Fibrocell Science Inc Annual Report 2008

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, 2008OR 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 NYSE AMEX 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. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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 o Non-accelerated filer o Smaller reporting company þ (Do not check if a smaller reporting 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, 2008, 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 $12,392,273.As of April 9, 2009, issuer had 41,887,266 shares issued and 37,887,266 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, 2008, 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 14 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 MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 36 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE 47 ITEM 9A. CONTROLS AND PROCEDURES 48 ITEM 9B. OTHER INFORMATION 48 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 49 ITEM 11. EXECUTIVE COMPENSATION 49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 49 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 49 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE 50 Exhibit 23 Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Exhibit 32.2 Table of ContentsPart IThis Annual Report on Form 10-K (including the section regarding Management’s Discussion and Analysis ofFinancial Condition and Results of Operations) contains certain “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, aswell as information relating to Isolagen, Inc. and its subsidiaries (referred to as “Isolagen,” “Company,” “we,” or “our”) that isbased on management’s exercise of business judgment and assumptions made by and information currently available tomanagement. Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of ourmanagement, such statements can only be based on facts and factors currently known by us. Consequently, forward-lookingstatements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from theresults and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and otherdocuments, releases and reports released by us, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the factssuggest” and words of similar import, are intended to identify any forward-looking statements. You should not place unduereliance on these forward-looking statements. These statements reflect our current view of future events and are subject tocertain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or shouldunderlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions orresults described in such statements. Although we believe that our expectations are based on reasonable assumptions, we cangive no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from ourforward looking statements including those set forth in Item 1A of this report. Other unknown, unidentified or unpredictablefactors could materially and adversely impact our future results. We undertake no obligation and do not intend to update, reviseor otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of any unanticipated 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 2008”mean the year ended December 31, 2008, 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 notlimited to the following: Isolagen, Isolagen Therapy, Isolagen Process, Agera and Agera Rx. This report also includes othertrademarks, service marks and trade names of other companies. Other trademarks and trade names appearing in this report are theproperty of the 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 has recentlycompleted Phase III clinical studies, and the related Biologics License Application (“BLA”) has been submitted to the Food andDrug Administration (“FDA”). During 2009 we completed one of two Phase II/III studies for the treatment of acne scars. During2008 we completed our open-label Phase II study related to full face rejuvenation.We also develop and market an advanced skin care product line through our Agera Laboratories, Inc. subsidiary, inwhich we acquired a 57% interest in August 2006.Going Concern and Risk of BankruptcyAt December 31, 2008, we had cash and cash equivalents of $2.9 million and negative working capital of $(87.3)million. We believe that our existing capital resources are adequate to sustain our operation through approximately the end ofApril 2009, under our current, reduced operating plan. As such, we require additional cash resources prior to or duringapproximately the end of April 2009, or we will likely enter into bankruptcy and/or cease operations. Further, if we do raiseadditional cash resources prior to the end of April 2009, it may be raised in contemplation of or in connection with bankruptcy.In the event of a bankruptcy, it is likely that our common stock and common stock equivalents will become worthless and ourcreditors will receive significantly less than what is owed to them. As of the date of the filing of this annual report, we have nocommitments for any such additional funding and there is no assurance that we will receive any such additional funding.As of December 31, 2008, we had $90 million of debt which could be called due as early as November 2009, at theoption of the bond holders. Further, approximately $1.6 million of interest related to this debt is due on May 1, 2009. Wecurrently do not have the cash or available funding to pay the interest of $1.6 million due May 1, 2009.Through December 31, 2008, we have been primarily engaged in developing our initial product technology. In thecourse of our development activities, we have sustained losses and expect such losses to continue through at least 2009. Infiscal 2008 we financed our operations primarily through our existing cash, but as discussed above we now require additionalfinancing. There is substantial doubt about our ability to continue as a going concern.We will require additional capital to continue our operations past approximately the end of April 2009. There is noassurance that we will be able to obtain any such additional capital as we need to finance these efforts, through asset sales,equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can be giventhat any such financing, if obtained, will be adequate to meet our ultimate capital needs and to support our growth. If adequatecapital cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted.If we do not obtain additional funding, or do not anticipate additional funding, prior to or during approximately the end ofApril 2009, we will likely enter into bankruptcy and/or cease operations. Further, if we do raise additional cash resources priorto the end of April 2009, it may be raised in contemplation of or in connection with bankruptcy.We filed a shelf registration statement on Form S-3 during June 2007, which was subsequently declared effective bythe SEC. The shelf registration allows us the flexibility to offer and sell, from time to time, up to an original amount of$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, we sold under this shelf registration statement 6,746,647 shares of common stock toinstitutional investors, raising proceeds of $13.8 million, net of offering costs. We may offer and sell up to an additional$36.2 million of securities pursuant to this shelf registration. However, in general, companies that are under $75 million inmarket capitalization, such as Isolagen, are limited to selling up to one-third of the value of such company’s common stock heldby non-affiliates in any twelve month period. 2Table of ContentsOur ability to complete additional offerings, including any additional offerings under our shelf registration statement,is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception ofthe Company and the offering terms. Currently the credit and equity markets both in the United States and internationally areseverely contracted, which will make our task of raising additional debt or equity capital even more difficult. In addition, ourability to raise additional financing through the issuance of common stock or convertible securities may be adversely affectedby uncertainties regarding the continued listing of our common stock on the NYSE Amex (see Item 5). Finally, our ability tocomplete an offering may be dependent on the status of our FDA regulatory milestones and our clinical trials, and in particular,the status of our indication for the treatment of nasolabial folds, the status of the related Biologics License Application, and thestatus of our Phase II/III acne scar trial, which cannot be predicted. 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 conditions discussed above, 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, among other things, upon our ability to secure additional adequate financing or capital prior to orduring approximately the end of April 2009. If we do not obtain additional funding, or do not anticipate additional funding,prior to or during approximately the end of April 2009, we will likely enter into bankruptcy and/or cease operations. Further, ifwe do raise additional cash resources prior to the end of April 2009, it may be raised in contemplation of or in connection withbankruptcy. If we enter into bankruptcy, it is likely that our common stock and common stock equivalents will becomeworthless and our creditors will receive significantly less than what is owed to them.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we have recorded a fullimpairment on all of our long-lived assets as of December 31, 2008, and as such, we have recorded an impairment charge of$6.7 million during the year ended December 31, 2008.Isolagen’s Technology PlatformWe use our proprietary Isolagen Process to produce an autologous living cell therapy. We refer to this autologousliving cell therapy as the Isolagen Therapy. We believe this therapy addresses the normal effects of aging or injury to the skin.Each of our product candidates is designed to use Isolagen Therapy to treat an indicated condition. We use our Isolagen Processto harvest autologous fibroblasts from a small skin punch biopsy from behind the ear with the use of a local anesthetic. Wechose this location both because of limited exposure to the sun and to avoid creating a visible scar. In the case of our dentalproduct candidate, the biopsy is taken from the patient’s palette. The biopsy is then packed in a vial in a special shippingcontainer and shipped to our laboratory where the fibroblast cells are released from the biopsy and initiated into our cell cultureprocess where the cells proliferate until they reach the required cell count. The fibroblasts are then harvested, tested by qualitycontrol and released by quality assurance prior to shipment. The number of cells and the frequency of injections may vary andwill depend on the indication or application being studied.If 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.Certain of our product candidates are still in clinical development and, as such, benefits we expect to see associated with ourproduct candidates may not be validated in our clinical trials. In addition, disadvantages of our product candidates may becomeknown in the future.Our StrategyOur business strategy is primarily focused on our approval efforts related to our nasolabial fold/wrinkle indication, forwhich we have submitted a BLA in March 2009. Our additional objectives include achieving regulatory milestones related toour other Phase II/III Acne Scar program, as funding permits in the future (refer to Clinical Development Programs below). 3Table of ContentsClinical Development ProgramsOur product development programs are focused on the aesthetic and therapeutic markets. These programs aresupported by a 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 providefull-face rejuvenation that includes the improvement of fine lines, wrinkles, skin texture and appearance. Our therapeuticdevelopment programs are designed to treat acne scars, restrictive burn scars and dental papillary recession. All of our productcandidates are non-surgical and minimally invasive. Although the discussions below may include estimates of when we expecttrials to be completed, the prediction of when a clinical trial will be completed is subject to a number of factors anduncertainties. Also, please refer to Part I, Item 1A of this Form 10-K for a discussion of certain of our risk factors related to ourclinical development programs, as well as other risk factors related to our business.Aesthetic Development ProgramsWrinkles/Nasolabial Folds — Phase III Trials: In October 2006, we reached an agreement with the U.S. Food andDrug Administration, or FDA, on the design of a Phase III pivotal study protocol for the treatment of nasolabial folds (lineswhich run from the sides of the nose to the corners of the mouth). The randomized, double-blind protocol was submitted to theFDA under the agency’s Special Protocol Assessment, or SPA. Pursuant to this assessment process, the FDA has agreed that ourstudy design for two identical trials, including subject numbers, clinical endpoints, and statistical analyses, is adequate toprovide the necessary data that, depending on the outcome, could form the basis of an efficacy claim for a marketingapplication. The pivotal Phase III trials evaluated the efficacy and safety of Isolagen Therapy against placebo in approximately400 subjects total with approximately 200 subjects enrolled in each trial. The injections were completed in January 2008 andthe trial data results were disclosed in October 2008. The Phase III trial data results indicated statistically significant efficacyresults for the treatment of nasolabial folds. The Phase III data analysis, including safety results, was disclosed in October 2008.We submitted the related Biologics License Application (BLA) to the FDA in March 2009.Full Face Rejuvenation — Phase II Trial: In March 2007 we commenced an open label (unblinded) trial ofapproximately 50 subjects. Injections of Isolagen Therapy began to be administered in July 2007. This trial was designed tofurther evaluate the safety and use of Isolagen Therapy to treat fine lines and wrinkles for the full face. Five investigators acrossthe United States participated in this trial. The subjects received two series of injections approximately one month apart. In lateDecember 2007, all 45 remaining subjects completed injections. The subjects were followed for twelve months following eachsubject’s last injection. Data results related to this trial were disclosed in August 2008, which included top line positive efficacyresults related to this open label Phase II trial.Therapeutic Development ProgramsAcne Scars — Phase II/III Trial: In November 2007, we commenced an acne scar Phase II/III study. This studyincluded approximately 95 subjects. This placebo controlled trial was designed to evaluate the use of our Isolagen Therapy tocorrect or improve the appearance of acne scars. Each subject served as their own control, receiving Isolagen Therapy on oneside of their face and placebo on the other. The subjects received three treatments two weeks apart. The follow-up andevaluation period was completed four months after each subject’s last injection. In March 2009, we disclosed certain trial dataresults, which included statistically significant efficacy results for the treatment of moderate to severe acne scars. Compilationof safety data and data related to the validation of the study photo guide assessment scale discussed below is ongoing.In connection with this acne scar program, we developed a photo guide for use in the evaluators’ assessment of acnestudy subjects. We had originally designed the acne scar clinical program as two randomized, double-blind, Phase III, placebo-controlled trials. However, our evaluator assessment scale and photo guide have not previously been utilized in a clinical trial.In November 2007, the FDA recommended that we consider conducting a Phase II study in order to address certain study issues,including additional validation related to our evaluator assessment scale. As such, we modified our clinical plans to initiate asingle Phase II/III trial. This Phase II/III study, was powered to demonstrate efficacy, and has allowed for a closer assessment ofthe evaluator assessment scale and photo guide that is ongoing. We expect to initiate a subsequent, additional Phase III trial,subject to sufficient financial resources. We believe that the two trials may have the potential to form the basis of a licensuresubmission to the FDA. 4Table of ContentsRestrictive Burn Scars — Phase II Trial: In January 2007, we met with the FDA to discuss our clinical program for theuse of Isolagen Therapy for restrictive burn scar patients. This Phase II trial would evaluate the use of Isolagen Therapy toimprove range of motion, function and flexibility, among other parameters, in existing restrictive burn scars in approximately20 patients. However, we have delayed the screening and enrollment in this trial until such time as we raise sufficient additionalfinancing.Dental Study — Phase II Trial: In late 2003, we completed a Phase I clinical trial for the treatment of conditionrelating to periodontal disease, specifically to treat Interdental Papillary Insufficiency. In the second quarter of 2005, weconcluded the Phase II dental clinical trial with the use of Isolagen Therapy and subsequently announced that investigator andsubject visual analog scale assessments demonstrated that the Isolagen Therapy was statistically superior to placebo at fourmonths after treatment. Although results of the investigator and subject assessment demonstrated that the Isolagen Therapy wasstatistically superior to placebo, an analysis of objective linear measurements did not yield statistically significant results.In 2006, we commenced a Phase II open-label dental trial for the treatment of Interdental Papillary Insufficiency. Thissingle site study included 11 subjects. The study was previously placed on internal hold due to our financial resourceconstraints. We currently do not expect to fund additional trial efforts related to this applicationAgera Skincare SystemsWe market and sell a skin care product line through our majority-owned subsidiary, Agera Laboratories, Inc., whichwe acquired 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). InMarch, we announced that we were pursuing the potential sale of our 57% ownership interest in Agera. We did not receive anoffer for the sale of this ownership interest that we deemed acceptable. We are no longer actively pursuing the potential sale ofour 57% ownership interest in Agera.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 $4.6 billion in 2008. We believe the aesthetic procedure market is driven by: • aging of the “baby boomer” population, which currently includes ages approximately 45 to 63; • the 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. 5Table of ContentsAccording to the ASAPS, 10.3 million surgical and non-surgical cosmetic procedures were performed in 2008, ascompared to 11.7 million in 2007. Also according to the ASAPS, approximately 8.5 million non-surgical procedures wereperformed in 2008 and approximately 9.6 million non-surgical procedures were performed in 2007. We believe that the conceptof non-surgical cosmetic procedures involving injectable materials has become more mainstream and accepted. According tothe ASAPS, the following table shows the top five non-surgical cosmetic procedures performed in 2008: Procedure Number Botox injection 2,464,123 Laser hair removal 1,280,964 Hyaluronic acids 1,262,848 Chemical peel 591,808 Laser skin resurfacing 570,880 Procedures among the 35 to 50 year old age group made up approximately 45% of all non-surgical cosmeticprocedures in 2008. The 51 to 64 year old age group made up 27% of all non-surgical cosmetic procedures in 2008, while the19 to 34 year old age group made up 20% of all non-surgical cosmetic procedures in 2008. Botox injection was the mostpopular 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 certainmedical conditions 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. Indications related to restrictive burn scars and periodontal disease areon internal company hold. We are not aware of other autologous cell-based treatments for any of these therapeutic applications.Acne Scars. Acne is the most common skin disorder in the United States. The term acne includes conditions rangingfrom clogged pores to outbreaks of severe lesions. According to the American Academy of Dermatology and the NationalInstitute of Health, nearly 80% of people aged 11 to 30 have acne outbreaks at some point, and approximately 95% of thesepatients will have some degree of scarring depending on the severity and duration of the condition. Over time, as facial tonedeclines and facial fat stores are depleted, the scars typically become more noticeable. Current treatments for acne scarring aredermabrasion, laser resurfacing, surgical excision, and certain temporary fillers. We believe this market represents a significantopportunity for our acne scar product candidate.Burns and Burn Scars. According to a Kalorama Information study on burns (Wound Care Volume II: Burns,Kalorama Information, August 2005), an estimated 2.5 million Americans seek medical care each year for burns andapproximately 100,000 are hospitalized. Approximately 50% of patients with deep second degree, third and fourth degree burnsdevelop restrictive scarring which are often painful, and reduce flexibility and functionality of the area affected. We believe thismarket represents a significant opportunity for our non-surgical treatment of existing restrictive burn scars. We also believeadditional market opportunity exists for the use of our product candidate prior to the formation of a restrictive scar to promotehealing in the acute phase of burn wound healing.Agera Skincare Market OpportunitiesThe independent research firm, Kalorama Information, estimated that from 2005 to 2010, over 70 million people inthe United States alone will receive cosmetic facial procedures for which they will pay over $60 billion. Based on a Kline &Company, Inc. study, “The U.S. Professional Skin Care Market 2003,” the 2008 U.S. professional skin care market was estimatedat $742 million. This Kline & Company, Inc study describes the market as comprised of the following sub-markets: Salons andspas (59%), Retail stores (22%) and Medical care (19%). The doctor dispensing market is primarily focused in the Dermatologyand Plastic Surgeon segments but we believe is gaining interest with a broader audience of physician specialties, including themedical spa environment.Sales and MarketingWhile our Isolagen Therapy product candidates are still in the pre-approval phase in the United States, no marketingor sales can occur within the United States. Our Agera skincare products are primarily sold directly to our establisheddistributors and salons, with historically and recently very little focus on marketing efforts. We continue to attempt to identifyadditional third party distributors for our Agera product line. We believe that our Agera products have the potential tocomplement our Isolagen Therapy product candidates in the future. 6Table of ContentsIntellectual PropertyWe believe that patents, trademarks, copyrights, proprietary formulations (related to our Agera skincare products) andother proprietary 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.As of December 31, 2008, we had 9 issued U.S. patents, 2 pending U.S. patent applications, 31 granted foreign patentsand 1 pending international patent application. 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 andtheir enforcement 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 andproprietary rights of third parties. It is uncertain whether the issuance of any third party patents would require us to alter ourproducts or technology, obtain licenses or cease certain activities. Our failure to obtain a license to technology that we mayrequire to discover, develop or commercialize our future products may have a material adverse impact on us. One or more third-party patents 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. 7Table of ContentsWe 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 productdevelopment and technological change. Competition is intense among manufacturers of prescription pharmaceuticals anddermal injection products. Our core products are considered dermal injection products.If certain of our product candidates are approved, we will compete with a variety of companies in the dermatologyand plastic 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, allogenic cell therapies, hyaluronic acid injections and Botulinum toxin injections, and other dermal fillers. Indirectcompetition comes from facial care treatment products. Items catering to the growing demand for therapeutic skin care productsinclude facial scrubs, 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 tooffer certain facial aesthetic benefits. Depending on the clinical outcomes of the Isolagen Therapy trials in aesthetics, thesuccess or failure of gaining approval and the label granted by the FDA if and when the therapy is approved, the competition forthe Isolagen 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 thatcould complement 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 would ormay compete with synthetic, human or animal derived cell or tissue products marketed by companies like Genzyme, IntegraLife Sciences, Johnson & Johnson, C.R. Bard, LifeCell, Organogenesis, Intercytex, and others.The market for skincare products is quite competitive with low barriers to entry. We believe Agera’s dominantcompetitors in this market include companies like Obagi Medical Products, Inc., Skin Medica, Murad, Inc., Dermalogica,Pevonia Botanica and others.Government RegulationOur Isolagen Therapy technologies are subject to extensive government regulation, principally by the FDA and stateand local authorities in the United States and by comparable agencies in foreign countries. Governmental authorities in theUnited States 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, the PublicHealth Service Act, or PHSA, and under comparable laws by the states and in most foreign countries. 8Table of ContentsDomestic RegulationIn the United States, the FDA, under the FFDCA, the PHSA, and other federal statutes and regulations, subjectspharmaceutical and biologic products to rigorous review. If we do not comply with applicable requirements, we may besubjected to administrative or judicial enforcement action, the government may refuse to approve our marketing applications orto allow us to manufacture or market our products or product candidates, and we may be criminally prosecuted. The FDA alsohas the authority to suspend or revoke previously granted marketing authorizations, or seek a product withdrawal or recall (ororder a recall of a biologic or a human cellular or tissue-based product under certain circumstances) if we fail to comply withregulatory standards or if we encounter problems following initial marketing.FDA Approval ProcessTo obtain approval of a new product from the FDA, we must, among other requirements, submit data demonstratingthe product’s safety and efficacy as well as detailed information on the manufacture and composition of the product candidate.In most 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. Ona product-by-product basis, the FDA may regulate such products as drugs, biologics, or medical devices, in addition toregulating them as human cells, tissues, or cellular or tissue-based products (“HCT/Ps”), depending on whether or not theparticular product triggers any of an enumerated list of regulatory factors. A fundamental difference in the treatment of productsunder these classifications is that the FDA generally permits HCT/Ps that do not trigger any of those regulatory factors to becommercially distributed without marketing approval. In contrast, products that trigger those factors, such as if they are morethan minimally manipulated when processed or manufactured, are regulated as drugs, biologics, or medical devices and requireFDA approval. We have determined that our Isolagen Therapy (TM) triggers regulatory factors that make it a biologic, inaddition to an HCT/P, and consequently, we must obtain approval from FDA before marketing Isolagen Therapy (TM) and mustalso satisfy all regulatory requirements for HCT/Ps.The process required by the FDA before a new drug or biologic may be marketed in the United States generallyinvolves the 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 clinicaltrials may begin; • performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of theproposed drug 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, orBLA, for a biologic. 9Table of ContentsPre-clinical tests include laboratory evaluation of product chemistry formulation and stability, as well as animal andother studies to evaluate toxicity. In view of the autologous nature of our product candidates and our prior clinical experiencewith our product candidates, we concluded that it was reasonably safe to initiate clinical trials without pre-clinical studies andthat the clinical trials would be adequate to further assess both the safety and efficacy of our product candidates. Under FDAregulations, the results of any pre-clinical testing, together with manufacturing information and analytical data, are submitted tothe FDA as part of an IND application. The FDA requires a 30-day waiting period after the filing of each IND application beforeclinical trials may begin, in order to ensure that human research subjects will not be exposed to unreasonable health risks. Atany time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, or mayauthorize trials only on specified terms. The IND application process may become extremely costly and substantially delaydevelopment of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results inclinical trials.The 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 testedfor safety, 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 safetyprofile and to be potentially effective in Phase II clinical trials, new clinical trials will be initiated to furtherdemonstrate clinical efficacy, optimal dosage and safety within an expanded and diverse subject population atgeographically-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. SPAs thus help establish up-front agreement with the FDA about the adequacy of a clinical trial design to support a regulatory approval, but the agreementis not binding if new circumstances arise. Even if the FDA agrees to an SPA, the agreement may be changed by the sponsor orthe FDA on written agreement by both parties, or a senior FDA official determines that a substantial scientific issue essential todetermining the safety or effectiveness of the product was identified after the testing began. There is no guarantee that a studywill ultimately be adequate to support an approval even if the study is subject to an SPA. The FDA retains significant latitudeand discretion in interpreting the terms of the SPA agreement and the data and results from any study that is the subject of theSPA agreement.Clinical trials must meet requirements for Institutional Review Board, or IRB, oversight, patient informed consent andthe FDA’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. 10Table of ContentsThe sponsor must submit to the FDA the results of the pre-clinical and clinical trials, together with, among otherthings, detailed information on the manufacturing and composition of the product, and proposed labeling, in the form of anNDA, or, in the case of a biologic, a BLA. The applicant must also submit with the NDA or BLA a substantial user fee payment,unless a waiver or reduction applies. We believe that a waiver reduction applies to Isolagen related to our BLA submission forthe nasolabial folds/wrinkles indication. For fiscal year 2009 this fee is $1,247,200. The FDA has advised us it is regulating ourIsolagen Therapy as a biologic. Therefore, we expect to submit BLAs to obtain approval of our product candidates. Each NDAor BLA submitted 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 will usually respond tothe applicant in accordance with performance goals the FDA has established for the review of NDAs and BLAs — six months forpriority applications and 10 months for regular applications. The review process is often significantly extended by FDArequests for additional information, preclinical or clinical studies, clarification, or a risk evaluation and mitigation strategy, orREMS, or by changes to the application submitted by the applicant in the form of amendments. The FDA may refer the BLA toan advisory committee for review, evaluation and recommendation as to whether the application should be approved, but theFDA is not bound by the recommendation of an advisory committee.It is possible that our product candidates will not successfully proceed through this approval process or that the FDAwill not approve them in any specific period of time, or at all. The FDA may deny or delay approval of applications that do notmeet applicable regulatory criteria, or if the FDA determines that the clinical data do not adequately establish the safety andefficacy of the product. Satisfaction of FDA pre-market approval requirements for a new biologic is a process that may take anumber of years and the actual time required may vary substantially based upon the type, complexity and novelty of theproduct or disease. The FDA reviews these applications and, when and if it decides that adequate data are available to show thatthe product is both safe and effective and that other applicable requirements have been met, approves the drug or biologic formarketing. Government regulation may delay or prevent marketing of potential products for a considerable period of time andimpose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinicaltrials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations thatcould delay, limit or prevent regulatory approval. Upon approval, a product candidate may be marketed only for thoseindications approved in the BLA or NDA and may be subject to labeling and promotional requirements or limitations,including warnings, precautions, contraindications and use limitations, which could materially impact profitability. Onceapproved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is notmaintained or if safety, efficacy or other problems 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 approvethe product, it may require post-marketing testing, including potentially expensive Phase IV studies, to confirm or otherwisefurther evaluate the safety and effectiveness of the product. The FDA also may require, as a condition to approval or continuedmarketing of a drug, a risk evaluation and mitigation strategy, or REMS, if deemed necessary to manage a known or potentialserious risk associated with the product. An REMS can include additional educational materials for healthcare professionals andpatients such as Medication Guides and Patient Package Inserts, a plan for communicating information to healthcareprofessionals, and restricted distribution of the product. In addition, the FDA may, in some circumstances, impose restrictions onthe use of the product, which may be difficult and expensive to administer and may require prior approval of promotionalmaterials. Following approval, FDA may require labeling changes or impose new post-approval study, risk management, ordistribution restriction requirements.Ongoing FDA RequirementsBefore approving an NDA or BLA, the FDA usually will inspect the facilities at which the product is manufacturedand will not approve the product unless the manufacturing facilities are in compliance with the FDA’s current GoodManufacturing Practices, or cGMP, requirements which govern the manufacture, holding and distribution of a product.Manufacturers of human cellular or tissue-based biologics also must comply with the FDA’s Good Tissue Practices, asapplicable, and the general biological product standards. Following approval, the FDA periodically inspects drug and biologicmanufacturing facilities to ensure continued compliance with the cGMP requirements. Manufacturers must continue to expendtime, money and effort in the areas of production, quality control, record keeping and reporting to ensure compliance with thoserequirements. Failure to comply with these requirements subjects the manufacturer to possible legal or regulatory action, such assuspension of manufacturing, seizure of product, voluntary recall of product, withdrawal of marketing approval or civil orcriminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition ofmarketing restrictions through labeling changes or market removal. Product approvals may be withdrawn if compliance withregulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. 11Table of ContentsThe labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be incompliance with FDA and FTC requirements which include, among others, standards and regulations for direct-to-consumeradvertising, industry-sponsored scientific and educational activities, and promotional activities involving the internet. Ingeneral, all product promotion must be consistent with the FDA approval for such product, contain a balanced presentation ofinformation on the product’s uses and benefits and important safety information and limitations on use, and otherwise not befalse or misleading. The FDA and FTC have very broad enforcement authority, and failure to abide by these regulations canresult in penalties, including the issuance of a Warning Letter directing a company to correct deviations from regulatorystandards and enforcement 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.HIPAA 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 productsare potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centersfor Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the U.S.Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individualU.S. Attorney offices 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. 12Table of ContentsInternational RegulationThe regulation of our product candidates outside of the United States varies by country. Certain countries regulatehuman tissue products as a pharmaceutical product, which would require us to make extensive filings and obtain regulatoryapprovals before 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 continuingefforts to evaluate the best uses of our resources, in the fourth quarter of 2006, the Board of Directors approved the proposedclosing of our UK operation. We completed the closure of our London manufacturing facility on March 31, 2007. Wepreviously used our London facility for the commercialization of our process (for which we earned revenue from the sale ofIsolagen Therapy in the United 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 as the activities there have been devoted to the research anddevelopment of our clinical applications and the development of a commercial scale and in a cost-effective production method.All component parts used in our Exton, Pennsylvania manufacturing process are readily available with short lead times, and allmachinery is maintained and calibrated. We believe we have made improvements in our manufacturing processes, and weexpect to continue such efforts in the future.Our Agera products are manufactured by a third-party contract manufacturer under a contract manufacturingagreement. The agreement is effective through July 2014.Research and DevelopmentIn addition to our clinical development activities, our research and development activities include improving ourmanufacturing processes and reducing manufacturing costs. We expense research and development costs as they are incurred.For the years ended December 31, 2008 and 2007, we incurred research and development expenses of $10.2 million and$13.3 million, respectively.EmployeesAs of April 13, 2009, we employed 9 people on a full-time basis, all located in the United States, and one employee,our Chief Executive Officer, who is based in Ireland and works in both Ireland and the United States. We also employ two full-time and one part-time Agera employees. None of our employees are covered by a collective bargaining agreement, and weconsider our relationship with our employees to be good. We also employ consultants and temporary labor on an as neededbasis to supplement existing staff.Segment InformationFinancial information concerning the Company’s business segments and geographic areas of operation is included inNote 15 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 periods presented, to reflect the treatment of these operations as discontinued operations. 13Table of ContentsCorporate 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 may likely file for bankruptcy in the very near term. We will need to raisesubstantial additional capital to fund our operations through the very near term and through commercialization of ourproduct candidates, and we do not have any commitments for that 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, 2008 we had cash and cash equivalents of $2.9 millionand negative working capital of $(87.3) million (including our cash and cash equivalents). We believe our existing capitalresources are inadequate to finance our operations past the end of April 2009. Beyond our efforts to obtain immediate financing,which may not occur, we are incurring losses from operations, have limited capital resources, and do not have access to a line ofcredit or other debt facility.We 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. If we file for bankruptcy, it is likely that our common stock willbecome worthless, given that there currently exists approximately $90 million of debt, which has a priority over commonshareholders.Additionally, we do not know whether any financing, if obtained, will be adequate to meet our capital needs and tosupport our growth. Currently the credit and equity markets both in the United States and internationally are severelycontracted, which will make our task of raising additional debt or equity capital even more difficult. If adequate capital cannotbe obtained on satisfactory terms, we may terminate or delay our efforts related to regulatory approval of one or more of ourproduct candidates, curtail or delay the implementation of manufacturing process improvements or delay the expansion of oursales and marketing capabilities, any of which could cause our business to fail.If we do not obtain additional funding, we will likely enter into bankruptcy and/or cease operations. Further, if we doraise additional cash resources prior to the end of April 2009, it may be raised in contemplation of or in connection withbankruptcy. If we enter into bankruptcy, it is likely that our common stock and common stock equivalents will becomeworthless and our creditors will receive significantly less than what is owed to them.Our independent registered public accounting firm has modified their report for our fiscal year ended December 31,2008 with respect to our ability to continue as a going concern. Due to the likelihood of bankruptcy and in connection with theCompany’s review for impairment of long-lived assets in accordance with SFAS 144, “Accounting for the Impairment orDisposal of Long-lived Assets,” we have recorded a full impairment on all of our long-lived assets as of December 31, 2008, andas such, we have recorded an impairment charge of $6.7 million during the year ended December 31, 2008 in the consolidatedstatement of operations. If we became unable to continue as a going concern, we would have to liquidate our assets and we maylikely receive significantly less than the values at which they are carried on our consolidated financial statements. Theinclusion of a going concern modification in our independent registered public accounting firm’s audit opinion for the yearended December 31, 2008 may materially and adversely affect our stock price and our ability to raise new capital. 14Table of ContentsWe submitted our Biologics License Application for the treatment of wrinkles/nasolabial folds to the FDA in March 2009,and the FDA may deem this Biologics License Application to be unacceptable.We submitted a Biologics License Application (“BLA”) for our Isolagen Therapy (TM) for the treatment ofwrinkles/nasolabial folds, to the FDA in March 2009. The FDA has 60 days to deem the application to be filed or to refuse tofile it on incompleteness grounds. Even if the FDA files the BLA, the FDA may ultimately not approve our application.Any failure or delay in receiving regulatory approval for the sale of any product candidate, has the potential tomaterially harm our business, and may prevent us from raising necessary, additional financing.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. Clinicaltrials are required and the marketing and manufacturing of our product candidates are subject to rigorous testing procedures. Wehave finished injections related to our pivotal Phase III clinical trial for our lead facial product candidate and have submittedthe related BLA to the FDA. Our other product candidates will require additional clinical trials. The commencement andcompletion of clinical trials for any of our product candidates 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 or failures in obtaining approval of our clinical trial protocol from an institutional review board, or IRB,to conduct a clinical trial at a prospective study site; • delays in the enrollment of subjects; • manufacturing difficulties; • failure of our clinical trials and clinical investigators to be in compliance with the FDA’s Good ClinicalPractices, or GCP; • failure of our third-party contract research organizations, clinical site organizations and other clinical trialmanagers, to satisfy their contractual duties, comply with regulations or meet expected deadlines; • lack of efficacy during clinical trials; or • unforeseen safety issues.We 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. 15Table of ContentsWe utilize bovine-sourced materials to manufacture our Isolagen Therapy. Future FDA regulations, as well ascurrently proposed regulations, may require us to change the source of the bovine-sourced materials we use in our products or tocease using 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 imposepost-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 ofour product candidates; • testing and surveillance to further evaluate or monitor our future products and their continued compliance withregulatory standards and requirements; • submitting products for inspection; or • imposing a risk evaluation and mitigation strategy (“REMS”) to ensure that the benefits of the drug outweigh therisks.Protocol deviations may release the FDA from its binding acceptance of our Special Protocol Assessment (“SPA”) studydesign, which may result in the delay, or non-approval, by the FDA of the Isolagen Therapy.In connection with preparations for FDA Investigator Inspections related to our nasolabial fold/wrinkle Phase IIIstudies, we identified protocol deviations related to the timing of visits and other types of deviations. The possibility exists thatour special protocol assessment could no longer be binding on the FDA if the FDA considers these deviations, individually orin aggregate, to be significant. Further, future investigator audits may identify deviations unknown at this time. Accordingly,the possibility exists that although our Phase III studies yielded statistically significant results, the studies may not beacceptable to the FDA under the SPA.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 have recently completed a pivotal Phase III clinical trial related toour lead facial aesthetic product candidate. The success of prior pre-clinical or clinical trials does not ensure the success of thesetrials, which are being conducted in populations with different racial and ethnic demographics than our previous trials. If ourcurrent trials or any future clinical trials are unsuccessful, our business and reputation would be harmed and the price at whichour stock trades could be adversely affected. In addition, if our Phase III clinical trials related to our lead facial aesthetic productcandidate is deemed to be unacceptable or deficient in anyway by the FDA, we may be unable to raise additional equity or debtfinancing that we may require to continue our operations.All of our product candidates are subject to the risks of failure inherent in the development of biotherapeuticproducts. The results of early-stage clinical trials of our product candidates do not necessarily predict the results of later-stageclinical trials. Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despitehaving successfully progressed through initial clinical testing. Even if we believe the data collected from clinical trials of ourproduct candidates is promising, this data may not be sufficient to support approval by the FDA or any other U.S. or foreignregulatory approval. Pre-clinical and clinical data can be interpreted in different ways. Accordingly, FDA officials could reachdifferent conclusions 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 anytime. 16Table of ContentsUnlike our Phase III Nasolabial/Wrinkle trial, our Phase II/III Acne Scar trial is not subject to a Special ProtocolAssessment (“SPA”) with the FDA. In addition, we have developed a photo guide for use in the evaluators’ assessment of acnestudy subjects. Our evaluator assessment scale and photo guide have not been previously used in a clinical trial. To obtain FDAapproval with respect to the acne scar indication, we will require FDA concurrence with the use of our evaluator assessmentscale and photo guide.Any failure or delay in completing clinical trials for our product candidates, or in receiving regulatory approval forthe sale of 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.We are not in compliance with the American Stock Exchange’s continued listing standards and, as a result, our commonstock may be delisted from the American Stock Exchange.On March 17, 2009, we received notice from the NYSE Amex (the “Exchange”) notifying us that we are not incompliance with Section 1003(a)(iv) of the Exchange’s Company Guide (the “Company Guide”). Specifically, the Exchangestaff noted that we sustained losses which are so substantial in relation to our overall operations or our existing financial sourcesthat it appears questionable, in the opinion of the Exchange, as to whether we will be able to continue operations and/or meetour obligations as they mature. As previously disclosed, we received a notice from the Exchange on March 12, 2008, advisingus that we were not in compliance with Sections 1003 (a)(i)-(iii) of the Company Guide.We currently intend to submit a plan in response to the most recent notice by April 17, 2009 outlining ourcompliance strategy with the current continued listing deficiency by September 14, 2009, subject to our successfullycompleting a sufficient financing transaction or strategic partnership prior to April 17, 2009. As of the date of the filing of thisannual report, we have no commitments for any such additional funding and there is no assurance that we will receive any suchadditional funding. If we submit a plan and our plan to regain compliance is accepted by the Exchange, we may be able tocontinue our listing during this period, during which time we will be subject to periodic review to determine progress consistentwith the plan. If we do not submit a plan or if the plan is not accepted by the Exchange, we will be subject to delistingprocedures as set forth in the Company Guide. Under Company Guide rules, we have the right to appeal the determination bythe Exchange staff to initiate delisting proceedings and to seek a hearing before an Exchange Panel. The time and place of sucha hearing will be determined by the Panel. If the Panel does not grant the relief sought by us, our common stock could bedelisted from the Exchange. There is no assurance that the Exchange staff will accept our plan of compliance or that, even ifsuch plan is accepted, we will be able to implement the plan within the prescribed timeframe.In addition, the Exchange’s notice states that our common stock has closed at between $0.15 and $0.87 per share overthe last six months, and that the Staff is concerned that, as a result of the low selling price, our common stock may not besuitable for auction market trading. Pursuant to Section 1003(f)(v) of the Company Guide, the Exchange has notified us that itdeems it appropriate that we effect a reverse stock split within a reasonable amount of time in view of the fact that our commonstock has been selling for a substantial period of time at a low price per share.These uncertainties regarding the continued listing of our common stock on the Exchange will add to the difficulty ofraising additional financing through the issuance of common stock or convertible securities.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 salesmay occur, could cause the market price of our common stock to decline. We have used and it is likely that we will continue touse our common stock or securities convertible into or exchangeable for our common stock to fund our working capital needs orto acquire 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. 17Table of ContentsWe 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. Ourconsolidated net losses for the years ended 2008 and 2007 were $31.4 million and $35.6 million, respectively. As ofDecember 31, 2008, we had an accumulated development stage net loss attributable to common shareholders of $194.1 million.We expect to continue to experience increasing operating losses and negative 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; • research and development; • brand development; • personnel costs; • development of relationships with strategic business partners, including physicians who might use our futureproducts; and • interest expense and amortization of issuance costs related to our outstanding note payables.If our product candidates fail in clinical trials or do not gain regulatory approval, if our product candidates do notachieve market acceptance, or if we do not succeed in effectively and efficiently implementing manufacturing process andtechnology improvements to make our product commercially viable, we will not be profitable. If we fail to become and remainprofitable, or if 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 generatesignificant revenue from (a) the sale of our product candidates, which is dependent on the receipt of FDA approval for ourproduct candidates and is dependent on our ability to successfully market and sell such product candidates, and (b) our Ageraproduct line, which is dependent on achieving significant market penetration in its 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 II/III clinicaltrial for our acne scar product candidate; • successfully improve our manufacturing process; and • obtain FDA approvals. 18Table of ContentsEven if our product development efforts are successful, we cannot assure you that we will be able to commercializeany of our product candidates currently under development. In that event, we will be unable to generate significant revenue,and our business 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 ourproducts to date. Prior to the fourth quarter of 2006 we offered the Isolagen Therapy for sale in the United Kingdom. Our UnitedKingdom operation had been operating on a negative gross margin as we investigated means to improve manufacturingtechnologies for the Isolagen Process. During the fourth quarter of 2006 we determined to cease offering our Isolagen Therapyin the United Kingdom, as part of our continuing efforts to evaluate the best uses of our resources. Our revenue for the yearsended December 31, 2008 and 2007, which excludes historical revenue from discontinued operations, was $1.1 million and$1.4 million, respectively.We do not currently offer any products for sale that are based upon our Isolagen Therapy, and we cannot guaranteethat we will ever market any such products. We must demonstrate that our product candidates satisfy rigorous standards ofsafety and efficacy before the FDA and other regulatory authorities in the United States and abroad will approve the productcandidates for commercial marketing. We will need to conduct significant additional research, including potentially pre-clinical testing and clinical testing before we can file additional applications with the FDA for approval of our productcandidates. We must also develop, validate and obtain FDA approval of any improved manufacturing process. In addition, tocompete effectively our future products must be easy to use, cost-effective and economical to manufacture on a commercialscale. We may not achieve any of these objectives, and we may never 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 canobtain marketing approval for our product candidates. We have never gone through a FDA pre-approval regulatory inspectionof our manufacturing facility, and we cannot guarantee that we will satisfy the requirements for approval. All of ourmanufacturing methods, equipment and processes for the active pharmaceutical ingredient and finished product must complywith the FDA’s current Good Manufacturing Practices, or cGMP, requirements. We will also need to perform extensive audits ofour suppliers, vendors and contract laboratories. The cGMP requirements govern all areas of recordkeeping, productionprocesses and controls, personnel and quality control. To ensure that we meet these requirements, we will expend significanttime, money and effort. Due to the unique nature of our Isolagen Therapy, we cannot predict the likelihood that the FDA willapprove our facility as compliant with cGMP requirements even if we believe that we have taken the steps necessary to achievecompliance.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 still may be unable to commercially manufacture the Isolagen Therapy profitably. Our manufacturing cost has been subjectto fluctuation, 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. 19Table of ContentsWe 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 suchproducts on a commercial scale and in a cost-effective manner. As stated in the preceding risk factor, we intend to seek FDAapproval of our manufacturing process as a component of the BLA application and approval process. However, we can provideno assurance that we will be able to cost-effectively and commercially scale our operations using our current manufacturingprocess. If we are unable to develop suitable techniques to produce and manufacture our product candidates, our businessprospects 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 tomanufacture Agera’s products, and the manufacturer is responsible for supplying the formula ingredients for the Agera productlines. If for any reason the manufacturer discontinues production of Agera’s products at a time when we have a low volume ofinventory on hand or are experiencing a high demand for the products, significant delays in production of the products andinterruption of product sales may result as we seek to establish a relationship and commence production with a newmanufacturer, which would negatively impact our results of operation.The large majority of our revenue, which relates to the Agera business segment, is to one, international customer.Our revenues, which relate solely to the Agera business segment, are highly concentrated in one large, internationalcustomer. This large customer represented 64% and 69% of 2008 and 2007 consolidated revenues, respectively. Further, thislarge customer represented 94% of consolidated accounts receivable, net, at December 31, 2008 and 2007. A reduction ofrevenue related to this large customer, due to competitor product alternatives, pricing pressures, the financial health of the largecustomer, or otherwise, would have a significant, negative impact on the business of Agera, and the related value thereof.If 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.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 ofour product 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. 20Table of ContentsOur 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 are currently expected take place at a single U.S. facility. If regulatory, manufacturing or other problems requireus to discontinue production 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 failuresor similar events. Our insurance policies have limited coverage levels for loss or damages in these events and may notadequately compensate us for any losses that may occur. In addition, terrorist acts or acts of war may cause harm to ouremployees or damage our Exton facility. The potential for future terrorist attacks, the national and international responses toterrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic andpolitical uncertainties that could adversely affect our business and results of operations in ways that we cannot predict, andcould cause our stock price to fluctuate or decline. We are uninsured for these types of losses.As 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,our historical financial data is of limited value in estimating future operating expenses. Our budgeted expense levels are basedin part on our expectations concerning the costs of our clinical trials, which depend on the success of such trials and our abilityto effectively and efficiently conduct such trials, and expectations related to our efforts to achieve FDA approval with respect toour product candidates. In addition, our budgeted expense levels are based in part on our expectations of future revenue that wemay receive from our Agera product line, and the size of future revenue depends on the choices and demand of individuals. Ourlimited operating history and clinical trial experience make these costs and revenues difficult to forecast accurately. We may beunable to adjust our operations in a timely manner to compensate for any unexpected increase in costs or shortfall in revenue.Further, our fixed manufacturing costs and business development and marketing expenses will increase significantly as weexpand our operations. Accordingly, a significant increase in costs or shortfall in revenue could have an immediate and materialadverse 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 areoutside of 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; 21Table of Contents • 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 theforeign countries 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.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 patientswho have 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. To date, we have received written demands by an attorneyrepresenting approximately 132 former patients each claiming, on average, £3,500 (or approximately $5,250), plusunquantified interest and incidental expenses. To date, no formal legal action has been brought by the attorney against us.Further, one former United Kingdom patient has claimed personal injury as a result of the use of the Isolagen Therapy; althoughno formal legal action has been brought against us to date with respect to this matter. While we have taken, and continue totake, what we believe are appropriate precautions, we may be unable to avoid significant liability exposure. We currently keepin force product liability insurance, although such insurance may not be adequate to fully cover any potential claims or maylapse in accordance with its terms prior to the assertion of claims. We may be unable to obtain product liability insurance in thefuture, or we may be unable to do so on acceptable terms. Any insurance we obtain or have obtained in the past may not provideadequate coverage against any asserted claims. In addition, regardless of merit or eventual outcome, product liability claimsmay 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 any future product liability claims our business could be adversely affected, and if these claimsare in excess of insurance coverage, if any, that we may possess, our financial position will suffer. 22Table 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 toextensive ongoing requirements by the FDA, as well as by a number of foreign, national, state and local agencies. Theseregulations will impact many aspects of our operations, including testing, research and development, manufacturing, safety,efficacy, labeling, storage, quality control, adverse event reporting, import and export, record keeping, approval, distribution,advertising and promotion of our future products. We must also submit new or supplemental applications and obtain FDAapproval for certain changes to an approved product, product labeling or manufacturing process. Application holders must alsosubmit advertising and other promotional material to the FDA and report on ongoing clinical trials. The FDA enforces post-marketing regulatory requirements, including the cGMP requirements, through periodic unannounced inspections. We do notknow whether we will pass any future FDA inspections. Failure to pass an inspection could disrupt, delay or shut down ourmanufacturing operations. Failure to comply with applicable regulatory requirements could, among other things, result in: • administrative or judicial enforcement actions; • 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 thatsome advertising or promotional practices are false, misleading or deceptive. The FDA and FTC are authorized to impose a widearray of 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’srequirements; • changes in the methods of marketing and selling products; • taking FDA mandated corrective action, which may include placing advertisements or sending letters tophysicians rescinding 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 criminaland civil penalties. If we become subject to any of the above requirements, it could be damaging to our reputation and restrictour ability to sell or market our future products, and our business condition could be adversely affected. We may also incursignificant expenses in defending ourselves. 23Table of ContentsPhysicians may prescribe pharmaceutical or biologic products for uses that are not described in a product’s labelingor differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does notregulate physicians’ 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 theFDA, we intend to disseminate peer-reviewed articles on our future products to practitioners. If, however, our activities fail tocomply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA orother regulatory 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, the federal anti-kickbacklaw, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirementsof the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each as amended. If products aremade available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws andrequirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfaircompetition laws. The distribution of product samples to physicians must comply with the requirements of the PrescriptionDrug Marketing Act.Depending on the circumstances, failure to meet post-approval requirements can result in criminal prosecution, finesor other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal ofpre-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 tochange the healthcare system in ways that could impact our ability to sell our future products profitably. For instance, therecurrently is no legal pathway for generic or similar versions of BLA-approved biologics, sometimes called “follow-onbiologics” or “biosimilars,” but there is continuing interest by Congress on this issue and on healthcare reform in general. It isunknown what type of regulatory framework, what legal provisions, and what timeframes for issuance of regulations or guidanceany final legislation on biosimilars would contain, but the future profitability of any approved biological product could bematerially adversely impacted by the approval of a biosimilar product. The FDA’s policies may change and additionalgovernment regulations may be enacted, which could prevent or delay regulatory approval of our product candidates. Wecannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation oradministrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we might notbe permitted to market our future products and our business could suffer.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, thoseproducts may not be accepted by the market. A number of factors may affect the rate and level of market acceptance of ourproducts, 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. 24Table of ContentsIf our current or future product candidates fail to achieve market acceptance, our profitability and financial conditionwill suffer.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.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, orour inability to recruit and train additional key personnel in a timely manner, could materially and adversely affect our businessand our 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 may 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 is a high demand for highly trained executive, technical and managerial personnel in our industry. We do not knowwhether we will be able to attract, train and retain highly qualified technical and managerial personnel in the future, whichcould have a material 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. Ourability to achieve commercial success will depend in part on obtaining and maintaining patent protection and trade secretprotection of our technology and future products, as well as successfully defending these patents against third party challenges.In order to do so 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, 2008, we had 9 issued U.S. patents, 2 pending U.S. patent applications, 31 granted foreignpatents, and 1 pending international application. However, we may not be able to obtain additional patents relating to ourtechnology or otherwise protect our proprietary rights. If we fail to obtain or maintain patents from our pending and futureapplications, we may not be able to prevent third parties from using our proprietary technology. We will be able to protect ourproprietary rights from unauthorized use only to the extent that these rights are covered by valid and enforceable patents thatwe control or are effectively maintained by us as trade secrets. Furthermore, the degree of future protection of our proprietaryrights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us togain or keep a competitive advantage.The patent situation of companies in the markets in which we compete is highly uncertain and involves complexlegal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadthof claims allowed in such companies’ patents has emerged to date in the United States. The laws of other countries do notprotect intellectual 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 thefollowing: • the inventors of the inventions covered by each of our pending patent applications might not have been the firstto make 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 not result 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 attemptto patent; • other companies, universities or research institutions may design around technologies we have licensed,patented or developed; 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 orits patents and proprietary rights or challenge the validity or enforceability of our patents and proprietary rights. Likewise, wemay need to resort to litigation to enforce our patent rights or to determine the scope and validity of a third party’s proprietaryrights.We cannot be sure that other parties have not filed for or obtained relevant patents that could affect our ability toobtain patents or operate our business. Even if we have previously filed patent applications or obtain issued patents, others mayfile their own patent applications for our inventions and technology, or improvements to our inventions and technology. Wehave become aware of published patent applications filed after the issuance of our patents that, should the owners pursue andobtain patent claims to our inventions and technology, could require us to challenge such patent claims. Others may challengeour patent or other intellectual property rights or sue us for infringement. In all such cases, we may commence legal proceedingsto resolve 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 thistype of 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,and pay 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-licenseto our patented technology; or • stop research and commercial activities relating to the affected products or services if a license is not availableon acceptable terms, if at all.Any of these events could materially adversely affect our business strategy and the value of our business. 27Table of ContentsIn 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.If 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 Directorsis divided 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 purchaseour newly created Series C participating preferred stock in connection with the adoption of a stockholder rights plan. Theserights may have certain anti-takeover effects. For example, the rights may cause substantial dilution to a person or group thatattempts to acquire us in a manner which causes the rights to become exercisable. As such, the rights may have the effect ofrendering more 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 stockin the public market, or as a result of the perception that these sales could occur, which could occur if we issue a large number ofshares of common stock (or securities convertible into our common stock) in connection with a future financing, as our commonstock is trading at historically low levels. These factors could make it more difficult for us to raise funds through future offeringsof common stock. As of April 9, 2009, there were 41,887,266 shares of common stock issued and 37,887,266 outstanding. All ofour outstanding shares are freely transferable without restriction or further registration 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 noassurance of any liquidity or resale value of our common stock, and stockholders may be required to hold shares of our commonstock for an 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 independent registered public accounting firm auditing the company’s financial statements has been required toand may be required in the future to attest to and report on the company’s internal control over financial reporting. Ineffectiveinternal controls over our financial reporting have occurred in the past and may arise in the future. As a consequence, ourinvestors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of oursecurities. 29Table of ContentsOur 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, 2008, we had approximately $90.5 million of indebtednessoutstanding (including related accrued interest of $0.5 million). As of the date of this report, approximately $89.7 million ofthis indebtedness could be called due as early as November 2009 at the option of the bond holders. Further, the $89.7 million ofindebtedness would become due immediately upon a change in control of the Company. We also have approximately$1.6 million of interest due on May 1, 2009, for which we currently do not have the available capital to pay when due. Thelevel 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,debt service, acquisitions or general corporate purposes; • 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 thepayment of any 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 havebetter access 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 ofour indebtedness to accelerate the maturity date of the indebtedness in the event of a change of control of thecompany.If we do not grow our revenues, we could have difficulty making required payments on our indebtedness in the future.If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail tocomply with the various requirements of our indebtedness, we would be in default, which would permit the holders of ourindebtedness to accelerate the maturity of the indebtedness and could cause defaults under any indebtedness we may incur inthe future. Any default under our indebtedness would have a material adverse effect on our business, operating results andfinancial condition.General economic conditions, industry cycles and financial, business and other factors affecting our operations, manyof which 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 financingmay contain 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; 30Table of Contents • 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 or sale of assets might not be available, or available on economically favorable terms.The 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 April 1, 2009, the per share closing price of our common stock was $0.16. From January 1, 2007 through April 1,2009, the per share closing price of our common stock ranged from $0.15 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 regulatoryapprovals domestically 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 one location, Exton, Pennsylvania. TheExton, Pennsylvania location is leased and consists of approximately 86,500 square feet. The lease is noncancelable throughMarch 31, 2013. 31Table of ContentsItem 3. Legal ProceedingsFederal Securities LitigationThe Company and certain of its current and former officers and directors are defendants in class action cases pendingin the United 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 onbehalf of a putative class of purchasers of publicly traded Isolagen securities between March 3, 2004 and August 1, 2005. Theselawsuits were Elliot Liff v. Isolagen, Inc. et al., C.A. No. H-05-2887, filed in the United States District Court for the SouthernDistrict of Texas; Michael Cummiskey v. Isolagen, Inc. et al., C.A. No. 05-cv-03105, filed in the United States District Court forthe Southern District of Texas; Ronald A. Gargiulo v. Isolagen, Inc. et al., C.A. No. 05-cv-4983, filed in the United StatesDistrict Court for the Eastern District of Pennsylvania, and Gregory J. Newman v. Frank M. DeLape, et al., C.A. No. 05-cv-5090,filed in the 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 againstthe underwriters of an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. OnNovember 1, 2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied the Company’smotions to dismiss the complaint. On November 6, 2007, the court entered a scheduling order that provides for discovery to becomplete by June 8, 2009. On February 4, 2008, Lead Plaintiffs moved for class certification. On February 15, 2008, LeadPlaintiffs dismissed without prejudice their claims against certain of the underwriters named as defendants in the FederalSecurities Class Action, but maintained claims against CIBC World Markets Corp. and UBS Securities LLC (the“Underwriters”).On April 1, 2008, the court entered an order staying the schedule set forth in its November 6, 2007 order for a periodof 90 days and directing the parties (together with the parties in the Beattie action, described under “Derivative Actions,”below) to participate in mediation before a private mediator. The mediation occurred on June 2, 2008 and June 5, 2008, atwhich the parties reached an agreement in principle to settle the Federal Securities Litigation. On October 23, 2008, the partiesexecuted a definitive settlement agreement. In November 2008, the Company received settlement proceeds from its directorsand officers liability insurance carrier, of which $4.4 million was paid to the class action plaintiffs in December 2008 inaccordance with the definitive settlement agreement. On March 25, 2009, the court entered an order and final judgmentapproving the settlement and dismissing the Federal Securities Litigation with prejudice. There is no accrual in theaccompanying consolidated balance sheet at December 31, 2008 and 2007 with respect to the Federal Securities Litigation. 32Table of ContentsDerivative ActionsThe Company is the nominal defendant in derivative actions (the “Derivative Actions”) pending in State DistrictCourt in Harris County, Texas, the United States District Court for the Eastern District of Pennsylvania, and the Court ofCommon Pleas of Chester County, Pennsylvania.On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840, Carmine Vitale v. FrankDeLape, et al. in the 55th Judicial District Court of Harris County, Texas, and in February 2006, Mr. Vitale filed an amendedpetition. In this action, the plaintiff purports to bring a shareholder derivative action on behalf of the Company against certainof the Company’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 ofCivil Procedure based on pleading defects inherent in the Vitale petition. The plaintiff filed an amended petition onFebruary 15, 2006, to which the defendants renewed their special exceptions. On September 6, 2006, the Court granted thespecial exceptions and permitted the plaintiff thirty days to attempt to replead. Thereafter, the plaintiff moved the Court for anorder compelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the Court entered an orderexplaining its grounds for granting the special exceptions. On November 3, 2006, the plaintiff filed a second amended petition.On February 8, 2007, the Company filed its answer and special exceptions to the second amended petition. On August 9, 2007,the Court 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 etal., in the United States District Court for the Southern District of Texas. This action makes substantially similar allegations asthe original complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior tofiling the 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 orabout April 5, 2008, Keene moved the appeals court to stay the appeal for a period of 90 days to permit Keene to participate inthe mediation of the federal securities litigation (described above) and the Beattie derivative litigation (described below). Themediation is described under “Federal Securities Litigation” above.On October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432, William ThomasFordyce v. Frank M. DeLape, et al., in the Court of Common Pleas of Chester County, Pennsylvania. This action makessubstantially similar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to makea demand on the 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 Courtof Common Pleas entered an opinion and order sustaining the preliminary objections and dismissing the complaint withprejudice. 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, etal., in the United States District Court for the Eastern District of Pennsylvania. This action makes substantially similarallegations as the original complaint in the Vitale action.On April 1, 2008, the court entered an order extending the defendants’ time to respond to the complaint for a periodending 150 days from April 1, 2008 and directing the parties, together with the parties to the federal securities litigationdescribed above, to mediation before a private mediator. The mediation is described under “Federal Securities Litigation”above.The mediation occurred on June 2, 2008 and June 5, 2008, at which the parties reached an agreement in principle tosettle the Keene and Beattie Derivative Actions, and on January 27, 2009, the parties executed a definitive settlementagreement. The settlement is subject to court approval. The court has scheduled a hearing to consider whether to approve thesettlement for May 12, 2009. The proposed settlement of the Keene and Beattie Derivative Actions provides for the Company tomake certain payments of attorneys’ fees and expenses to counsel for Keene and Beattie. Those payments are to be made by theCompany from proceeds previously received by the Company from its directors and officers liability insurance. An accrual of$0.3 million and $0.0 million has been recorded in the accompanying consolidated balance sheets at December 31, 2008 and2007, respectively, in connection with the proposed settlement.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 Mr. Tomz’sdefense costs to date amount to in excess of 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 could potentially be liable to reimburse Mr. Tomz for the reasonable and necessary costsof defense in the Keene case and in the putative securities cases, both of which have been resolved by settlement, as describedabove. The Company has refused to pay the amount of fees and expenses for which Mr. Tomz has sought reimbursementbecause it believes they are excessive, duplicative and have not been properly segregated between reimbursable and non-reimbursable claims. The Company has negotiated an acceptable compromise for the amounts billed by Mr. Tomz’s localPennsylvania counsel for an amount less than $0.1 million.Prior to the resolution of the various derivative actions, Mr. Tomz filed a demand for arbitration seeking advancementof his defense costs. He subsequently agreed to stay those proceedings. At present, Mr. Tomz has not sought to lift this stay andit is uncertain whether he will attempt to do so in the future. 34Table of ContentsThe Company has accrued less than $0.1 million in the accompanying consolidated financial statements as ofDecember 31, 2008 with respect to Mr. Tomz’s existing defense costs in dispute.UnderwritersThe Underwriters have each demanded that the Company indemnify, hold harmless and defend them with respect tothe claims asserted in the putative securities actions. The total amount demanded to date is approximately $0.8 million. TheUnderwriters demands for indemnification were a subject of the ongoing mediation efforts described under “Federal SecuritiesLitigation” above, and as part of the proposed settlement of the Federal Securities Litigation the Underwriters agreed to releasetheir claims for indemnification. Accordingly, no accrual has been recorded in the accompanying consolidated balance sheets atDecember 31, 2008 and December 31, 2007 in connection with the Underwriters original demand of approximately$0.8 million.United KingdomSubsequent to the Company’s public announcement regarding the closure of the United Kingdom operation, theCompany received negative publicity and negative correspondence from former patients in the United Kingdom that previouslyreceived the Company’s treatment. To date, the Company has received written demands by an attorney representingapproximately 132 former patients, as of December 31, 2008, each claiming negligent misstatements were made and eachclaiming, on average, £3,500 (or approximately $5,250), plus unquantified interest and incidental expenses. The Company hasresponded to the written demand and is in the process of evaluating the merits of the claims. To date, no formal legal action hasbeen brought by the attorney against the Company, and no provision has been recorded in the consolidated financial statementsrelated to this matter.During 2008, the Company received written correspondence from one former patient claiming physical injuryallegedly from the use of Isolagen Therapy. The Company believes this claim is without merit. To date, no formal legal actionhas been brought by the former patient against the Company, and no provision has been recorded in the consolidated financialstatements related to this matter.Item 4. Submission of Matters to a Vote of Security HoldersNo matters were submitted to a vote of security holders during the fourth quarter of 2008. 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.” Themarket for our common stock is limited and volatile. The following table sets forth the high and low sales prices, as applicable,for our common stock for each of the periods indicated as reported by the NYSE Amex. December 31, December 31, 2008 2007 High Low High Low First Quarter $2.45 $0.28 $3.93 $1.98 Second Quarter 0.86 0.31 5.00 3.54 Third Quarter 1.66 0.37 4.19 2.04 Fourth Quarter 0.84 0.17 3.40 2.24 The closing price of our common stock on March 31, 2009 was $0.17.On March 17, 2009, we received notice from the NYSE Amex (the “Exchange”) notifying us that we are not incompliance with Section 1003(a)(iv) of the Exchange’s Company Guide (the “Company Guide”). Specifically, the Exchangestaff noted that we sustained losses which are so substantial in relation to our overall operations or our existing financial sourcesthat it appears questionable, in the opinion of the Exchange, as to whether we will be able to continue operations and/or meetour obligations as they mature. As previously disclosed, we received a notice from the Exchange on March 12, 2008, advisingus that we were not in compliance with Sections 1003 (a)(i)-(iii) of the Company Guide.We currently intend to submit a plan in response to the most recent notice by April 17, 2009 outlining ourcompliance strategy with the current continued listing deficiency by September 14, 2009, subject to our successfullycompleting a sufficient financing transaction or strategic partnership prior to April 17, 2009. As of the date of the filing of thisannual report, we have no commitments for any such additional funding and there is no assurance that we will receive any suchadditional funding. If we submit a plan and if our plan to regain compliance is accepted by the Exchange, we may be able tocontinue our listing during this period, during which time we will be subject to periodic review to determine progress consistentwith the plan. If we do not submit a plan or if the plan is not accepted by the Exchange, we will be subject to delistingprocedures as set forth in the Company Guide. Under Company Guide rules, we have the right to appeal the determination bythe Exchange staff to initiate delisting proceedings and to seek a hearing before an Exchange Panel. The time and place of sucha hearing will be determined by the Panel. If the Panel does not grant the relief sought by us, our common stock could bedelisted from the Exchange. There is no assurance that the Exchange staff will accept our plan of compliance or that, even ifsuch plan is accepted, we will be able to implement the plan within the prescribed timeframe.In addition, the Exchange’s notice states that our common stock has closed at between $0.15 and $0.87 per share overthe last six months, and that the Staff is concerned that, as a result of the low selling price, our common stock may not besuitable for auction market trading. Pursuant to Section 1003(f)(v) of the Company Guide, the Exchange has notified us that itdeems it appropriate that we effect a reverse stock split within a reasonable amount of time in view of the fact that our commonstock has been selling for a substantial period of time at a low price per share.These uncertainties regarding the continued listing of our common stock on the Exchange will add to the difficulty ofraising additional financing through the issuance of common stock or convertible securities. 36Table of ContentsHoldersAs of March 31, 2009, we had 367 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, ifany, to support 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 2008.Purchases of Equity Securities.We did not repurchase any of our equity securities during the fourth quarter of 2008.Item 6. Selected Financial DataWe are a smaller reporting company, and are not required to report this information. 37Table 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 nasolabial folds, or wrinkles. We completed Phase III clinical trials with respect tothis indication during 2008 and submitted the related Biologics License Application to the FDA in March 2009.We completed a Phase II/III study in acne scars in March 2009, which yielded statistically significant efficacy results,and an open-label Phase II trial with respect to full face rejuvenation during 2008, which yielded positive top line efficacyresults. During 2008, we began preparations for a Phase II burn scar study, however, due to funding limitations, this study wassuspended in order to preserve cash resources. Our efforts and resources are now primarily focused on obtaining FDA approvalfor the Isolagen Therapy nasolabial folds/wrinkle indication.We sometimes refer to our product candidates in the aggregate as Isolagen Therapy. From 2002 through 2006, wemade Isolagen Therapy available to physicians primarily in the United Kingdom. In the fourth quarter of 2006, our Board ofDirectors approved closing our United Kingdom operation. Our United Kingdom operation was shutdown on March 31, 2007(as more fully discussed in Note 5 in Notes to the Consolidated Financial Statements and below).We also develop and market an advanced skin care product line through our Agera Laboratories, Inc. subsidiary, inwhich we acquired a 57% interest in August 2006. Agera offers a complete line of skincare systems based on a wide array ofproprietary formulations, trademarks and nano-peptide technology. Agera markets its product in both the United States andEurope (primarily the United Kingdom).We are considered to be a “development stage” enterprise.Going Concern and Risk of BankruptcyAt December 31, 2008, we had cash and cash equivalents of $2.9 million and negative working capital of $(87.3)million. We believe that our existing capital resources are adequate to sustain our operation through approximately the end ofApril 2009, under our current, reduced operating plan. As such, we require additional cash resources prior to or duringapproximately the end of April 2009, or we will likely enter into bankruptcy and/or cease operations. Further, if we do raiseadditional cash resources prior to the end of April 2009, it may be raised in contemplation of or in connection with bankruptcy.In the event of a bankruptcy, it is likely that our common stock and common stock equivalents will become worthless and ourcreditors will receive significantly less than what is owed to them. As of the date of the filing of this annual report, we have nocommitments for any such additional funding and there is no assurance that we will receive any such additional funding.As of December 31, 2008, we had $90 million of debt which could be called due as early as November 2009, at theoption of the bond holders. Further, approximately $1.6 million of interest related to this debt is due on May 1, 2009. Wecurrently do not have the cash or available funding to pay the interest of $1.6 million due May 1, 2009.Through December 31, 2008, we have been primarily engaged in developing our initial product technology. In thecourse of our development activities, we have sustained losses and expect such losses to continue through at least 2009. Infiscal 2008 we financed our operations primarily through our existing cash, but as discussed above we now require additionalfinancing. There is substantial doubt about our ability to continue as a going concern. 38Table of ContentsWe will require additional capital to continue our operations past approximately the end of April 2009. There is noassurance that we will be able to obtain any such additional capital as we need to finance these efforts, through asset sales,equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can be giventhat any such financing, if obtained, will be adequate to meet our ultimate capital needs and to support our growth. If adequatecapital cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted.If we do not obtain additional funding, or do not anticipate additional funding, prior to approximately the end of April 2009,we will likely enter into bankruptcy and/or cease operations. Further, if we do raise additional cash resources prior to the end ofApril 2009, it may be raised in contemplation of or in connection with bankruptcy.We filed a shelf registration statement on Form S-3 during June 2007, which was subsequently declared effective bythe SEC. The shelf registration allows us the flexibility to offer and sell, from time to time, up to an original amount of$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, we sold under this shelf registration statement 6,746,647 shares of common stock toinstitutional investors, raising proceeds of $13.8 million, net of offering costs. We may offer and sell up to an additional$36.2 million of securities pursuant to this shelf registration. However, in general, companies that are under $75 million inmarket capitalization, such as Isolagen, are limited to selling up to one-third of the value of such company’s common stock heldby non-affiliates in any twelve month period.Our ability to complete additional offerings, including any additional offerings under our shelf registration statement,is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception ofthe Company and the offering terms. Currently the credit and equity markets both in the United States and internationally areseverely contracted, which will make our task of raising additional debt or equity capital even more difficult. In addition, ourability to raise additional financing through the issuance of common stock or convertible securities may be adversely affectedby uncertainties regarding the continued listing of our common stock on the NYSE Amex (see Part II, Item 5). Finally, ourability to complete an offering may be dependent on the status of our FDA regulatory milestones and our clinical trials, and inparticular, the status of our indication for the treatment of nasolabial folds, the status of the related Biologics LicenseApplication, and the status of our Phase II/III acne scar trial, which cannot be predicted. There is no assurance that capital in anyform would be available to us, and if available, on terms and conditions that are acceptable.As a result of the conditions discussed above, 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, among other things, upon our ability to secure additional adequate financing or capital prior to orduring approximately the end of April 2009. If we do not obtain additional funding, or do not anticipate additional funding,prior to or during approximately the end of April 2009, we will likely enter into bankruptcy and/or cease operations. Further, ifwe do raise additional cash resources prior to the end of April 2009, it may be raised in contemplation of or in connection withbankruptcy. If we enter into bankruptcy, it is likely that our common stock and common stock equivalents will becomeworthless and our creditors will receive significantly less than what is owed to them.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we have recorded a fullimpairment on all of our long-lived assets as of December 31, 2008, and as such, we have recorded an impairment charge of$6.7 million during the year ended December 31, 2008.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.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. Wereceived a written demand by an attorney representing approximately 132 former patients each claiming negligentmisstatements were made and each claiming, on average, £3,500 (or approximately $5,250), plus unquantified interest andincidental expenses. To date, no formal legal action has been brought by the attorney against the Company, and no provisionhas been recorded in the consolidated financial statements related to this matter. Further, during 2008 we received writtencorrespondence from one former patient claiming physical injury allegedly from the use of Isolagen Therapy. To date, no formallegal action has been brought by the former patient against the Company, and no provision has been recorded in theconsolidated financial statements related to this matter. 39Table of ContentsWith the closure of the United Kingdom operation on March 31, 2007, our European operations (both the UnitedKingdom and Switzerland) and Australian operations have been presented in the financial statements as discontinuedoperations for all periods 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 ourconsolidated financial statements, which have been prepared in conformity with accounting principles generally accepted inthe United States of America. Our significant accounting policies are more fully described in Note 3 of the Notes to theConsolidated Financial Statements. However, certain accounting policies and estimates are particularly important to theunderstanding of our financial position and results of operations and require the application of significant judgment by ourmanagement or can be materially affected by changes from period to period in economic factors or conditions that are outside ofthe control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, ourmanagement uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates.Those estimates are based on our historical operations, our future business plans and projected financial results, the terms ofexisting contracts, our observance of trends in the industry, information provided by our customers and information availablefrom other outside sources, as appropriate. The following discusses our critical accounting policies and estimates.Going 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 2009. We will be required to obtain additional capital in April 2009 tocontinue and expand our operations. There is no assurance that we will be able to obtain any such additional capital as we needto finance these efforts, through asset sales, equity or debt financing, or any combination thereof, or on satisfactory terms or atall.At December 31, 2008, our cash and cash equivalents was $2.9 million. For the year ended December 31, 2008, ourcash used for operations was $20.0 million. These factors, as well as our future spending estimates, were important factors inconcluding that substantial doubt exists about our ability to continue as a going concern. We believe these estimates areparticularly important to the understanding of our financial position.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we have recorded a fullimpairment on all of our long-lived assets as of December 31, 2008, and as such, we have recorded an impairment charge of$6.7 million during the year ended December 31, 2008.Stock-Based Compensation: In December 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial 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 for Stock Issued to Employees” (“APB No. 25”), and amends SFAS No. 95, “Statement of Cash Flows.” SFASNo. 123 (R) requires entities to recognize compensation expense for all share-based payments to employees and directors,including grants of employee stock options, based on the grant-date fair value of those share-based payments, adjusted forexpected 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. 40Table of ContentsThe 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.The 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 $0.7 million and $1.8 million related to our employee and director stock optionsfor the years ended December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, we granted stockoptions to purchase 1.1 million shares of our common stock. As of December 31, 2008, there was $0.7 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 1.7 years. As of December 31, 2008, there was $0.3 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.In March 2007, and in connection with the separation of the Company’s President, the Company agreed to modifycertain of the President’s stock options such that (1) 120,000 unvested, time-based stock options would vest immediately and(2) of 400,000 performance based stock options, 100,000 would be cancelled and the remaining 300,000 would be extendedsuch that the 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.On January 7, 2008, we 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 our non-executive Chairman of the Board and tobecome a consultant to the company, and Mr. Teti resigned his position as Chief Executive Officer and President. Mr. Tetiretained his previously issued stock options which were modified such that Mr. Teti will continue to vest in accordance with theoriginal terms, except as a non-employee. As a result of the modifications to Mr. Teti’s stock options set forth in the ConsultingAgreement, we recorded 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. Further, related to Mr. Teti’s 833,335 unvested stock optionsat the date of modification, we record stock option expense over the remaining periods those stock options are earned inaccordance with EITF 96-18, “Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or inConjunction with Selling Goods and Services.”Accounting for Legal Matters: As discussed in Note 11 of Notes to Consolidated Financial Statements, set forthelsewhere in this Report, we have settled in principle our class and derivative actions. We have also received threats oflitigation 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 is not recordeduntil it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. We expenseour legal costs as they are incurred and record any insurance recoveries on such legal costs in the period the recoveries arereceived. Although we have not recorded a provision for loss regarding these matters, a loss could occur in a future period. 41Table of ContentsResearch and Development Expenses: Research and development costs are expensed as incurred and include salariesand benefits, 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.Impairment of Long-lived Assets: SFAS No.144 (“SFAS 144”), “Accounting for the Impairment of Long-lived Assetsand for Long-lived Assets to be Disposed Of” addresses financial accounting and reporting for the impairment or disposal oflong-lived assets. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater thanthe projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized.Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we have recorded a fullimpairment on all of our long-lived assets as of December 31, 2008, and as such, we have recorded an impairment charge of$6.7 million during the year ended December 31, 2008 in the consolidated statement of operations.-Results of Operations—Comparison of Years Ending December 31, 2008 and 2007REVENUES. Revenue decreased $0.3 million to $1.1 million for the year ended December 31, 2008, as compared to$1.4 million for the year ended December 31, 2007. 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. Due to our financial statement presentation of ourUnited Kingdom operation as a discontinued operation, our revenue for all periods presented is representative of only Agera, asall historical United Kingdom revenue is reflected in loss from discontinued operations. We believe that the decline in Agera’ssales in fiscal 2008 was due to the general economic conditions during 2008. In addition, for cash conservation purposes, wehave reduced marketing expenses from the prior year. Agera management is undergoing efforts to increase and diversify itscustomer base. We currently expect first quarter 2009 revenue to be approximately $0.2 million.COST OF SALES. Costs of sales decreased $0.1 million to $0.6 million for the year ended December 31, 2008, ascompared to $0.7 million for the year ended December 31, 2007. Our cost of sales relates to the operation of Agera.As a percentage of revenue, Agera cost of sales were approximately 55% for the year ended December 31, 2008 andapproximately 47% for the year ended December 31, 2007. The increase in 2008 cost of sales as a percentage of revenue, ascompared to 2007, is primarily due to inventory reserves recorded during 2008 of less than $0.1 million. Excluding the increasein inventory reserve, Agera cost of sales as a percentage of revenue would have been approximately 46% for the year endedDecember 31, 2008.IMPAIRMENT OF LONG-LIVED ASSETS. Due to the likelihood of bankruptcy and in connection with theCompany’s review for impairment of long-lived assets in accordance with SFAS 144, “Accounting for the Impairment orDisposal of Long-lived Assets,” we have recorded a full impairment on all of our long-lived assets as of December 31, 2008, andas such, we have recorded an impairment charge of $6.7 million during the year ended December 31, 2008 in the consolidatedstatement of operations. 42Table of ContentsSELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreasedapproximately $10.3 million, or 55%, to $8.5 million for the year ended December 31, 2008, as compared to $18.7 million forthe year ended December 31, 2007. The decrease in selling, general and administrative expense is primarily due to thefollowing:a) For the year ended December 31, 2008, there was no severance expense as compared to the year endedDecember 31, 2007. Severance expense and related costs associated with the termination of our former president, pursuantto a settlement agreement executed in June 2007, resulted in an additional $4.6 million of selling, general andadministrative expense for the year ended December 31, 2007 (see Notes 11 and 13 of Notes to Consolidated FinancialStatements).b) Salaries, bonuses and payroll taxes decreased by approximately $1.5 million to $3.8 million for the year endedDecember 31, 2008, as compared to $5.3 million for the year ended December 31, 2007, due to a decrease in the number ofour employees, primarily at the executive management level, which resulted in lower salary expense. In addition to thelower salary expense, there was no bonus expense for the year ended December 31, 2008 as compared to December 31,2007, due to our financial position at December 31, 2008.c) Marketing expense decreased by approximately $0.7 million to $0.1 million for the year ended December 31, 2008,as compared to $0.8 million during the year ended December 31, 2007 due primarily to decreased marketing andpromotional efforts related to marketing and selling our Agera line of advanced skin care systems.d) Travel expense decreased by approximately $0.5 million to $0.2 million for the year ended December 31, 2008, ascompared to $0.7 million for the year ended December 31, 2007 due to the decrease in the number of our employees,primarily at the executive management level, decrease in business development activities during 2008, and focused effortsto conserve cash resources during 2008.e) Other general and administrative expenses decreased by approximately $2.7 million to $4.1 million for the yearended December 31, 2008, as compared to $6.8 million for the year ended December 31, 2007. The majority of thisdecrease, or $1.5 million, was due to 2007 activities which did not occur during 2008, such as costs related to debtrestructuring and business development activities. The remaining decrease of $1.2 million in other general andadministrative expenses are due to cost-saving measures implemented during 2008, including savings related toaccounting and audit expenses, insurance premiums, consultants and other general costs.f) Legal expenses decreased by approximately $0.3 million to $0.3 million for the year ended December 31, 2008, ascompared to $0.6 million for the year ended December 31, 2007. For the years ended December 31, 2008 and December 30,2007, we received $1.3 million and $1.7 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 $1.6 million for the year ended December 31, 2008 and $2.3 millionfor the year ended December 31, 2007. As such, excluding reimbursements of legal defense costs, our legal expenses havedecreased $0.7 million in 2008 from the prior year as a result of the June 2008 mediation efforts which resulted in asettlement in principle related to our class action and derivative action matters. Our legal expenses fluctuate primarily as aresult of the amount and timing of defense costs related to our class action and derivative action matters, as well as a resultof the amount and timing of defense cost reimbursements from our insurance carrier. Such reimbursements are recordedwhen received. We also incurred $0.2 million in legal costs, during the year ended December 31, 2008, related toinvestigating and responding to claims related to our previous United Kingdom operation (see Note 11 — Commitmentsand Contingencies for a discussion of our various legal matters). 43Table of ContentsRESEARCH AND DEVELOPMENT. Research and development expenses decreased by approximately $3.1 millionfor the year ended December 31, 2008 to $10.2 million, as compared to $13.3 million for the year ended December 31, 2007.Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for our IsolagenTherapy for specific dermal applications in the United States, as well as costs related to other potential indications for ourIsolagen Therapy, such as acne scars and burn scars. Also, research and development expense includes costs to developmanufacturing, cell collection and logistical process improvements. Research and development costs primarily includepersonnel and laboratory costs related to these FDA trials and certain consulting costs. The total inception to date cost ofresearch and development as of December 31, 2008 was $54.2 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 product candidate or requires changes in our studyprotocols or in the event that the results of the studies are not consistent with our expectations, the process will be moreexpensive and time consuming. Due to the complexities of the FDA approval process, we are unable to predict what the cost ofobtaining approval for our dermal product candidate will be.The major changes in research and development expenses are due primarily to the following:a) Consulting expense decreased by approximately $1.7 million to $4.9 million for the year ended December 31,2008, as compared to $6.6 million for the year ended December 31, 2007, primarily as a result of decreased expendituresrelated to our Phase III wrinkle/nasolabial fold study, which concluded during 2008.b) Salaries, bonuses and payroll taxes decreased by approximately $0.6 million to $2.4 million for the year endedDecember 31, 2008, as compared to $3.0 million for the year ended December 31, 2007, as a result of decreased employeesengaged in research and development activities. In addition to lower salary expense, there was no bonus expense for theyear ended December 31, 2008 as compared to December 31, 2007, due to our financial position at December 31, 2008.c) Laboratory costs decreased by approximately $0.5 million to $1.0 million for the year ended December 31, 2008, ascompared to $1.5 million for the year ended December 31, 2007, as a result of decreased clinical and manufacturingactivities in our Exton, Pennsylvania location, primarily due to the completion of the Phase III nasolabial folds trialsduring 2008.d) Contract labor support related to our clinical manufacturing operation decreased $0.3 million to $0.2 million forthe year ended December 31, 2008, as compared to $0.5 million for the year ended December 31, 2007, as a result ofdecreased clinical activities in our Exton, Pennsylvania location.e) Facilities, depreciation and travel costs remained constant at $1.7 million for the year ended December 31, 2008and December 31, 2007.LOSS FROM DISCONTINUED OPERATIONS. As discussed above under “—Closure of the United KingdomOperation,” during the three months ended December 31, 2006, the Board of Directors approved the closure of our UnitedKingdom operation. The United Kingdom operation was closed in March 2007.The loss from discontinued operations increased by approximately $2.8 million for the year ended December 31,2008 to $4.5 million, as compared to $1.7 million for the year ended December 31, 2007. The $4.5 million loss fromdiscontinued operations for the year ended December 31, 2008, primarily related to the sale of our Swiss campus in March 2008.In connection with this sale, we recorded a loss on sale of $6.3 million, offset by a foreign currency exchange gain of$2.1 million upon the substantial liquidation of the Swiss subsidiary. The foreign exchange gain recorded during the threemonths ended March 31, 2008 results from removing from the accumulated foreign currency translation adjustment account instockholders’ equity, a credit balance which related to the translation into U.S. dollars of our Swiss franc assets and liabilities.The credit balance which had accumulated, and the resulting gain recorded upon the substantial liquidation of our Swiss francassets, reflected the increase in the value of the Swiss franc relative to the U.S. dollar over the period that we had operated inSwitzerland. Refer to Notes 3 and 5 of Notes to the Consolidated Financial Statements for further discussion regarding the saleof the Swiss campus and results from discontinued operations. Administrative costs and facility costs related to the UnitedKingdom and Swiss operations comprised approximately $0.3 million, net, during the year ended December 31, 2008. 44Table of ContentsThe $1.7 million loss from discontinued operations 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. The $1.1 million loss from discontinued operations during thethree 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.As of December 31, 2008, all previously leased facilities related to discontinued operations have been exited, and allbuildings, property and equipment related to discontinued operations have been sold or otherwise disposed of.INTEREST INCOME. Interest income decreased approximately $0.7 million to $0.2 million for the year endedDecember 31, 2008, as compared to $0.9 million for the year ended December 31, 2007. The decrease in interest income of$0.7 million resulted from a decrease in the amount of cash, cash equivalents and restricted cash balances, as a result of our useof these balances primarily to fund our 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, 2008, ascompared to the year ended December 31, 2007. 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, 2008 and 2007, respectively.MINORITY INTEREST. Minority interest income increased to $1.7 million for the year ended December 31, 2008, ascompared to $0.2 million for the year ended December 31, 2007. The increase in minority interest income of $1.5 million isprimarily due to an impairment charge recorded during the year ended December 31, 2008 of $3.7 million, which related to thefull impairment of the Agera segment intangible assets, and the associated 43% minority interest ownership of Agera.NET LOSS. Net loss decreased $4.2 million to $31.4 million for the year ended December 31, 2008, as compared to anet loss of $35.6 million for the year ended December 31, 2007. This decrease in our net loss primarily represents the effects ofdecreased research and development expenses and general and administrative expenses as a result of decreased spending forclinical trials, the reduction in employees and compensation expense and cost saving measures implemented during 2008, andincreased minority interest income, offset by the impairment charge of $6.7 million related to long-lived assets for the yearended December 31, 2008, the increase in loss from discontinued operations and reductions in interest income, as discussedabove.Liquidity and Capital ResourcesCash FlowsNet cash provided by (used in) operating, investing and financing activities for the two years ended December 31,2008 and 2007 were as follows: Year Ended December 31, 2008 2007 (in millions) Cash flows from operating activities $(20.0) $(29.7)Cash flows from investing activities 6.4 (0.1)Cash flows from financing activities — 14.7 45Table of ContentsOPERATING ACTIVITIES. Cash used in operating activities during the year ended December 31, 2008 amounted to$20.0 million, a decrease of $9.7 million over the year ended December 31, 2007. The decrease in our cash used in operatingactivities over the prior year is primarily due to a decrease in net losses (adjusted for non-cash items) of $12.6 million, offset byoperating cash outflows from changes in operating assets and liabilities. The change in operating assets and liabilities isprimarily due to a large decrease in accrued liabilities (see Note 8 of Notes to the Consolidated Financial Statements) atDecember 31, 2008 as compared to December 31, 2007.Our negative operating cash flows in 2008 were funded from cash on hand at December 31, 2007, which wereprimarily the result of previously completed debt and equity offerings, as well as from the proceeds of the sale of our Swisscampus in March 2008, discussed further below.INVESTING ACTIVITIES. Cash provided by investing activities during the year ended December 31, 2008 amountedto approximately $6.4 million as compared to cash used in investing activities of $0.1 million during the year endedDecember 31, 2007. Investing activities during the year ended December 31, 2008 related primarily to the sale of our Swisscampus in March 2008 for approximately $6.4 million, net of selling costs.FINANCING ACTIVITIES. There were no financing activities during the year ended December 31, 2008, as comparedto $14.7 million cash proceeds from financing activities during the year ended December 31, 2007. In August 2007, we raised$13.8 million, net of offering costs, via the sale of 6.8 million shares of our common stock to institutional investors. In addition,during the year ended December 31, 2007, we received cash proceeds of approximately $0.9 million as a result of stock optionand warrant 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, 2008 2007 (in millions) Cash flows used in operating activities $(0.3) $(2.6)Cash flows provided by investing activities 6.4 0.1 The cash provided by investing activities during the year ended December 31, 2008 of $6.4 million, related to thesale of our Swiss campus, during 2008 is discussed above under “Investing Activities.”Cash flows used in discontinued operations during the year ended December 31, 2007 was $2.6 million. Our UnitedKingdom operation was active during the three months ended March 31, 2007, and was shutdown on March 31, 2007. The netloss from our United Kingdom operation during the three months ended March 31, 2007 was $1.1 million. In addition, accruedexpenses and deferred revenue decreased by $1.2 million during this shutdown period (cash outflows), primarily related to thepayment of severance and refunds to customers.Working CapitalGENERAL: As of December 31, 2008, we had cash and cash equivalents of $2.9 million and negative working capitalof $(87.3) million (including our cash and cash equivalents). We believe our existing capital resources are adequate to financeour operation through approximately the second half of April 2009, under our current reduced operating plan; however, ourlong-term viability is dependent upon our ability to raise additional debt and/or equity to meet our business objectives, theapproval of our products, the successful operation of our business, and our ability to improve our manufacturing process. Weestimate that we will require additional cash resources by the end of the second half of April 2009. As of the date of the filing ofthis annual report, we have no commitments for any such additional funding and there is no assurance that we will receive anysuch additional funding. See “ — Going Concern and Risk of Bankruptcy” above. 46Table of ContentsDEBT: In November 2004, we issued $90.0 million in principal amount of 3.5% convertible subordinated notes dueNovember 1, 2024, although these notes may be due sooner as discussed below. The notes are our general, unsecuredobligations. The notes are subordinated in right of payment, which means that they rank in right of payment behind otherindebtedness of ours. In addition, the notes are effectively subordinated to all existing and future liabilities of our subsidiaries.We will be required to repay the full principal amount of the notes on November 1, 2024 unless they are previously converted,redeemed or repurchased.The notes bear interest at an annual rate of 3.5% from the date of issuance of the notes. We pay interest twice a year,on each 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 to100% of the principal amount of such notes plus accrued and unpaid interest (including additional interest, if any) to, butexcluding, the redemption date.The note holders 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. As the holders have theright to require us to repurchase their notes on November 1, 2009, the notes are recorded as a current liability on ourconsolidated balance sheet as of December 31, 2008, resulting in negative working capital of $(87.3) as of December 31, 2008.Further, approximately $1.6 million of interest is due on May 1, 2009, and we currently do not have the available capitalresources to pay this interest when due.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, 2008.Item 8. Financial Statements and Supplementary DataThe financial statements, including the notes thereto and report of the independent auditors thereon, are included inthis report as set forth in the “Index to Financial Statements.” See F-1 for Index to Consolidated Financial Statements.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None. 47Table of ContentsItem 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresDuring the fourth quarter of 2008, management, including our principal executive officer and principal financialofficer, 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, 2008, 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, assuch term 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 thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles in the United States of America. Our internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition 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 becomeinadequate because 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 managementconcluded that our internal control over financial reporting was effective as of December 31, 2008. This annual report does notinclude an attestation report of our registered public accounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit us to provide only management’s report in this annual report.Changes in Internal ControlsThere was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter thathas materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationSince December 31, 2008, two note holders have converted $2.3 million of the 3.5% Subordinated Notes into247,774 common shares of the Company. 48Table 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 2009 AnnualMeeting of Stockholders which will be filed with the Securities and Exchange Commission no later than April 30, 2009 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, principalfinancial officer, principal accounting officer or controller and any persons performing similar functions. The code of ethics ison our website at www.isolagen.com. We intend to disclose any future amendments to, or waivers from, the code of ethics withinfour business days of the waiver or amendment through a website posting or by filing a Current Report on Form 8-K with theSEC.Item 11. Executive CompensationThe information required by this Item 11 will be included in the Company’s Proxy Statement for the 2009 AnnualMeeting of Stockholders which will be filed with the Securities and Exchange Commission no later than April 30, 2009 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 ProxyStatement for the 2009 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission nolater than April 30, 2009 and is incorporated into this Item 12 by reference.Securities Authorized for Issuance Under Equity Compensation PlansAs of December 31, 2008, 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 issuance Equity compensation plans approved bysecurity holders 4,868,500 $3.49 3,773,652 Equity compensation plans not approved bysecurity holders (1) 3,568,333 $2.42 — Total 8,436,833 $3.04 3,773,652 (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 2009 AnnualMeeting of Stockholders which will be filed with the Securities and Exchange Commission no later than April 30, 2009 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 2009 AnnualMeeting of Stockholders which will be filed with the Securities and Exchange Commission no later than April 30, 2009 and isincorporated into this Item 14 by reference. 49Table 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, 2008 and 2007 • Consolidated Statements of Operations for the years ended December 31, 2008 and 2007 and inception toDecember 31, 2008 • Consolidated Statements of Shareholders’ Equity and Comprehensive Loss from inception to December 31, 2008 • Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 and inception toDecember 31, 2008 • 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.(b) Exhibits.The following exhibits are filed as part of this annual report:EXHIBIT NO. IDENTIFICATION OF EXHIBIT EXHIBITNO. IDENTIFICATION OF EXHIBIT 2 Agreement and Plan of Merger by and among American Financial Holding, Inc., ISO Acquisition Corp.,Isolagen Technologies, Inc., Gemini IX, Inc., and William K. Boss, Jr., Olga Marko and Dennis McGilldated 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., as trustee(11) 4.5 Rights Agreement, dated as of May 12, 2006, by and between the registrant and American Stock Transfer& Trust Company, including the Form of Certificate of Designation, Preferences and Rights of Series CJunior Participating Preferred Stock attached as Exhibit A thereto, the Form of Rights Certificateattached as Exhibit B thereto and the Summary of Rights to Purchase Preferred Stock attached asExhibit 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 AcetiGbmh as Lessor(7) 50Table of Contents EXHIBITNO. IDENTIFICATION OF EXHIBIT 10.4 Intellectual Property Purchase Agreement between Isolagen Technologies, Inc., Gregory M. Keller, andPacGen Partners(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.dated February 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., IsolagenTechnologies, Inc. and Frank DeLape(19) 10.12 Employment Agreement dated March 12, 2007 between Isolagen, Inc. and Steven Trider(23)* 10.13 Settlement Agreement and Release between Susan Stranahan Ciallella and Isolagen, Inc. dated June 8,2007 (24) 10.14 Consulting and Non-Competition Agreement dated January 7, 2008 between Isolagen, Inc. andNicholas L. Teti * (26) 10.15 Employment Agreement dated January 7, 2008 between Isolagen, Inc. and Declan Daly(26)* 10.16 Employment Agreement between Isolagen, Inc. and Todd J. Greenspan, dated March 11, 2008.(27)* 10.17 Agreement related to the Sale of Swiss Real Estate, dated March 19, 2008, between IsolagenInternational, SA and Dernier Batz SA.(27) 10.18 Settlement, Mutual Release and Lease Termination Agreement, dated August 2008, among Isolagen,Inc., Isolagen Technologies, Inc. and Claire O Aceti GmbH.(28) 14 Code of Ethics(9) 21 List of Subsidiaries(23) 23 BDO Seidman, LLP Consent(29) 31.1 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002(29) 31.2 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002(29) 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(29) 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(29) * 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. 51Table of Contents (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) Reserved. (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) Reserved. (23) Previously filed as an exhibit to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006,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, 2008, and is incorporated by referencehereto. (26) 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. (27) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended March 31, 2008, as filed on May 9,2008, and is incorporated by reference hereto. (28) Previously filed as an exhibit to the company’s Form 10-Q for the fiscal quarter ended September 30, 2008, as filed onNovember 6, 2008, and is incorporated by reference hereto. (29) Filed herewith. 52Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Isolagen, Inc. By: /s/ Declan Daly Declan Daly, Chief Executive Officer Date: April 14, 2009Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on 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 April 14, 2009 /s/ Declan DalyDeclan Daly Chief Executive Officer and Director April 14, 2009 /s/ Todd J. GreenspanTodd J. Greenspan Chief Financial Officer April 14, 2009 /s/ Steven MorrellSteven Morrell Director April 14, 2009 /s/ Henry TohHenry Toh Director April 14, 2009 /s/ Marshall G. WebbMarshall G. Webb Director April 14, 2009 /s/ Terry E. VandewarkerTerry E. Vandewarker Director April 14, 2009 /s/ Kenneth A. SelzerKenneth A. Selzer Director April 14, 2009 53Table 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, 2008 and 2007 F-3 Consolidated Statements of Operations for the years ended December 31, 2008 and 2007 and Inception toDecember 31, 2008 (Unaudited) F-4 Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss From Inception toDecember 31, 2008 F-5-14 Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 and Inception toDecember 31, 2008 (Unaudited) F-15 Notes to Consolidated Financial Statements F-16-43 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 31,2008 and 2007 and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive loss,and cash flows for each of the years then ended. We have also audited the statements of shareholders’ equity (deficit) for theperiod from December 28, 1995 (inception) to December 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based onour 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. The Company is not required to have, nor were we engaged to perform, an audit ofinternal control over financial reporting as of December 31, 2008. Our audit for the year ended December 31, 2008 includedconsideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis 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, 2008 and 2007, and the results of its operations and its cash flows for each of theyears then ended and the statements of shareholders’ equity (deficit) for the period from December 28, 1995 (inception) toDecember 31, 2008 in conformity with accounting principles generally accepted in the United States of America.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, has a net capitaldeficit, and the remaining outstanding obligations of the debt balance of $90 million at December 31, 2008 may be put to theCompany in November 2009 that raise substantial doubt about its ability to continue as a going concern. Management’s plan inregard to these matters is also described in Note 2. The financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty./s/ BDO Seidman, LLPHouston, TexasApril 14, 2009 F-2Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Balance Sheets December 31, 2008 2007 Assets Current assets: Cash and cash equivalents $2,854,300 $16,590,720 Restricted cash — 451,382 Accounts receivable, net 338,850 319,674 Inventory, net 467,246 669,119 Other receivables — 29,250 Prepaid expenses 738,652 701,214 Other current assets, net of amortization of $3,121,828 and $0, respectively 624,365 — Current assets of discontinued operations, net 29,992 14,515 Total current assets 5,053,405 18,775,874 Property and equipment, net of accumulated depreciation, impairment andamortization of $6,320,549 and $2,921,651, respectively — 3,395,723 Intangibles, net of amortization and impairment of $5,318,300 and $718,762,respectively — 4,599,538 Other assets, net of amortization of $0 and $2,372,589, respectively — 1,424,456 Assets of discontinued operations held for sale — 11,202,725 Other long-term assets of discontinued operations — 92,874 Total assets $5,053,405 $39,491,190 Liabilities, Minority Interests and Shareholders’ Deficit Current liabilities: Current debt $90,072,286 $— Accounts payable 415,909 403,815 Accrued expenses 1,647,713 4,348,256 Deferred revenue 7,522 — Current liabilities of discontinued operations 209,458 217,822 Total current liabilities 92,352,888 4,969,893 Long term debt — 90,000,000 Other long term liabilities of continuing operations 1,171,638 1,206,721 Long term liabilities of discontinued operations — 107,511 Total liabilities 93,524,526 96,284,125 Commitments and contingencies (see Note 11) Minority interests 177,350 1,858,026 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 41,639 41,640 Additional paid-in capital 131,341,227 129,208,631 Treasury stock, at cost, 4,000,000 shares (25,974,000) (25,974,000)Accumulated other comprehensive income — 718,926 Accumulated deficit during development stage (194,057,337) (162,646,158)Total shareholders’ deficit (88,648,471) (58,650,961)Total liabilities, minority interests and shareholders’ deficit $5,053,405 $39,491,190 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 For the Year Ended December 31, (date of inception) to 2008 2007 December 31, 2008 (Unaudited) Revenue Product sales $1,104,885 $1,400,986 $4,280,374 License fees — — 260,000 Total revenue 1,104,885 1,400,986 4,540,374 Cost of sales 602,511 656,029 1,855,196 Gross profit 502,374 744,957 2,685,178 2008 Impairment of long-lived assets 6,732,754 — 6,732,754 Selling, general and administrative expenses 8,499,307 18,730,863 74,645,392 Research and development 10,173,117 13,298,338 54,162,151 Operating loss (24,902,804) (31,284,244) (132,855,119)Other income (expense) Interest income 181,514 901,262 6,989,291 Other income — 150,138 322,581 Interest expense (3,899,239) (3,899,239) (16,558,080)Minority interest 1,680,676 246,347 2,005,155 Loss before income taxes from continuingoperations (26,939,853) (33,885,736) (140,096,172)Income tax benefit — — 190,754 Loss from continuing operations (26,939,853) (33,885,736) (139,905,418)Loss from discontinued operations, net oftax (4,471,326) (1,687,378) (41,138,234)Net loss (31,411,179) (35,573,114) (181,043,652)Deemed dividend associated with beneficialconversion of preferred stock — — (11,423,824)Preferred stock dividends — — (1,589,861)Net loss attributable to common shareholders $(31,411,179) $(35,573,114) $(194,057,337)Per share information: Loss from continuing operations — basicand diluted $(0.72) $(1.02) $(8.41)Loss from discontinued operations — basicand diluted (0.12) (0.05) (2.47)Deemed dividend associated with beneficialconversion of preferred stock — — (0.69)Preferred stock dividends — — (0.10)Net loss per common share — basic and diluted $(0.84) $(1.07) $(11.67)Weighted average number of basic and dilutedcommon shares outstanding 37,639,492 33,093,370 16,627,354 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 forcash on8/23/98 — $— — $— 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 forserviceson3/1/00 — — — — 68,698 69 (44) — — — — 25 Issuance ofcommonstock forserviceson4/4/00 — — — — 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 ofcommonstock forservices on7/1/01 — $— — $— 156,960 $157 $(101) — $— $— $— $56 Issuance ofcommonstock forservices on7/1/01 — — — — 125,000 125 (80) — — — — 45 Issuance ofcommonstock forcapitalizationof accruedsalaries on8/10/01 — — — — 70,000 70 328,055 — — — — 328,125 Issuance ofcommonstock forconversionofconvertibledebt on8/10/01 — — — — 1,750,000 1,750 1,609,596 — — — — 1,611,346 Issuance ofcommonstock forconversionofconvertibleshareholdernotespayable on8/10/01 — — — — 208,972 209 135,458 — — — — 135,667 Issuance ofcommonstock forbridgefinancing on8/10/01 — — — — 300,000 300 (192) — — — — 108 Retirement oftreasurystock on8/10/01 — — — — — — (50,280) (2,400) 50,280 — — — Issuance ofcommonstock for netassets ofGemini on8/10/01 — — — — 3,942,400 3,942 (3,942) — — — — — Issuance ofcommonstock for netassets ofAFH on8/10/01 — — — — 3,899,547 3,900 (3,900) — — — — — Issuance ofcommonstock forcash 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 ofcommonstock forservices on8/10/01 — — — — 60,000 60 — — — — — 60 Issuance ofcommonstock forcash on8/28/01 — — — — 26,667 27 39,973 — — — — 40,000 Issuance ofcommonstock forservices 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 Comprehensiveloss — — — — — — — — — — — (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 issuedtonon-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 Number of Number of Paid-In Number of Comprehensive Development Equity of 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—4thqtr — — — — — — 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 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 onvested optionsrelated to non-employees—1st qtr — $— — $— — $— $44,849 — $— $— $— $44,849 Compensationexpense onoption awardsissued toemployee anddirectors—1stqtr — — — — — — 151,305 — — — — 151,305 Expense inconnectionwithmodification ofemployee stockoptions —1stqtr — — — — — — 1,262,815 — — — — 1,262,815 Retirement ofrestricted stock — — — — (165) (1) — — — — — (1)Compensationexpense onvested optionsrelated to non-employees—2nd qtr — — — — — — 62,697 — — — — 62,697 Compensationexpense onoption awardsissued toemployee anddirectors—2ndqtr — — — — — — 193,754 — — — — 193,754 Compensationexpense onvested optionsrelated to non-employees—3rd qtr — — — — — — 166,687 — — — — 166,687 Compensationexpense onoption awardsissued toemployee anddirectors—3rdqtr — — — — — — 171,012 — — — — 171,012 Compensationexpense onvested optionsrelated to non-employees—4th qtr — — — — — — (86,719) — — — — (86,719)Compensationexpense onoption awardsissued toemployee anddirectors—4thqtr — — — — — — 166,196 — — — — 166,196 Comprehensiveloss: Net loss — — — — — — — — — — (31,411,179) (31,411,179)Reclassification offoreignexchange gainon substantialliquidation offoreign entities — — — — — — — — — (2,152,569) — (2,152,569)Othercomprehensivegain, foreigncurrencytranslationadjustment — — — — — — — — — 1,433,643 — 1,433,643 Comprehensiveloss — — — — — — — — — — — (32,130,105)Balance 12/31/08 — $— — $— 41,639,492 $41,639 $131,341,227 4,000,000 $(25,974,000) $— $(194,057,337) $(88,648,471)The accompanying notes are an integral part of these consolidated financial statements. F-14Table of ContentsIsolagen, Inc.(A Development Stage Company)Consolidated Statements of Cash Flows Cumulative Period from December 28, 1995 For the Year Ended December 31, (date of inception) to 2008 2007 December 31, 2008 (Unaudited) Cash flows from operating activities: Net loss $(31,411,179) $(35,573,114) $(181,043,652)Adjustments to reconcile net loss to net cash used inoperating activities: Equity awards issued for services 2,132,597 3,026,610 10,025,546 Uncompensated contribution of services — — 755,556 Depreciation and amortization 1,376,863 1,505,218 9,091,990 Provision for doubtful accounts 7,191 11,803 337,309 Provision for inventory reserve 90,342 — 90,342 Amortization of debt issue costs 749,239 749,239 3,121,830 Amortization of debt discounts on investments — — (508,983)Loss on disposal or impairment of long-lived assets 13,059,375 59,871 17,668,477 Foreign exchange gain on substantial liquidationof foreign entity (2,152,569) — (2,286,420)Minority interest (1,680,676) (246,347) (2,005,155)Change in operating assets and liabilities,excluding effects of acquisition: Decrease (increase) in restricted cash 451,383 1,031,815 — Decrease (increase) in accounts receivable (26,367) (187,603) (183,162)Decrease (increase) in other receivables 46,870 268,912 195,346 Decrease (increase) in inventory 111,530 (393,778) (484,825)Decrease (increase) in prepaid expenses 64,362 431,390 (593,856)Decrease (increase) in other assets 42,937 122,149 183,441 Increase (decrease) in accounts payable (6,021) (898,831) 288,240 Increase (decrease) in accrued expenses andother liabilities (2,874,518) 704,436 1,443,390 Increase (decrease) in deferred revenue 7,522 (348,642) (42,574)Net cash used in operating activities (20,011,119) (29,736,872) (143,947,160)Cash flows from investing activities: Acquisition of Agera, net of cash acquired (6,679) — (2,016,520)Purchase of property and equipment (33,337) (184,538) (25,515,170)Proceeds from the sale of property and equipment 6,444,386 57,153 6,542,434 Purchase of investments — — (152,998,313)Proceeds from sales and maturities of investments — — 153,507,000 Net cash provided by (used in) investingactivities 6,404,370 (127,385) (20,480,569)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 — — 135,667 Proceeds from the issuance of preferred stock, net — — 12,931,800 Proceeds from the issuance of common stock, net — 14,672,737 93,753,857 Principle payments on insurance loan (15,336) — (15,336)Cash dividends paid on preferred stock — — (1,087,200)Cash paid for fractional shares of preferred stock — — (38,108)Merger and acquisition expenses — — (48,547)Repurchase of common stock — — (26,024,280)Net cash provided by (used in) financingactivities (15,336) 14,672,737 167,311,660 Effect of exchange rate changes on cash balances (114,335) (1,305) (29,631)Net increase (decrease) in cash and cash equivalents (13,736,420) (15,192,825) 2,854,300 Cash and cash equivalents, beginning of period 16,590,720 31,783,545 — Cash and cash equivalents, end of period $2,854,300 $16,590,720 $2,854,300 Supplemental disclosures of cash flow information: Cash paid for interest $3,150,000 $3,150,000 $12,715,283 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 Financing of insurance premiums 87,623 87,623 Increase in receivable in connection with sale of Swissproperty 27,125 — 27,125 The accompanying notes are an integral part of these consolidated financial statements. F-15Table of ContentsIsolagen, Inc.(A Development Stage Company)Notes to Consolidated Financial StatementsNote 1—Basis of Presentation, Business and OrganizationIsolagen, Inc. (“Isolagen”), a Delaware corporation, is the parent company of Isolagen Technologies, Inc., a Delawarecorporation (“Isolagen Technologies”) and Agera Laboratories, Inc., a Delaware corporation (“Agera”). Isolagen Technologies isthe parent company of Isolagen Europe Limited, a company organized under the laws of the United Kingdom (“IsolagenEurope”), Isolagen Australia Pty Limited, a company organized under the laws of Australia (“Isolagen Australia”), and IsolagenInternational, S.A., a company organized under the laws of Switzerland (“Isolagen Switzerland”). The common stock of theCompany, par value $0.001 per share, (“Common Stock”) is traded on the NYSE Amex exchange (formerly known as theAmerican Stock Exchange or “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 completeline of 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 protocolfor the treatment of nasolabial folds. The randomized, double-blind protocol was submitted to the FDA under the agency’sSpecial Protocol Assessment (“SPA”) regulations. Pursuant to this assessment process, the FDA has agreed that the Company’sstudy design for two identical trials, including patient numbers, clinical endpoints, and statistical analyses, is acceptable to theFDA to form the basis of an efficacy claim for a marketing application. The randomized, double-blind, pivotal Phase III trialswill evaluate the efficacy and safety of Isolagen Therapy against placebo in approximately 400 patients with approximately200 patients enrolled in each trial. The Company completed enrollment of the study and commenced injection of subjects inearly 2007. All injections were completed in January 2008 and top line results from this trial were publically announced inAugust 2008. The data analysis, including safety data, was publically released in October 2008. The related Biologics LicenseApplication was submitted to the FDA in March 2009.During 2006 and prior, the Company sold its aesthetic product primarily in the United Kingdom. However, during thefourth 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, 2008, the Company has been primarily engaged in developing its initial product technology.In the course of its development activities, the Company has sustained losses and expects such losses to continue through atleast 2009. In fiscal 2008 the Company financed its operations primarily through its existing cash. However, the Company nowrequires additional financing. As a result, as described in Note 2, there exists substantial doubt about the Company’s ability tocontinue as a going concern. The Company’s ability to operate profitably is largely contingent upon its success in obtainingfinancing, obtaining regulatory approval to sell one or a variety of applications of the Isolagen Therapy, upon its successfuldevelopment of markets for its products and upon the development of profitable scaleable manufacturing processes. There is noassurance that the Company will be able to obtain any such additional capital as it needs to finance these efforts, through assetsales, equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can begiven that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support theCompany’s growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’soperations would be materially negatively impacted. In addition, even if the Company were to obtain the capital it requires, noassurance can be given that the Company will be able to obtain necessary regulatory approvals, successfully develop themarkets for its products or develop profitable manufacturing methods in the future. F-16Table of ContentsAcquisition and merger and basis of presentationOn August 10, 2001, Isolagen Technologies consummated a merger with American Financial Holdings, Inc. (“AFH”)and Gemini 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 itsmajority-owned subsidiary. All significant intercompany transactions and balances have been eliminated. IsolagenTechnologies was, for accounting purposes, the surviving entity of the Merger, and accordingly for the periods prior to theMerger, the financial statements 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 fromAugust 10, 2001 onward.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, 2008, the Company had cash and cash equivalents of $2.9 million and negative working capital of$(87.3) million. The Company believes that its existing capital resources are adequate to finance its operation throughapproximately the second half of April 2009, under the Company’s current reduced operating conditions. As such, theCompany estimates that it will require additional cash resources prior to or during the second half of April 2009. The Companyhas no commitments for any such additional funding and there is no assurance that the Company will receive any suchadditional funding.Through December 31, 2008, the Company has been primarily engaged in developing its initial product technology.In the course of its development activities, the Company has sustained losses and expects such losses to continue through atleast 2009. In fiscal 2008 the Company financed its operations primarily through its existing cash. However, as discussedabove, the Company now requires additional financing. There exists substantial doubt about the Company’s ability to continueas a going concern.The Company will require additional capital to continue its operations past approximately the second half ofApril 2009. There is no assurance that the Company will be able to obtain any such additional capital as it needs to financethese efforts, through asset sales, equity or debt financing, or any combination thereof, on satisfactory terms or at all.Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimatecapital needs and to support the Company’s growth. If adequate capital cannot be obtained on a timely basis and on satisfactoryterms, the Company’s operations would be materially negatively impacted. If the Company does not obtain additional funding,or does not anticipate additional funding, prior to or during approximately the second half of April 2009, it will likely enterinto bankruptcy and possibly cease operations. Further, if the Company does raise additional cash resources prior to the end ofApril 2009, it may be raised in contemplation of or in connection with bankruptcy.The 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 securities pursuant to this shelf registration. However, in general, companiesthat are under $75 million in market capitalization are limited to selling up to one-third of the value of such company’scommon stock held by non-affiliates in any twelve month period. F-17Table of ContentsThe Company’s ability to complete additional offerings, including any additional offerings under its shelfregistration statement, is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and suchmarket’s reception of the Company and the offering terms. Currently the credit and equity markets both in the United States andinternationally are severely contracted, which will make the Company’s task of raising additional debt or equity capital evenmore difficult. In addition, the Company’s ability to raise additional financing through the issuance of common stock orconvertible securities may be adversely affected by uncertainties regarding the continued listing of the Company’ commonstock on the NYSE Amex (see Note 11). Finally, the Company’s ability to complete an offering may be dependent on the statusof its clinical trials, and in particular, the status of the Biologics License Application related to its indication for nasolabialfolds/wrinkles, which cannot be predicted. There is no assurance that capital in any form would be available to the Company,and if available, on terms and conditions that are acceptable.As a result of the conditions discussed above, 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, among other things, upon its ability to secure additional adequatefinancing or capital prior to or during approximately the second half of April 2009. If the Company is unable to obtainadditional sufficient funds, the Company will be required to terminate or delay its efforts to obtain regulatory approval of one,more than one, or all of its product candidates, curtail or delay the implementation of manufacturing process improvementsand/or delay the expansion of its sales and marketing capabilities. Any of these actions would have an adverse effect on theCompany’s operations, the realization of its assets and the timely satisfaction of its liabilities. If the Company does not obtainadditional funding, or does not anticipate additional funding, prior to or during approximately the second half of April 2009, itwill likely enter into bankruptcy and possibly cease operations. Further, if the Company does raise additional cash resourcesprior to the end of April 2009, it may be raised in contemplation of or in connection with bankruptcy.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company hasrecorded a full impairment on all of its long-lived assets as of December 31, 2008, and as such, has recorded an impairmentcharge of $6.7 million during the year ended December 31, 2008.Note 3—Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Examples include provisions for bad debts and inventory obsolescence,useful lives of property and equipment and intangible assets, impairment of property and equipment and intangible assets,deferred taxes, the provision for and disclosure of litigation and loss contingencies (see Note 11) and estimates and assumptionsrelated to equity-based compensation expense (see Note 13). In addition, management’s assessment of the Company’s ability tocontinue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. Actualresults 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’ deficit. Gains and losses resulting from foreign currency transactions are included inearnings and, other than discussed below, have not been material in any one period. Balances of related after-tax componentscomprising accumulated other comprehensive income included in shareholders’ deficit at December 31, 2007 related solely toforeign currency translation adjustments. F-18Table of ContentsUpon 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. DuringMarch 2008, the Company substantially liquidated the assets of the Company’s Swiss entity (in connection with the sale of theCompany’s Swiss campus; see Assets of Discontinued Operations Held for Sale below). As such, the amount of the accumulatedforeign currency translation adjustment account in stockholders’ deficit which related to the Company’s Swiss franc assets andliabilities was removed from equity by recording income of $2.1 million, which is included in loss from discontinuedoperations in the accompanying consolidated statement of operations for the year ended December 31, 2008.Balances of related after-tax components comprising accumulated other comprehensive income included inshareholders’ deficit at December 31, 2008 and December 31, 2007 are as follows: December 31, 2008 2007 Foreign currency translation adjustment $— $718,926 Accumulated other comprehensive income $— $718,926 Statement of cash flowsFor purposes of the statements of cash flows, the Company considers all highly liquid investments (i.e., investmentswhich, when purchased, have original maturities of three months or less) to be cash equivalents. At December 31, 2008 andDecember 31, 2007, the Company had $0.0 million and $0.5 million of cash restricted related to the payment of the non-cancelable portion of the Exton, Pennsylvania facility lease, due monthly through March 2008, respectively.Concentration of credit riskThe Company maintains its cash primarily with major U.S. domestic banks. The amounts held in these banksgenerally exceed the insured limit of $250,000. The terms of these deposits are on demand to minimize risk. The Company hasnot incurred losses related to these deposits. Cash equivalents are maintained in two financial institutions. The Companyinvests these funds primarily in government securities, money market accounts and demand deposit accounts.Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemedto have a high risk of collectability. Management reviews its accounts receivable on a monthly basis to determine if anyreceivables will potentially be uncollectible. One foreign customer represents 94% and 94% of accounts receivable, net, atDecember 31, 2008 and 2007, respectively. 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 allowance for doubtful accounts related to continuing operations was $25,303 and $18,112 at December 31,2008 and 2007, respectively. The allowance for doubtful accounts related to discontinued operations was $51,354 and $70,840at December 31, 2008 and 2007, respectively.InventoryAgera purchases the large majority of its inventory from one contract manufacturer. Agera accounts for its inventoryon the first-in-first-out method. At December 31, 2008, Agera’s inventory of $0.5 million consisted of $0.2 million of rawmaterials and $0.3 million of finished goods. At December 31, 2007, Agera’s inventory of $0.7 million consisted of $0.1 millionof raw materials and $0.6 million of finished goods.Assets of discontinued operations held for saleIn April 2005, the Company acquired land and a two-building, 100,000 square foot campus (the “Swiss campus”) inBevaix, Canton of Neuchâtel, Switzerland. In March 2008, the Company sold its Swiss campus to a third party forapproximately $6.4 million, net of transaction costs. The net book value of the Swiss campus on the date of sale wasapproximately $12.7 million (or $10.6 million, net of the related cumulative foreign currency translation gain of approximately$2.1 million, as discussed in Foreign Currency Translation above). In connection with this sale of the Swiss campus, theCompany recorded a net loss of $4.2 million which is reflected in loss from discontinued operations in the accompanyingconsolidated statement of operations for the year ended December 31, 2008 (refer to Note 5 for further detail related to the netloss on the sale of the Swiss campus). As of December 31, 2008, $6.4 million of the net sale proceeds had been paid to theCompany, and less than $0.1 million was recorded as a receivable within currents assets of discontinued operations in theaccompanying consolidated balance sheet. F-19Table of ContentsProperty and equipmentProperty and equipment is carried at cost less accumulated depreciation, impairment valuation and amortization.Generally, depreciation and amortization for financial reporting purposes is provided by the straight-line method over theestimated useful life of three years, except for leasehold improvements which are amortized using the straight-line method overthe remaining lease term or the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as anexpense as incurred.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company hasrecorded a full impairment on all of its long-lived assets as of December 31, 2008, and as such, has recorded an impairmentcharge of $6.7 million during the year ended December 31, 2008 in the accompanying consolidated statement of operations.$2.4 million of this $6.7 million impairment charge recorded during the year ended December 31, 2008 related to property andequipment, as discussed in Note 7.Intangible assetsIntangible assets primarily include proprietary formulations and trademarks, which were acquired in connection withthe acquisition of Agera (see Note 4), as well as certain in-process patents. 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. Due to the likelihood ofbankruptcy and in connection with the Company’s review for impairment of long-lived assets in accordance with SFAS 144,“Accounting for the Impairment or Disposal of Long-lived Assets,” the Company has recorded a full impairment on all of itslong-lived assets as of December 31, 2008, and as such, has recorded an impairment charge of $6.7 million during the yearended December 31, 2008. $4.3 million of this $6.7 million impairment charge recorded during the year ended December 31,2008 in the accompanying consolidated statement of operations related to intangible assets, as shown in the table below.Intangible assets are comprised as follows: December 31, 2008 2007 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 (1,063,593) (718,762)Less: Impairment valuation (4,254,707) — Intangible assets, net $— $4,599,538 Debt Issue CostsThe costs incurred in issuing the Company’s 3.5% Convertible Subordinated Notes, including placement agent fees,legal and accounting costs and other direct costs are included in other assets and are being amortized to expense using theeffective interest method over five years, through November 2009. Debt issuance costs, net of amortization, were approximately$0.6 million at December 31, 2008 and approximately $1.4 million at December 31, 2007 and were included in other currentassets, net, at December 31, 2008 and other assets, net, at December 31, 2007 in the accompanying consolidated balance sheets.The unamortized debt issue costs are classified as a current asset at December 31, 2008 because the related debt is classified as acurrent liability at that date (see Note 9).The Company filed registration statements on Form S-3 and Form S-4 (the “Combined Registration Statements”)during July 2007. The Combined Registration Statements related to (1) a proposed exchange offer of new 3.5% convertiblesenior notes due 2024 to the holders of the currently outstanding $90 million, in principal amount, 3.5% convertiblesubordinated notes due 2024 and (2) a proposed offer to the public of an additional $30 million, in principal amount, of new3.5% convertible senior notes due 2024. In August, 2007 the Company decided not to proceed with the offerings covered bythe Combined Registration Statements, and the Combined Registration Statements were subsequently withdrawn by theCompany in August 2007 prior to being declared effective by the SEC. During the year ended December 31, 2007, theCompany incurred $0.8 million of costs related to the Combined Registration Statements. As a result of the Company’swithdrawal of the Combined Registration Statements in August 2007, such $0.8 million of costs were expensed and areincluded in selling, general and administrative expenses in the consolidated statement of operations for the year endedDecember 31, 2007. F-20Table of ContentsTreasury 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.As a result, the Company believes that the requirements of SAB 104 were met as each injection was shipped, as therisk of loss 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 was recognized.Shipping and handling costsAgera charges its customers for shipping and handling costs. Such charges to customers are presented net of the costsof shipping and handling, as selling, general and administrative expense, and are not significant to the consolidated statementsof operations.Advertising costAgera advertising costs are expensed as incurred and include the costs of public relations and certain marketingrelated activities. 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. F-21Table of ContentsClinical trial costs are a significant component of research and development expenses and include costs associatedwith third-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,“Accounting for 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 recognizecompensation expense for all share-based payments to employees and directors, including grants of employee stock options,based on the grant-date fair value of those share-based payments, adjusted for expected forfeitures. The Company adopted SFASNo. 123(R) using the modified prospective application method. Under the modified prospective application method, the fairvalue measurement requirements of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, orcancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service hasnot been rendered that were outstanding as of January 1, 2006 is recognized as the requisite service is rendered on or afterJanuary 1, 2006. The compensation cost for that portion of awards is based on the grant-date fair value of those awards ascalculated for pro forma disclosures under SFAS No. 123. Changes to the grant-date fair value of equity awards granted beforeJanuary 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.Income taxesAn asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxesarise from temporary differences between income tax and financial reporting and principally relate to recognition of revenueand expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax ratesand laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards (“NOLs”). If it is more likely thannot that 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 recordsuch interest as interest expense and would record such penalties as other expense in the consolidated statement of operations.No such charges have been incurred by the Company. As of December 31, 2008 and 2007, the Company had no accrued interestrelated to uncertain 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, 2008, the Company has $63.9 million of unrecognized net deferredtax assets, the large majority of which relates to the future benefit of loss carryforwards. The Company has provided a fullvaluation allowance for the net deferred tax assets. The tax years 2005 through 2008 remain open to examination by the majortaxing jurisdictions to which we are subject. Refer to Note 10 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. F-22Table of ContentsAt December 31, 2008, options and warrants to purchase 8,496,833 million shares of common stock at exercise pricesranging from $0.41 to $9.00 per share were outstanding, but were not included in the computation of diluted earnings per shareas their effect would be antidilutive. Also, 9,828,009 million shares issuable upon the conversion of the Company’s convertiblenotes, at a conversion price of approximately $9.16, were not included as their effect would be antidilutive.At December 31, 2007, options and warrants to purchase 7,892,245 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, 9,828,009 million shares issuable upon the conversion of the Company’s convertible notes,at a conversion 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, accounts payable and convertible subordinateddebentures. The fair values of the Company’s accounts receivable and accounts payable approximate, in the Company’sopinion, their respective carrying amounts. The Company’s marketable debt security investments are carried at fair value. TheCompany’s convertible subordinated debentures were quoted at approximately 15% and 74% of par value at December 31,2008 and 2007, respectively. Accordingly, the fair value of our convertible subordinated debentures was approximately$13.5 million and $66.6 million at December 31, 2008 and 2007, respectively. The Company’s convertible subordinateddebentures are publicly traded, although not actively traded. The fair value of the convertible subordinated debentures areestimated based on primary factors such as (1) the most recent trade prices of the convertible subordinated debentures on or nearthe respective reporting period end and/or (2) the bid and ask prices of the convertible subordinated debentures at the end of thereporting period. Historically, these factors have fluctuated significantly, and these factors are expected to fluctuate in futureperiods. Accordingly, the fair value of the convertible subordinated debentures has historically fluctuated significantly and isexpected to fluctuate in future periods.Recently Issued Accounting Standards Not Yet EffectiveIn December 2007, the Financial Accounting Standards Board released SFAS No. 141-R, “Business Combinations.”This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008, which is any business combination 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. The Company is currently assessing the impact the adoption of thispronouncement will have on the financial statements.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.Agera markets its product in both the United States and Europe. The Company believes that the acquisition of Agera willcomplement the 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. F-23Table of ContentsThe acquisition has been accounted for as a purchase. Accordingly, the bases in Agera’s assets and liabilities havebeen adjusted 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. Less than $0.1 million is due to the selling shareholder as of December 31, 2008.Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company hasrecorded a full impairment on all of its long-lived assets as of December 31, 2008, and as such, has recorded an impairmentcharge of $6.7 million during the year ended December 31, 2008. $3.7 million of this $6.7 million impairment charge recordedduring the year ended December 31, 2008 in the accompanying consolidated statement of operations related to intangibleassets of the Agera segment (refer to Note 15 for additional segment information.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 closing of the Company’s United Kingdom operation. On March 31, 2007, theCompany completed the closure of its United Kingdom manufacturing facility. The United Kingdom operation was located inLondon, England with two locations; a manufacturing site and an administrative site. Both sites were under operating leases.The manufacturing site lease originally expired during February 2010, and during the three months ended September 30, 2008,the Company entered into a settlement and release agreement with the landlord. The settlement and release agreement releasedthe Company from any and all obligations under the lease contract in exchange for a payment of less than $0.1 million, whichwas paid during the three months ended September 30, 2008. In addition, the Company agreed to release its claim on the relatedlease deposit, which was less than $0.1 million. The administrative site lease expired in April 2007. The Company believes thatsubstantially all costs related to the closure of the United Kingdom operation have been incurred by December 31, 2008,excluding any potential claims or contingencies unknown or which cannot be estimated at 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 toits United Kingdom operation of $1.4 million during 2006, which is included in loss from discontinued operations in theconsolidated statement of operations for the year ended December 31, 2006. During March 2008, the Company sold itsbuildings located in Switzerland (see Note 3). All assets, liabilities and results of operations of the United Kingdom, Switzerlandand Australian operations are reflected as discontinued operations in the accompanying consolidated financial statements. Allprior period information has been restated to reflect the presentation of discontinued operations. F-24Table of ContentsThe following sets forth the components of assets and liabilities of discontinued operations as of December 31, 2008and December 31, 2007: December 31, December 31, (in millions) 2008 2007 Accounts receivable, net $— $— Inventory — — Value-added tax refund due — — Other current assets — — Total current assets — — Assets held for sale — 11.2 Long term assets — 0.1 Total assets $— $11.3 Accounts payable $— $— Accrued expenses and other current liabilities 0.2 0.2 Total current liabilities 0.2 0.2 Long term liabilities 0.0 0.1 Total liabilities $0.2 $0.3 The following sets forth the results of operations of discontinued operations for the years ended December 31, 2008and December 31, 2007: December 31, December 31, (in millions) 2008 2007 Net revenue $— $0.2 Gross loss — (0.3)Loss on sale of Swiss campus, before foreign currency gain (6.3) — Operating loss (6.7) (2.0)Foreign exchange gain on substantial liquidation of foreign entity 2.1 — Other income 0.1 0.3 Loss from discontinued operations $(4.5) $(1.7)The following sets forth information about the major components of the United Kingdom operation exit costsincurred during 2007. No such costs were incurred during 2008: Costs Incurred for the Year Ended Cumulative Costs December 31, 2007 Incurred to Date Employee severance $183,222 $467,318 Fixed asset impairment — 1,445,647 Total $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, 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 $— Note 6—Available-for-Sale InvestmentsThe Company had no available-for-sale investments at December 31, 2008 or 2007. Proceeds from the sale ofavailable-for-sale marketable debt securities were $0.0 million for the years ended December 31, 2008 and 2007, respectively,and no realized gains and losses based on specific identification, were included in the results of operations upon those sales. F-25Table of ContentsNote 7—Property and EquipmentProperty and equipment is comprised of: December 31, 2008 2007 Leasehold improvements $3,753,998 $3,751,030 Lab equipment 1,447,218 1,423,840 Computer equipment and software 1,101,097 1,101,097 Office furniture and fixtures 18,236 41,407 6,320,549 6,317,374 Less: Accumulated depreciation and amortization (3,938,622) (2,921,651)Less: Impairment valuation (2,381,927) — Property and equipment, net $— $3,395,723 The amounts of depreciation and amortization expense for the above property and equipment included in thestatement of operations are as follows: Year ended December 31, 2008 2007 Depreciation expense related to continuing operations: Selling, general, administrative,research and development expenses $1,032,032 $1,168,251 Due to the likelihood of bankruptcy and in connection with the Company’s review for impairment of long-livedassets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company hasrecorded a full impairment on all of its long-lived assets as of December 31, 2008, and as such, has recorded an impairmentcharge of $6.7 million during the year ended December 31, 2008. $2.4 million of this $6.7 million impairment charge recordedduring the year ended December 31, 2008 related to property and equipment, as shown in the table above.Note 8—Accrued ExpensesAccrued expenses are comprised of the following: December 31, 2008 2007 Accrued professional fees $479,943 $2,243,319 Accrued settlement fees 325,000 — Accrued compensation 17,570 840,641 Accrued severance — 379,402 Accrued interest 525,000 525,000 Accrued other 300,200 359,894 Accrued expenses $1,647,713 $4,348,256 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. F-26Table of ContentsThe Company used approximately $26 million of the net proceeds to repurchase 4,000,000 shares of its commonstock, of which 2,000,000 shares were repurchased from Frank DeLape, who was then the Chairman of the Board of Directors,Michael Macaluso, a former director and the former President and Chief Executive Officer, Olga Marko, the former Senior VicePresident and Director of Research, Michael Avignon, the former Manager of International Operations, and Timothy J. Till, ashareholder. The purchase price from the insiders, affiliates and founders of the Company listed above was $6.33 per sharewhich represented a 5% discount from the closing price of the Company’s common stock on the American Stock Exchange onOctober 28, 2004, the date the offering of the 3.5% Subordinated Notes was priced. The purchase of the shares from the insiderswas approved by a special committee of independent directors in partial reliance on a fairness opinion issued by an investmentbank. The remaining 2,000,000 shares were repurchased in private transactions at a price of $6.66 per share. The remaining netproceeds of approximately $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 theCompany’s existing and future senior indebtedness. The 3.5% Subordinated Notes are also effectively subordinated to allindebtedness and other 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 inpart, for cash, at a redemption price equal to 100% of the principal amount of the 3.5% Subordinated Notes to be redeemed plusaccrued and 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.In the event a change in control occurs on or before November 9, 2009, the holders of the 3.5% Subordinated Notesmay require the Company to purchase all or a portion of their notes at a purchase price equal to 100% of the principal amount ofthe 3.5% Subordinated Notes to be purchased plus accrued and unpaid interest and the payment of a “make-whole” paymentwhich is based on the date on which the change in control occurs and the price per share paid for the Company’s common stockin such change in control transaction. The Company will be allowed to pay for the repurchase of the 3.5% Subordinated Notesand accrued and unpaid interest in cash or, at its option, shares of its common stock, and the Company will be allowed to makethe make-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(“the Securities Act”). However, the Company was obligated to file with the SEC a shelf registration statement covering resalesof the 3.5% 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. At December 31,2008, the Company has recorded the 3.5% Subordinated Notes as a current liability on the accompanying consolidated balancesheet as the holders may require the Company to purchase all of the 3.5% Subordinated Notes as early as November 2009.Note 10—Income TaxesIsolagen, Inc. and Isolagen Technologies, Inc. file a consolidated U.S. Federal income tax return. During the thirdquarter of 2006, the Company acquired a 57% interest in Agera (see Note 4). Agera files a separate U.S. Federal income taxreturn. The Company’s foreign subsidiaries, which comprise loss from discontinued operations, file income tax returns in theirrespective jurisdictions. The geographic source of loss from continuing operations is the United States. F-27Table of ContentsThe components of the income tax benefit below, which relate solely to continuing operations, are as follows for theyears ended December 31: 2008 2007 United States Current $— $— Deferred — — Foreign Current — — Deferred — — Total income tax benefit $— $— The reconciliation between income tax expense (benefit) at the U.S. federal statutory rate and the amount recorded inthe accompanying consolidated financial statements is as follows for the years ended December 31: 2008 2007 Tax at U.S. federal statutory rate $(9,428,949) $(11,860,007)Increase in domestic valuation allowance 11,238,433 13,833,925 State income taxes before valuation allowance, net of federal benefit (1,790,419) (1,694,287)Other (19,065) (279,631) $— $— The components of the Company’s deferred tax assets (liabilities) at December 31, 2008 and 2007 are as follows: December 31, 2008 2007 Deferred tax assets and liabilities: Loss carryforwards $57,112,820 $50,360,697 Accrued expenses and other 2,625,285 1,568,776 Stock option compensation 2,476,915 2,039,475 Property and equipment 1,708,838 814,503 63,923,858 54,783,451 Less: Valuation allowance (63,923,858) (54,783,451) $— $— As of December 31, 2008, the Company had generated U.S. net operating loss carryforwards of approximately$128.6 million which expire from 2011 to 2027 and net loss carryforwards in certain non-US jurisdictions of approximately$22.9 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, 2008 and 2007. The valuation allowance increased $9.1 million and $14.4 million during2008 and 2007, respectively, due primarily to the Company’s 2008 and 2007 net losses.Note 11—Commitments and ContingenciesFederal Securities LitigationThe Company and certain of its current and former officers and directors are defendants in class action cases pendingin the United 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 onbehalf of a putative class of purchasers of publicly traded Isolagen securities between March 3, 2004 and August 1, 2005. Theselawsuits were Elliot Liff v. Isolagen, Inc. et al., C.A. No. H-05-2887, filed in the United States District Court for the SouthernDistrict of Texas; Michael Cummiskey v. Isolagen, Inc. et al., C.A. No. 05-cv-03105, filed in the United States District Court forthe Southern District of Texas; Ronald A. Gargiulo v. Isolagen, Inc. et al., C.A. No. 05-cv-4983, filed in the United StatesDistrict Court for the Eastern District of Pennsylvania, and Gregory J. Newman v. Frank M. DeLape, et al., C.A. No. 05-cv-5090,filed in the United States District Court for the Eastern District of Pennsylvania. F-28Table of ContentsThe 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 againstthe underwriters of an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. OnNovember 1, 2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied the Company’smotions to dismiss the complaint. On November 6, 2007, the court entered a scheduling order that provides for discovery to becomplete by June 8, 2009. On February 4, 2008, Lead Plaintiffs moved for class certification. On February 15, 2008, LeadPlaintiffs dismissed without prejudice their claims against certain of the underwriters named as defendants in the FederalSecurities Class Action, but maintained claims against CIBC World Markets Corp. and UBS Securities LLC (the“Underwriters”).On April 1, 2008, the court entered an order staying the schedule set forth in its November 6, 2007 order for a periodof 90 days and directing the parties (together with the parties in the Beattie action, described under “Derivative Actions,”below) to participate in mediation before a private mediator. The mediation occurred on June 2, 2008 and June 5, 2008, atwhich the parties reached an agreement in principle to settle the Federal Securities Litigation. On October 23, 2008, the partiesexecuted a definitive settlement agreement. In November 2008, the Company received settlement proceeds of $5.25 millionfrom its directors and officers liability insurance carrier, of which $4.4 million was paid to the class action plaintiffs inDecember 2008 in accordance with the definitive settlement agreement. The $5.25 million cash received by the Company fromthe directors and officers liability insurance carrier, the $4.4 million that the Company paid to the class action plaintiffs, and the$0.3 million which remains due to be paid by the Company to the derivative action plaintiffs (discussed further below) wereeach recorded as selling, general and administrative expense, net, for the year ended December 31, 2008 in the accompanyingstatement of operations. On March 25, 2009, the court entered an order and final judgment approving the settlement anddismissing the Federal Securities Litigation with prejudice. There is no accrual in the accompanying consolidated balance sheetat December 31, 2008 and 2007 with respect to the Federal Securities Litigation.Derivative ActionsThe Company is the nominal defendant in derivative actions (the “Derivative Actions”) pending in State DistrictCourt in Harris County, Texas, the United States District Court for the Eastern District of Pennsylvania, and the Court ofCommon Pleas of Chester County, Pennsylvania.On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840, Carmine Vitale v. FrankDeLape, et al. in the 55th Judicial District Court of Harris County, Texas, and in February 2006, Mr. Vitale filed an amendedpetition. In this action, the plaintiff purports to bring a shareholder derivative action on behalf of the Company against certainof the Company’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. F-29Table of ContentsOn December 2, 2005, the Company filed its answer and special exceptions pursuant to Rule 91 of the Texas Rules ofCivil Procedure based on pleading defects inherent in the Vitale petition. The plaintiff filed an amended petition onFebruary 15, 2006, to which the defendants renewed their special exceptions. On September 6, 2006, the Court granted thespecial exceptions and permitted the plaintiff thirty days to attempt to replead. Thereafter, the plaintiff moved the Court for anorder compelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the Court entered an orderexplaining its grounds for granting the special exceptions. On November 3, 2006, the plaintiff filed a second amended petition.On February 8, 2007, the Company filed its answer and special exceptions to the second amended petition. On August 9, 2007,the Court 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 etal., in the United States District Court for the Southern District of Texas. This action makes substantially similar allegations asthe original complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior tofiling the 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 orabout April 5, 2008, Keene moved the appeals court to stay the appeal for a period of 90 days to permit Keene to participate inthe mediation of the federal securities litigation (described above) and the Beattie derivative litigation (described below). Themediation is described under “Federal Securities Litigation” above.On October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432, William ThomasFordyce v. Frank M. DeLape, et al., in the Court of Common Pleas of Chester County, Pennsylvania. This action makessubstantially similar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to makea demand on the 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 Courtof Common Pleas entered an opinion and order sustaining the preliminary objections and dismissing the complaint withprejudice. 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, etal., in the United States District Court for the Eastern District of Pennsylvania. This action makes substantially similarallegations as the original complaint in the Vitale action.On April 1, 2008, the court entered an order extending the defendants’ time to respond to the complaint for a periodending 150 days from April 1, 2008 and directing the parties, together with the parties to the federal securities litigationdescribed above, to mediation before a private mediator. The mediation is described under “Federal Securities Litigation”above.The mediation occurred on June 2, 2008 and June 5, 2008, at which the parties reached an agreement in principle tosettle the Keene and Beattie Derivative Actions, and on January 27, 2009, the parties executed a definitive settlementagreement. The settlement is subject to court approval. The court has scheduled a hearing to consider whether to approve thesettlement for May 12, 2009. The proposed settlement of the Keene and Beattie Derivative Actions provides for the Company tomake certain payments of attorneys’ fees and expenses to counsel for Keene and Beattie. Those payments are to be made by theCompany from proceeds previously received by the Company from its directors and officers liability insurance. An accrual of$0.3 million and $0.0 million has been recorded in the accompanying consolidated balance sheets at December 31, 2008 and2007, respectively, in connection with the proposed settlement. F-30Table of ContentsIndemnity 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 Mr. Tomz’sdefense costs to date amount to in excess of 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 could potentially be liable to reimburse Mr. Tomz for the reasonable and necessary costsof defense in the Keene case and in the putative securities cases, both of which have been resolved by settlement, as describedabove. The Company has refused to pay the amount of fees and expenses for which Mr. Tomz has sought reimbursementbecause it believes they are excessive, duplicative and have not been properly segregated between reimbursable and non-reimbursable claims. The Company has negotiated an acceptable compromise for the amounts billed by Mr. Tomz’s localPennsylvania counsel for an amount less than $0.1 million.Prior to the resolution of the various derivative actions, Mr. Tomz filed a demand for arbitration seeking advancementof his defense costs. He subsequently agreed to stay those proceedings. At present, Mr. Tomz has not sought to lift this stay andit is 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, 2008 with respect to Mr. Tomz’s existing defense costs in dispute.UnderwritersThe Underwriters have each demanded that the Company indemnify, hold harmless and defend them with respect tothe claims asserted in the putative securities actions. The total amount demanded to date is approximately $0.8 million. TheUnderwriters demands for indemnification were a subject of the ongoing mediation efforts described under “Federal SecuritiesLitigation” above, and as part of the proposed settlement of the Federal Securities Litigation the Underwriters agreed to releasetheir claims for indemnification. Accordingly, no accrual has been recorded in the accompanying consolidated balance sheets atDecember 31, 2008 and December 31, 2007 in connection with the Underwriters original demand of approximately$0.8 million.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 “Form10-K”), that the Company and Susan Ciallella had reached an understanding pursuant to which Ms. Ciallella would resign fromthe Company 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 $20,000payment to 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 claimsrelating to her termination; F-31Table of Contents(iii) $5,000 paid during June 2007 in connection with Ms. Ciallella’s release of claims under the Age Discriminationin Employment Act;(iv) $159,245 paid during June 2007 for the reimbursement of Ms. Ciallella’s legal fees in connection with thenegotiation and 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 8).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 subsequent to June 30, 2007. Accordingly, for the year ended December 31, 2007,the Company recorded total termination costs of approximately $4.6 million, as follows: 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 above, approximately $133,000 related to the Board of Directors’ SpecialCommittee legal counsel retained in connection with the Ciallella matter and was paid directly by the Company. Less than$10,000 related to the legal fees of one the Company’s Board members in connection with the Ciallella matter was paid directlyby the Company. Also, less than $10,000 related to the legal fees of the Company’s Chief Executive Officer in connection withthe Ciallella matter was paid directly by the Company. The Company pursued reimbursement of the amounts paid in excess ofMs. Ciallella’s contractual severance, plus defense costs, from its insurance carriers and in November 2008, the Companyreceived $0.3 million of reimbursements. As of December 31, 2008, all amounts due to Ms. Ciallella had been paid.United Kingdom Customer SettlementDuring 2005, the Company began an informal study and surveyed a number of patients who had previously receivedthe Isolagen 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. F-32Table of ContentsDuring the first quarter of 2006, the Company received a number of complaints from certain patients who had learnedof the limited re-treatment program and also learned that a number of physicians with dissatisfied patients were generatingpublic ill-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 have qualified for re-treatment and in addition to the criteriaset forth above, the patient would be treated by a physician identified by the Company who would treat these patients pursuantto a protocol. 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 would be retreated.The Company made this offer to approximately 290 patients during late March 2006. Accordingly, the Companybelieved its range of liability was between £290,000 (or approximately $0.5 million), assuming all 290 patients were to choosethe £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 year ended December 31, 2007, payments and retreatments to patients reduced the accrual by approximately$0.1 million. As of December 31, 2008, the accrual, which is included in current liabilities of discontinued operations in theconsolidated balance sheet, was $0.1 million. As discussed in Note 5, on March 31, 2007, the Company completed the closureof its United Kingdom manufacturing facility.United Kingdom ClaimsSubsequent to the Company’s public announcement regarding the closure of the United Kingdom operation, theCompany received negative publicity and negative correspondence from former patients in the United Kingdom that previouslyreceived the Company’s treatment. To date, the Company received written demand by an attorney representing approximately132 former patients, as of December 31, 2008, each claiming negligent misstatements were made and each claiming, on average,£3,500 (or approximately $5,250), plus unquantified interest and incidental expenses. The Company has responded to thewritten demand and is in the process of evaluating the merits of the claims. To date, no formal legal action has been brought bythe attorney against the Company, and no provision has been recorded in the consolidated financial statements related to thismatter.During 2008, the Company received written correspondence from one former patient claiming physical injuryallegedly from the use of Isolagen Therapy. The Company believes this claim is without merit. To date, no formal legal actionhas been brought by the former patient against the Company, and no provision has been recorded in the consolidated financialstatements related to this matter.NYSE Amex NoncomplianceOn March 17, 2009, the Company received notice from the NYSE Amex (the “Exchange”) notifying the Company itis not in compliance with Section 1003(a)(iv) of the Exchange’s Company Guide (the “Company Guide”). Specifically, theExchange staff noted that the Company sustained losses which are so substantial in relation to its overall operations or itsexisting financial sources that is appears questionable, in the opinion of the Exchange, as to whether the Company will be ableto continue operations and/or meet its obligations as they mature. As previously disclosed, the Company received a notice fromthe Exchange on March 12, 2008, advising the Company that it was not in compliance with Sections 1003 (a)(i)-(iii) of theCompany Guide.The Company currently intends to submit a plan in response to the most recent notice by April 17, 2009 outlining itscompliance strategy with the current continued listing deficiency by September 14, 2009, subject to the Company successfullycompleting a sufficient financing transaction or strategic partnership prior to April 17, 2009. As of the date of the filing of thisannual report, the Company has no commitments for any such additional funding and there is no assurance that the Companywill receive any such additional funding. If the Company submits a plan and if the plan to regain compliance is accepted by theExchange, the Company may be able to continue its listing during this period, during which time it will be subject to periodicreview to determine progress consistent with the plan. If the Company does not submit a plan or if the plan is not accepted bythe Exchange, the Company will be subject to delisting procedures as set forth in the Company Guide. Under Company Guiderules, the Company has the right to appeal the determination by the Exchange staff to initiate delisting proceedings and to seeka hearing before an Exchange Panel. The time and place of such a hearing will be determined by the Panel. If the Panel does notgrant the relief sought by the Company, its securities could be delisted from the Exchange. There is no assurance that theExchange staff will accept the Company’s plan of compliance or that, even if such plan is accepted, the Company will be ableto implement the plan within the prescribed timeframe. F-33Table of ContentsIn addition, the Exchange’s notice states that the Company’s common stock has closed at between $0.15 and $0.87per share over the last six months, and that the Staff is concerned that, as a result of the low selling price, the Company’scommon stock may not be suitable for auction market trading. Pursuant to Section 1003(f)(v) of the Company Guide, theExchange has notified the Company that it deems it appropriate that the Company effect a reverse stock split within areasonable amount of time in view of the fact that the Company’s common stock has been selling for a substantial period oftime at a low price per share.LeasesThe Company has entered into a lease for office, warehouse and laboratory facilities in Exton, Pennsylvania under athird party non-cancelable operating lease through 2013. Future minimum lease commitments at December 31, 2008 are asfollows: Year Ending December 31, 2009 $1,177,570 2010 1,177,570 2011 1,177,570 2012 1,177,570 2013 294,393 Thereafter — Total $5,004,673 For the years ended December 31, 2008 and 2007, rental expense totaled $1.5 million and $1.7 million, respectively,(which includes rent expense related to discontinued operations of $0.1 million and $0.4 million for the years endedDecember 31, 2008 and 2007, respectively).In April 2005, the Company entered into a non-cancelable three year operating lease for approximately 86,500 squarefeet in Exton, Pennsylvania. This facility houses members of the senior management team, quality and manufacturingpersonnel, and the corporate finance department. The Company began constructing a production line in a portion of this facilityin anticipation of eventual FDA approval. The facility was completed during September 2005. This production line is expectedto be utilized for the production of clinical supplies. During 2007, the Company extended the lease through March 31, 2013.The Company amortizes its leasehold improvements related to this facility through March 31, 2013. Lease expense isrecognized on a straight-line basis through March 31, 2013. The Exton, Pennsylvania minimum lease payments are included inthe future minimum lease commitments table above through March 31, 2013.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 pershare, at an offering price of $6 per share. After deducting the costs and expenses associated with the sale, the Companyreceived net cash 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 declaredeffective by the SEC. The shelf registration allowed 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 6,767,647shares 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. However, in general,companies that are under $75 million in market capitalization are limited to selling up to one-third of the value of suchcompany’s common stock held by non-affiliates in any twelve month period.Refer to the consolidated statement of shareholders’ equity (deficit) and comprehensive loss for common stocktransactions from the period December 28, 1995 through December 31, 2008. F-34Table of ContentsTreasury StockIn November 2004, the Company repurchased 4,000,000 shares of its common stock for an aggregate ofapproximately $26.0 million, of which 2,000,000 shares were repurchased from Frank DeLape, who was then the Chairman ofthe Board of Directors, Michael Macaluso, a former director and the former President and Chief Executive Officer, Olga Marko,the former Senior Vice President and 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 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,par value $0.001 per share, at an offering price of $3.50 per share. Each share of Series A Preferred Stock was convertible intotwo shares of common stock at any time after issuance and accrued dividends at 8% per annum payable in cash or additionalshares of Series A Preferred Stock. In conjunction with this private offering, the Company issued to the placement agentwarrants to purchase 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 onthe dates that the preferred stock sold or was issued as a dividend had a range of $2.30 — $5.40 per common share. Inaccordance with EITF 00-27 this created a beneficial conversion to the holders of the preferred stock and a deemed dividend tothe preferred stockholders totaling $10.2 million was recorded by the Company with a corresponding amount recorded asadditional paid-in capital. The deemed dividend associated with the beneficial conversion is calculated as the differencebetween the fair value of the underlying common stock less the proceeds that have been received for the Series A PreferredStock limited to the value of the proceeds received.In May 2003, the Company sold in a private offering 155,750 shares of Series B Convertible Preferred Stock, parvalue $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 millionshares of common stock. F-35Table 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 SFASNo. 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 underSFAS No. 123(R). The Company recorded $0.7 million and $1.8 million of compensation expense, net of tax, during the yearsended December 31, 2008 and 2007, respectively, for stock option awards to employees and directors based on the estimatedfair values, at the grant dates, of the awards. In addition, refer to Equity Instruments Issued for Services for discussion below ofadditional stock option expense incurred by the Company in accordance with EITF 96-18. F-36Table of ContentsThe weighted average fair market value using the Black-Scholes option-pricing model of the options granted was$0.92 and $1.91 for the years ended December 31, 2008 and 2007, respectively. The fair market value of the stock options at thedate of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, 2008 2007 Expected life (years) 5.8 4.1 Interest rate 2.9% 4.8%Dividend yield — — Volatility 92% 76%The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant, which term is consistent withthe expected life of the stock options. Expected volatility is based on the Company’s historical experience. Expected liferepresents the period of time that options are expected to be outstanding and is based on the Company’s historical experience orthe simplified method, as permitted by SEC Staff Accounting Bulletin No. 107 where appropriate. Expected dividend yield wasnot considered 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.There were no stock options exercised during the year ended December 31, 2008, resulting in zero cash proceeds tothe Company. There were 16,666 stock options exercised during the year ended December 31, 2007, resulting in cash proceedsto the Company of less than $0.1 million. The exercised options in 2007 had an intrinsic value of less than $0.1 million. Asummary of option activity for the year ended December 31, 2008 is as follows: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term Value Outstanding at January 1, 2008 7,723,999 $3.45 Granted 1,132,000 1.27 Exercised — — Forfeited (419,166) 5.89 Outstanding at December 31, 2008 8,436,833 3.04 5.30 $— Options exercisable at December 31, 2008 6,207,662 $3.49 4.89 $— The following table summarizes the status of the Company’s non-vested stock options since January 1, 2008: Non-vested Options Weighted- Number of Average Fair Shares Value Non-vested at January 1, 2008 2,546,838 $1.43 Granted 1,132,000 0.92 Vested (1,262,167) 1.27 Forfeited (187,500) 2.03 Non-vested at December 31, 2008 2,229,171 $1.22 The total fair value of shares vested during the years ended December 31, 2008 and 2007 was $1.6 million and$2.1 million, respectively. As of December 31, 2008, there was $0.7 million of total unrecognized compensation cost related tonon-vested director and employee stock options which vest over time. That cost is expected to be recognized over a weighted-average period of 1.7 years. As of December 31, 2008, there was $0.3 million of total unrecognized compensation cost related toperformance-based, non-vested employee stock options. That cost will begin to be recognized when the performance criteriawithin the respective performance-base option grants become probable of achievement. F-37Table of Contents2001 Stock Option and Stock Appreciation Rights PlanEffective August 10, 2001, the Company adopted the Isolagen, Inc. 2001 Stock Option and Stock AppreciationRights Plan (the “2001 Stock Plan”). The 2001 Stock Plan is discretionary and allows for an aggregate of up to 5,000,000 sharesof the Company’s common stock to be awarded through incentive and non-qualified stock options and stock appreciationrights. The 2001 Stock Plan is administered by the Company’s Board of Directors, who has exclusive discretion to selectparticipants who will receive the awards and to determine the type, size and terms of each award granted. As of December 31,2008, there were 2,923,500 options outstanding under the Stock Plan and 1,450,834 options are available to be issued underthe Stock Plan.During the three months ended March 31, 2008, the Company issued under the 2001 Stock Plan the following ten-year life option grants to Mr. Declan Daly, Chief Executive Officer: (a) an option to purchase 350,000 shares of common stockat an exercise price of $2.36, which vests in twelve equal quarterly installments commencing March 31, 2008; and (b) aperformance stock option to purchase 100,000 shares of common stock at an exercise price of $2.36 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.Further, during the three months ended March 31, 2008, the following options grants were issued: (1) options issuedto nine employees to purchase a total of 102,000 shares of common stock at an exercise price of $0.61, which vest in equalannual installments over three years and have a five year life, (2) an option issued to the Company’s Chief Financial Officer topurchase 200,000 shares of common stock at an exercise price of $0.48, which vests in equal annual installments over threeyears and have a ten year life and (3) performance options issued to two consultants to purchase 200,000 shares of commonstock at an average exercise price of $0.51 (or exercise price range of $0.41 to $0.61), which vest upon the attainment of certainperformance criteria. No compensation cost has been recorded for the performance stock option grants as the Company does notcurrently believe that the vesting events are probable of occurrence. A total of 952,000 stock options were granted during thethree months ended March 31, 2008 under the 2001 Stock Plan.The grant date fair value of the employee performance option awards issued during the three months ended March 31,2008 was approximately $0.2 million. This fair value of $0.2 million, or any portion thereof, will not be recognized ascompensation expense until the vesting of the award becomes probable. The fair value of the total non-employee performanceawards issued during the three months ended March 31, 2008 was less than $0.1 million as of March 31, 2008. Compensationexpense related to the non-employee performance option awards will not be recognized until vesting of the awards occur, andthe actual amount of expense will be based upon the valuation factors in effect at that time.During the three months ended June 30, 2008, the Company issued to its six independent Board of Director members,under the 2001 Stock Plan, a total of 180,000 options to purchase its common stock with an exercise price of $0.62 per shareand a ten year maximum contractual life. The options vested one-fourth upon grant and one-fourth over the three remainingfiscal quarters of 2008.No stock options were issued during the six months ended December 31, 2008 under the 2001 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 tothree employees, 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 of102,500 options to four employees with an exercise price of $3.38 per share, which have a five year maximum contractual lifeand which vest annually over a three year period from the date of grant and (2) a total of 50,000 performance-based options toone employee 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.During the three months ended December 31, 2007, the Company issued, under the 2001 Stock Plan, 30,000 optionsto one newly appointed board member, with exercise price of $3.14, with a contractual life of 10 years and a cliff-vesting periodof one year. F-38Table of Contents2003 Stock Option and Stock Appreciation Rights PlanOn January 29, 2003, the Company’s Board of Directors approved the 2003 Stock Option and Appreciation RightsPlan (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, 2008, there were1,640,000 options outstanding under the 2003 Stock Plan and 610,000 shares were available for issuance under the 2003 StockPlan. No options have been granted under the 2003 Stock Plan since November 2006.2005 Equity Incentive PlanOn April 26, 2005, the Company’s Board of Directors approved the 2005 Equity Incentive Plan (the “2005 StockPlan”). The 2005 Stock Plan is discretionary and allows for an aggregate of up to 2,100,000 shares of the Company’s commonstock to be awarded through incentive and non-qualified stock options, stock units, stock awards, stock appreciation rights andother stock-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, 2008, there were 305,000 options outstanding and 1,712,818 shares wereavailable for issuance under the 2005 Stock Plan. No options have been granted under the 2005 Stock Plan since June 2006.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.Modification of Stock OptionsOn January 7, 2008, the Company and Mr. Nicholas L. Teti, Jr. entered into a consulting and non-competitionagreement (the “Consulting Agreement”), pursuant to which Mr. Teti agreed to continue as the Company’s non-executiveChairman of the Board and to become a consultant to the Company, and Mr. Teti resigned his position as Chief ExecutiveOfficer and President of the Company. Pursuant to the Consulting Agreement, Mr. Teti’s original employment agreement, datedJune 5, 2006, was terminated and the parties agreed that he was owed no severance payments under the original employmentagreement. Mr. Teti retained his previously issued stock options which were modified such that Mr. Teti will continue to vest inaccordance with the original terms, except as a non-employee. As a result of the modifications to Mr. Teti’s stock options setforth in the Consulting Agreement, the Company recorded a non-cash compensation charge during the three months endedMarch 31, 2008 of approximately $1.3 million related to Mr. Teti’s 1,166,665 vested stock options on the date of modification.Further, stock compensation expense relating to the 833,335 unvested stock options Mr. Teti held at the time ofmodification are being recorded as stock option expense over the remaining periods those stock options are earned inaccordance with EITF 96-18, “Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or inConjunction with Selling Goods and Services.” These stock options vest ratably through June 30, 2009.In connection with the separation of the Company’s former President (see Note 7), the Company agreed on March 16,2007 to modify certain of her stock options such that (1) 120,000 unvested, time-based stock options would vest immediatelyand (2) of 400,000 performance based stock options, 100,000 would be cancelled and the remaining 300,000 would beextended such that the 300,000 options would expire 10 years from the original grant date, as opposed to expiring upontermination 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. F-39Table of ContentsRestricted StockAs of December 31, 2008 and December 31, 2007, 0 shares and 166 shares of unvested restricted stock wereoutstanding, respectively.Other Stock OptionsThe Company has not issued any options outside the 2001 Stock Plan, the 2003 Stock Plan or the 2005 Stock Plansince June 2006. As of December 31, 2008 and 2007, there were 3,568,333 nonqualified stock options outstanding outside ofthe shareholder approved plans discussed above.The Company’s Chairman of the Board was issued 500,000 options to purchase the Company’s common stock withan exercise price of $1.88 per share issued in June 2006. These options have a ten year maximum contractual life and theoptions have identical vesting terms to the Performance Stock Option Grant issued to the Company’s President under the 2005Stock 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. The fair value of the award will not be recognized as compensation expense until the vesting of the awardbecomes probable.Equity Instruments Issued for ServicesAs of December 31, 2008, the Company had outstanding 1,436,935 warrants and options issued to non-employeesunder consulting agreements. The following sets forth certain information concerning these warrants and options: Vested Warrants and options outstanding 1,270,268 Range of exercise prices $1.50-6.00 Weighted average exercise price $2.97 Expiration dates 2009-2016 Unvested Warrants and options outstanding 166,667 Exercise price $1.88 Weighted average exercise price $1.88 Expiration date 2016 All of the above unvested equity instruments relate to the Company’s former Chief Executive Officer and currentChairman, as of December 31, 2008. Expense related to these contracts was $0.2 million and less than $0.1 million for the yearsended December 31, 2008 and 2007, respectively. This expense, which is in addition to the stock option expense related toemployees and directors based on the grant date fair value discussed above, was calculated using the Black Scholes option-pricing model based on the following assumptions: Expected life (years) 3.5-4.3 YearsInterest rate 1.0-3.13%Dividend yield —Volatility 100-142%Further, there were 60,000 and 168,246 warrants outstanding as of December 31, 2008 and as of December 31, 2007,which were primarily issued in connection with past equity offerings. During the year ended December 31, 2007, there were520,010 warrants exercised. Of the warrants exercised during the year ended December 31, 2007, 463,370 were exercised viacash payment of the $1.93 exercise price, and the remaining 56,640 warrants were exercised via net share exercise. In total,492,613 shares of common stock were issued during 2007 as a result of these warrants exercised and $0.9 million of cashproceeds were received by the Company in connection with the payment of the related warrant exercise price. The intrinsicvalue of the warrants exercised during the year ended December 31, 2007 was $1.1 million. There were no warrants exercisedduring the year ended December 31, 2008. F-40Table of ContentsNote 14—Certain Relationships and Related-Party TransactionsFive 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 2008, theCompany advanced an aggregate of $0.5 million, or less than $0.1 million per person, for legal expenses incurred on behalf ofthose five Board members and seven former officers and directors in connection with their defense in those proceedings. During2007, the Company advanced an aggregate of $0.8 million, or approximately $0.1 million per person, for legal expensesincurred on behalf of those five Board members and seven former officers and directors in connection with their defense in thoseproceedings. Refer to Note 11 for a discussion of the related settlements in principle and reimbursements of associated legalexpenses.Since June 2005, Mr. Ralph De Martino, a member of the Company’s Board of Directors until June 2008, has been amember of the law firm Cozen O’Connor in the firm’s Washington, DC office. From January 2003 until June 2005, Mr. DeMartino was the managing partner of the Washington, DC office of the law firm Dilworth Paxson LLP. Fees paid by theCompany to Cozen O’Connor during 2008 and 2007 were $0.3 million and $0.7 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 13, Equity BasedCompensation, for discussion of the January 2008 departure of our former Chief Executive Officer.Note 15—Segment Information and Geographical informationWith the acquisition of Agera on August 10, 2006 (see Note 4), the Company now has two reportable segments:Isolagen Therapy and Agera. Prior to the acquisition of Agera, the Company reported one reportable segment. The IsolagenTherapy segment specializes in the development and commercialization of autologous cellular therapies for soft tissueregeneration. The Agera segment maintains proprietary rights to a scientifically-based advanced line of skincare products. Thefollowing table provides operating financial information for the continuing operations of the Company’s two reportablesegments: Segment Isolagen Year Ended December 31, 2008 Therapy Agera Consolidated External revenue $— $1,104,885 $1,104,885 Intersegment revenue — — — Total operating revenue — 1,104,885 1,104,885 Cost of revenue — 602,511 602,511 Impairment of long-lived assets during fiscal year 2008 2,989,930 3,742,824 6,732,754 Selling, general and administrative expense 7,811,172 688,135 8,499,307 Research and development expense 10,173,117 — 10,173,117 Management fee (357,000) 357,000 — Total operating expenses 20,617,219 4,787,959 25,405,178 Operating loss (20,617,219) (4,285,585) (24,902,804)Interest income 181,478 36 181,514 Interest expense (3,899,239) — (3,899,239)Minority interest — 1,680,676 1,680,676 Segment loss $(24,334,980) $(2,604,873) $(26,939,853) Supplemental information related to continuing operations Depreciation and amortization expense $1,050,024 $326,839 $1,376,863 Capital expenditures 33,337 — 33,337 Equity awards issued for services 2,132,597 — 2,132,597 Amortization of debt issuance costs 749,239 — 749,239 Total assets, including assets from discontinued operations 4,019,714 1,033,691 5,053,405 Property and equipment, net — — — Intangible assets, net — — — An intercompany receivable of $1.0 million, due from the Agera segment to the Isolagen Therapy segment, iseliminated in consolidation. This intercompany receivable is primarily due to the intercompany management fee charge toAgera by Isolagen, 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. F-41Table of Contents Segment Year Ended December 31, 2007 IsolagenTherapy 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 Interest expense 150,138 — 150,138 Minority interest (3,899,239) — (3,899,239)Income tax benefit — 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 3,026,610 — 3,026,610 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, iseliminated in consolidation. This intercompany receivable is primarily due to the intercompany management fee charge toAgera by Isolagen, 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.Geographical information concerning the Company’s continuing operations and assets is as follows: Revenue Year ended December 31, 2008 2007 United States $312,139 $368,784 United Kingdom 712,105 967,313 Other 80,641 64,889 $1,104,885 $1,400,986 During 2008, revenue from one foreign customer and one domestic customer represented 64% and 20% ofconsolidated revenue, respectively. During 2007, revenue from one foreign customer and one domestic customer represented69% and 16% of consolidated revenue, respectively. F-42Table of ContentsAs of December 31, 2008 and December 31, 2007, one foreign customer represented 94% and 94%, respectively, ofaccounts receivable, net. Property and Equipment, net As of December 31, 2008 2007 United States $— $3,395,723 Intangible Assets, net As of December 31, 2008 2007 United States $— $4,599,538 F-43Table of ContentsEXHIBIT INDEX EXHIBIT NO. IDENTIFICATION OF EXHIBIT 23 BDO Seidman, LLP Consent 31.1 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 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 datedApril 14, 2009 relating to the consolidated financial statements, which is incorporated by reference in this Form 10-K. Ourreport contains an explanatory paragraph regarding the Company’s ability to continue as a going concern./s/ BDO Seidman, LLPHouston, TexasApril 14, 2009 Exhibit 31.1CERTIFICATIONI, Declan Daly, Chief Executive 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: April 14, 2009 By: /s/ Declan DalyDeclan Daly Chief Executive Officer Isolagen, Inc. Exhibit 31.2CERTIFICATIONI, Todd J. Greenspan, 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: April 14, 2009 By: /s/ Todd J. GreenspanTodd J. Greenspan Chief Financial Officer Isolagen, Inc. Exhibit 32.1CERTIFICATION 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 of Isolagen, Inc. (the “Company”), hereby certifies that: i. the Annual Report on Form 10-K of the Company for the year ended December 31, 2008, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements ofSection 13(a) or 15(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 andresults of operations of the Company.Dated: April 14, 2009 By: /s/ Declan DalyDeclan Daly Chief Executive Officer Isolagen, Inc. Exhibit 32.2CERTIFICATION 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 of Isolagen, Inc. (the “Company”), hereby certifies that: i. the Annual Report on Form 10-K of the Company for the year ended December 31, 2008, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements ofSection 13(a) or 15(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 andresults of operations of the Company.Dated: April 14, 2009 By: /s/ Todd J. GreenspanTodd J. Greenspan Chief Financial Officer Isolagen, Inc.

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