoderm. Investments in less than five percent of the outstanding securities ofany class of a corporation subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, as amended, shall not be prohibited by this Section 5. At the option of Executive, Executive’s obligations under thisSection 5 arising after the termination of Executive shall be suspended during any period in which the Company fails to pay tohim Termination Payments required to be paid to him pursuant to this Agreement. The provisions of this Section 5 are subject tothe provisions of Section 14 of this Agreement.6. Inventions and Confidential Information.The parties hereto recognize that a major need of the Company is to preserve its specialized knowledge, trade secrets, andconfidential information. The strength and good will of the Company is derived from the specialized knowledge, trade secrets,and confidential information generated from experience with the activities undertaken by the Company and its subsidiaries.The disclosure of this information and knowledge to competitors would be beneficial to them and detrimental to the Company,as would the disclosure of information about the marketing practices, pricing practices, costs, profit margins, designspecifications, analytical techniques, and similar items of the Company and its subsidiaries. The Executive acknowledges thatthe proprietary information, observations and data obtained by him while employed by the Company concerning the businessor affairs of the Company are the property of the Company. By reason of his being a senior executive of the Company, theExecutive has or will have access to, and has obtained or will obtain, specialized knowledge, trade secrets and confidentialinformation about the Company’s operations and the operations of its subsidiaries, which operations extend throughout theUnited States. For purposes of this Section 6, “Company” shall mean the Company and each of its controlled subsidiaries.Therefore, subject to the provisions of Section 14 hereof, the Executive hereby agrees as follows, recognizing that the Companyis relying on these agreements in entering into this Agreement: 8 (i) During the period of Executive’s employment with the Company and thereafter, the Executive will not use,disclose to others, or publish or otherwise make available to any other party any inventions or any confidential businessinformation about the affairs of the Company, including but not limited to confidential information concerning the Company’sproducts. “Confidential Information” shall include commercial or trade secrets about Company’s products, methods,engineering designs and standards, analytical techniques, technical information, customer information, employee information,or financial and business records, any of which contains proprietary information created or acquired by the Company and whichinformation is held in confidence by Company. Confidential Information does not include information which: (i) becomesgenerally available to the public, unless said Confidential Information was disclosed in violation of a confidentialityagreement; or (ii) becomes available to Executive on a non-confidential basis from a source other than the Company or itsagents, provided that such source is not bound by a confidentiality agreement with the Company.(ii) During the period of Executive’s employment with the Company and for twelve (12) months thereafter,(a) the Executive will not directly or indirectly through another entity induce any employee of the Company to leave theCompany’s employ (unless the Board of Directors shall have authorized such employment and the Company shall haveconsented thereto in writing) or in any way interfere with the relationship between the Company and any employee thereof or(b) tortiously interfere with the Company’s business relationship with any customer, supplier, licensee, licensor or otherbusiness relation of the Company.7. Indemnification.The Company will indemnify (and advance the costs of defense of) and hold harmless the Executive (and his legalrepresentatives) to the fullest extent permitted by the laws of the state in which the Company is incorporated, as in effect at thetime of the subject act or omission, or by the Certificate of Incorporation and Bylaws of the Company, as in effect at such timeor on the date of this Agreement, whichever affords greater protection to the Executive, and the Executive shall be entitled tothe protection of any insurance policies the Company may elect to maintain generally for the benefit of its executive officers,against all judgments, damages, liabilities, costs, charges and expenses whatsoever incurred or sustained by him or his legalrepresentative in connection with any action, suit or proceeding to which he (or his legal representatives or other successors)may be made a party by reason of his being or having been an officer of the Company or any of its subsidiaries except that theCompany shall have no obligation to indemnify Executive for liabilities resulting from conduct of the Executive with respectto which a court of competent jurisdiction has made a final determination that Executive committed gross negligence or willfulmisconduct.8. Litigation Expenses.In the event of any litigation or other proceeding between the Company and the Executive with respect to the subjectmatter of this Agreement and the enforcement of the rights hereunder, the losing party shall reimburse the prevailing party forall of his/its reasonable costs and expenses relating to such litigation or other proceeding, including, without limitation, his/itsreasonable attorneys’ fees and expenses. 9 9. Consolidation; Merger; Sale of Assets; Change of Control.Nothing in this Agreement shall preclude the Company from combining, consolidating or merging with or into,transferring all or substantially all of its assets to, or entering into a partnership or joint venture with, another corporation orother entity, or effecting any other kind of corporate combination provided that the corporation resulting from or surviving suchcombination, consolidation or merger, or to which such assets are transferred, or such partnership or joint venture assumes thisAgreement and all obligations and undertakings of the Company hereunder. Upon such a consolidation, merger, transfer ofassets or formation of such partnership or joint venture, this Agreement shall inure to the benefit of, be assumed by, and bebinding upon such resulting or surviving transferee corporation or such partnership or joint venture, and the term “Company,”as used in this Agreement, shall mean such corporation, partnership or joint venture or other entity, and this Agreement shallcontinue in full force and effect and shall entitle the Executive and his heirs, beneficiaries and representatives to exactly thesame compensation, benefits, perquisites, payments and other rights as would have been their entitlement had suchcombination, consolidation, merger, transfer of assets or formation of such partnership or joint venture not occurred.10. Survival of Obligations.Sections 4, 5, 6, 7, 8, 9, 11, 12 and 14 shall survive the termination for any reason of this Agreement (whether suchtermination is by the Company, by the Executive, upon the expiration of this Agreement or otherwise).11. Executive’s Representations.The Executive hereby represents and warrants to the Company that to the best of his knowledge: (i) the execution, deliveryand performance of this Agreement by the Executive do not and shall not conflict with, breach, violate or cause a default underany contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which he is bound,(ii) the Executive is not a party to or bound by any employment agreement, non-compete agreement or confidentialityagreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, thisAgreement shall be the valid and binding obligation of the Executive, enforceable in accordance with its terms. The Executivehereby acknowledges and represents that he has consulted with legal counsel regarding his rights and obligations under thisAgreement and that he fully understands the terms and conditions contained herein.12. Company’s Representations.The Company hereby represents and warrants to the Executive that (i) the execution, delivery and performance of thisAgreement by the Company do not and shall not conflict with, breach, violate or cause a default under any contract, agreement,instrument, order, judgment or decree to which the Company is a party or by which it is bound; (ii) upon the execution anddelivery of this Agreement by the Executive, this Agreement shall be the valid and binding obligation of the Company,enforceable in accordance with its terms; and (iii) the Company’s representations made by the Board of Directors and membersof senior management prior to the execution of this Agreement regarding the science, business or fiscal propriety of theCompany are accurate in all material respects. 10 13. Enforcement.Because the Executive’s services are unique and because the Executive has access to confidential information concerningthe Company, the parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement.Therefore, in the event of a breach of this Agreement, the Company may, in addition to other rights and remedies existing in itsfavor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce,or prevent any violations of, the provisions hereof (without posting a bond or other security).14. Severability.In case any one or more of the provisions or part of a provision contained in this Agreement shall for any reason be held tobe invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall bedeemed not to affect any other jurisdiction or any other provision or part of a provision of this Agreement, nor shall suchinvalidity, illegality or unenforceability affect the validity, legality or enforceability of this Agreement or any provision orprovisions hereof in any other jurisdiction; and this Agreement shall be reformed and construed in such jurisdiction as if suchprovision or part of a provision held to be invalid or illegal or unenforceable had never been contained herein and suchprovision or part reformed so that it would be valid, legal and enforceable in such jurisdiction to the maximum extent possible.In furtherance and not in limitation of the foregoing, the Company and the Executive each intend that the covenants containedin Sections 5 and 6 shall be deemed to be a series of separate covenants, one for each and every state of the United States andany foreign country set forth therein. If, in any judicial proceeding, a court shall refuse to enforce any of such separatecovenants, then such unenforceable covenants shall be deemed eliminated from the provisions hereof for the purpose of suchproceedings to the extent necessary to permit the remaining separate covenants to be enforced in such proceedings. If, in anyjudicial proceeding, a court shall refuse to enforce any one or more of such separate covenants because the total time, scope orarea thereof is deemed to be excessive or unreasonable, then it is the intent of the parties hereto that such covenants, whichwould otherwise be unenforceable due to such excessive or unreasonable period of time, scope or area, be enforced for suchlesser period of time, scope or area as shall be deemed reasonable and not excessive by such court.15. Entire Agreement: Amendment.This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters coveredhereby and supersedes any prior agreement or understanding, including without limitation the 2007 Employment Agreement,which is as of the Effective Date terminated and of no further legal force or effect. Executive acknowledges and agrees that heresigns from the position of Chief Operating Officer as of the Effective Date. This Agreement may not be amended, waived,changed, modified or discharged except by an instrument in writing executed by or on behalf of the party against whomenforcement of any amendment, waiver, change, modification or discharge is sought. No course of conduct or dealing shall beconstrued to modify, amend or otherwise affect any of the provisions hereof. 11 16. Notices.All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have beenduly given if physically delivered, delivered by express mail or other expedited service or upon receipt if mailed, postageprepaid, via registered mail, return receipt requested, addressed as follows: (a) To the Company: (b) To the Executive: Isolagen Declan Daly 405 Eagleview Blvd. 51 Avoca Park Suite 200 Blackrock, Exton, PA 19341 Co. Dublin Irelandand/or to such other persons and addresses as any party shall have specified in writing to the other.17. Assignability.This Agreement shall not be assignable by either party and shall be binding upon, and shall inure to the benefit of, theheirs, executors, administrators, legal representatives, successors and assigns of the parties. In the even that all or substantiallyall of the business of the Company is sold or transferred, then this Agreement shall be binding on the transferee of the businessof the Company whether or not this Agreement is expressly assigned to the transferee.18. Governing Law.This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania.19. Waiver and Further Agreement.Any waiver of any breach of any terms or conditions of this Agreement shall not operate as a waiver of any other breach ofsuch terms or conditions or any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiverof such provision or of any other provision hereof. Each of the parties hereto agrees to execute all such further instruments anddocuments and to take all such further action as the other party may reasonably require in order to effectuate the terms andpurposes of this Agreement. 12 20. Headings of No Effect.The paragraph headings contained in this Agreement are for reference purposes only and shall not in any way affect themeaning or interpretation of this Agreement. 13 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. COMPANY: ISOLAGEN, INC. By EXECUTIVE: Declan Daly Exhibit 23Consent of Independent Registered Public Accounting FirmIsolagen, Inc.Exton, PennsylvaniaWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-108769, No. 333-122440 and No. 333-142959) and Form S-8 (No. 333-108219 and No. 333-131803) of Isolagen, Inc. of our report datedMarch 5, 2008 relating to the consolidated financial statements and the effectiveness of Isolagen, Inc’s internal control overfinancial reporting, which are incorporated by reference in this Form 10-K. Our report contains an explanatory paragraphregarding the Company’s ability to continue as a going concern./s/ BDO Seidman, LLPHouston, TexasMarch 5, 2008 Exhibit 31CERTIFICATIONI, Declan Daly, Chief Executive Officer and Chief Financial Officer of Isolagen, Inc., certify that:1. I have reviewed this Annual Report on Form 10-K of Isolagen, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, ismade known to us by others within those entities, particularly during the period in which this report is being prepared;b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this reportbased on such evaluation; andd. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):a. All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and reportfinancial information; andb. Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.Dated: March 5, 2008 By: /s/ Declan Daly Declan Daly Chief Executive Officer & Chief Financial Officer Isolagen, Inc. Exhibit 32CERTIFICATION PURSUANT TO SECTION 1350 OFCHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODEFor purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, theundersigned, Declan Daly, Chief Executive Officer and Chief Financial Officer of Isolagen, Inc. (the “Company”), herebycertifies that: i. the Annual Report on Form 10-K of the Company for the year ended December 31, 2007, as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Commission Act of 1934; and ii. the information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company.Dated: March 5, 2008 By: /s/ Declan Daly Declan Daly Chief Executive Officer & Chief Financial Officer Isolagen, Inc.

Continue reading text version or see original annual report in PDF format above