Isolagen Inc - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

OR

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	001-31564	87-0458888
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation)		Identification No.)

405 Eagleview Boulevard

Exton, Pennsylvania 19341

(Address of principal executive offices, including zip code)

(484) 713-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange 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. x Yes o No

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

As of October 29, 2007, issuer had 41,639,657 shares of issued and 37,639,657 shares outstanding common stock, par value $0.001.

TABLE OF CONTENTS

		PAGE

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets September 30, 2007 (unaudited) and December 31, 2006 (unaudited)	1

	Consolidated Statements of Operations Three months ended September 30, 2007 (unaudited) and September 30, 2006 (unaudited)	2

	Consolidated Statements of Operations Nine months ended September 30, 2007 (unaudited) and September 30, 2006 (unaudited) and cumulative period from inception to September 30, 2007 (unaudited)	3

	Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss From inception to September 30, 2007 (unaudited)	4

	Consolidated Statements of Cash Flows Nine months ended September 30, 2007 (unaudited) and September 30, 2006 (unaudited) and cumulative period from inception to September 30, 2007 (unaudited)	13

	Notes to Unaudited Consolidated Financial Statements	14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	54

Part II.	Other Information

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	57

Item 6.	Exhibits	58

PART I - FINANCIAL INFORMATION

Isolagen, Inc.

(A Development Stage Company)

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	23,351,762		$	31,783,545
Restricted cash	720,045			1,483,197
Accounts receivable, net of allowance for doubtful accounts of $18,041 and $0, respectively	226,252			81,502
Inventory	700,798			181,865
Other receivables	1,709			357
Prepaid expenses	347,840			860,244
Current assets of discontinued operations	30,699			739,009
Total current assets	25,379,105			35,129,719
Property and equipment, net of accumulated depreciation and amortization of $2,636,217 and $1,816,125, respectively	3,555,444			4,331,605
Intangible assets, net of amortization of $626,926 and $381,795, respectively	4,691,374			4,936,505
Other assets, net of amortization of $2,185,279 and $1,623,352, respectively	1,634,364			2,204,685
Assets of discontinued operations held for sale	11,003,373			10,503,234
Other long-term assets of discontinued operations	95,218			181,127
Total assets	$	46,358,878		$	57,286,875

Liabilities, Minority Interests and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	758,569		$	886,598
Accrued expenses	4,529,045			2,891,462
Current liabilities of discontinued operations	210,300			1,863,857
Total current liabilities	5,497,914			5,641,917
Long term debt	90,000,000			90,000,000
Other long term liabilities of continuing operations	1,170,345			999,940
Long term liabilities of discontinued operations	171,655			164,227
Total liabilities	96,839,914			96,806,084
Commitments and contingencies (see Note 7)
Minority interests	1,821,527			2,104,373

Shareholders’ deficit:
Preferred stock, $.001 par value; 5,000,000 shares authorized, which includes series C junior participating preferred stock, 10,000 shares authorized	—			—
Common stock, $.001 par value; 100,000,000 shares authorized	41,640			34,363
Additional paid-in capital	128,829,716			111,516,561
Treasury stock, at cost, 4,000,000 shares	(25,974,000		)	(25,974,000		)
Accumulated other comprehensive income (loss)	353,850			(127,462		)
Accumulated deficit during development stage	(155,553,769		)	(127,073,044		)
Total shareholders’ deficit	(52,302,563		)	(41,623,582		)
Total liabilities, minority interests and shareholders’ deficit	$	46,358,878		$	57,286,875

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

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,
	2007			2006
Revenue
Product sales	$	331,115		$	141,428
License fees	—			—
Total revenue	331,115			141,428
Cost of sales	158,096			72,444
Gross profit	173,019			68,984

Selling, general and administrative expenses	4,010,119			2,703,843
Research and development	3,093,187			1,843,974
Operating loss	(6,930,287		)	(4,478,833		)
Other income (expense)
Interest income	193,370			551,340
Interest expense	(974,810		)	(974,810		)
Minority interest	41,365			27,839
Loss from continuing operations	(7,670,362		)	(4,874,464		)
Loss from discontinued operations, net of tax	(128,111		)	(1,797,416		)
Net loss	$	(7,798,473	)	$	(6,671,880	)

Per share information:
Loss from continuing operations—basic and diluted	$	(0.23	)	$	(0.16	)
Loss from discontinued operations—basic and diluted	—			(0.06		)
Net loss per common share—basic and diluted	$	(0.23	)	$	(0.22	)
Weighted average number of basic and diluted common shares outstanding	33,893,072			30,342,866

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

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)

	Nine Months Ended September 30,						Cumulative Period from December 28, 1995 (date of inception) to September 30,
	2007			2006			2007
Revenue
Product sales	$	991,452		$	141,428		$	2,765,955
License fees	—			—			260,000
Total revenue	991,452			141,428			3,025,955
Cost of sales	474,556			72,444			1,071,212
Gross profit	516,896			68,984			1,954,743

Selling, general and administrative expenses	16,053,949			8,760,278			63,469,171
Research and development	9,554,290			6,442,360			40,244,986
Operating loss	(25,091,343		)	(15,133,654		)	(101,759,414		)
Other income (expense)
Interest income	727,052			1,812,573			6,633,567
Other income	65,138			—			237,581
Interest expense	(2,924,429		)	(2,924,430		)	(11,684,031		)
Minority interest	282,846			27,839			360,978
Loss from continuing operations before income taxes	(26,940,736		)	(16,217,672		)	(106,211,319		)
Income tax benefit	—			—			190,754
Loss from continuing operations	(26,940,736		)	(16,217,672		)	(106,020,565		)
Loss from discontinued operations, net of tax	(1,539,989		)	(8,503,373		)	(36,519,519		)
Net loss	(28,480,725		)	(24,721,045		)	(142,540,084		)
Deemed dividend associated with beneficial conversion of preferred stock	—			—			(11,423,824		)
Preferred stock dividends	—			—			(1,589,861		)
Net loss attributable to common shareholders	$	(28,480,725	)	$	(24,721,045	)	$	(155,553,769	)
Per share information:
Loss from continuing operations—basic and diluted	$	(0.85	)	$	(0.54	)	$	(7.41	)
Loss from discontinued operations—basic and diluted	(0.05		)	(0.28		)	(2.55		)
Deemed dividend associated with beneficial conversion of preferred stock	—			—			(0.80		)
Preferred stock dividends	—			—			(0.11		)
Net loss per common share—basic and diluted	$	(0.90	)	$	(0.82	)	$	(10.87	)
Weighted average number of basic and diluted common shares outstanding	31,561,344			30,291,607			14,310,868

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

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss

(Unaudited)

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional			Treasury Stock			Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital			Number of Shares	Amount		Comprehensive Income		Development Stage			Equity (Deficit)
Issuance of common stock for cash on 12/28/95	—	$	—	—	$	—	2,285,291	$	2,285	$	(1,465	)	—	$	—	$	—	$	—		$	820
Issuance of common stock for cash on 11/7/96	—	—		—	—		11,149	11		49,989			—	—		—		—			50,000
Issuance of common stock for cash on 11/29/96	—	—		—	—		2,230	2		9,998			—	—		—		—			10,000
Issuance of common stock for cash on 12/19/96	—	—		—	—		6,690	7		29,993			—	—		—		—			30,000
Issuance of common stock for cash on 12/26/96	—	—		—	—		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 of common stock for cash on 12/27/97	—	—		—	—		21,182	21		94,979			—	—		—		—			95,000
Issuance of common stock for Services on 9/1/97	—	—		—	—		11,148	11		36,249			—	—		—		—			36,260
Issuance of common stock for Services on 12/28/97	—	—		—	—		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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional			Treasury Stock				Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital			Number of Shares	Amount			Comprehensive Income		Development Stage			Equity (Deficit)
Issuance of common stock for cash on 8/23/98	—	$	—	—	$	—	4,459	$	4	$	20,063		—	$	—		$	—	$	—		$	20,067
Repurchase of common stock on 9/29/98	—	—		—	—		—	—		—			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 of common stock for cash on 9/10/99	—	—		—	—		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 of common stock for cash on 1/18/00	—	—		—	—		53,583	54		1,869			—	—			—		—			1,923
Issuance of common stock for Services on 3/1/00	—	—		—	—		68,698	69		(44		)	—	—			—		—			25
Issuance of common stock for Services on 4/4/00	—	—		—	—		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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional			Treasury Stock				Accumulated Other		Accumulated Deficit During		Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital			Number of Shares		Amount		Comprehensive Income		Development Stage		Equity (Deficit)
Issuance of common stock for services on 7/1/01	—	$	—	—	$	—	156,960	$	157	$	(101	)	—		$	—	$	—	$	—	$	56
Issuance of common stock for services on 7/1/01	—	—		—	—		125,000	125		(80		)	—		—		—		—		45
Issuance of common stock for capitalization of accrued salaries on 8/10/01	—	—		—	—		70,000	70		328,055			—		—		—		—		328,125
Issuance of common stock for conversion of convertible debt on 8/10/01	—	—		—	—		1,750,000	1,750		1,609,596			—		—		—		—		1,611,346
Issuance of common stock for conversion of convertible shareholder notes payable on 8/10/01	—	—		—	—		208,972	209		135,458			—		—		—		—		135,667
Issuance of common stock for bridge financing on 8/10/01	—	—		—	—		300,000	300		(192		)	—		—		—		—		108
Retirement of treasury stock on 8/10/01	—	—		—	—		—	—		(50,280		)	(2,400	)	50,280		—		—		—
Issuance of common stock for net assets of Gemini on 8/10/01	—	—		—	—		3,942,400	3,942		(3,942		)	—		—		—		—		—
Issuance of common stock for net assets of AFH on 8/10/01	—	—		—	—		3,899,547	3,900		(3,900		)	—		—		—		—		—
Issuance of common stock for cash on 8/10/01	—	—		—	—		1,346,669	1,347		2,018,653			—		—		—		—		2,020,000
Transaction and fund raising expenses on 8/10/01	—	—		—	—		—	—		(48,547		)	—		—		—		—		(48,547		)
Issuance of common stock for services on 8/10/01	—	—		—	—		60,000	60		—			—		—		—		—		60
Issuance of common stock for cash on 8/28/01	—	—		—	—		26,667	27		39,973			—		—		—		—		40,000
Issuance of common stock for services on 9/30/01	—	—		—	—		314,370	314		471,241			—		—		—		—		471,555

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

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional		Treasury Stock			Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital		Number of Shares	Amount		Comprehensive Income		Development Stage			Equity (Deficit)
Uncompensated contribution of services—3rd quarter	—	$	—	—	$	—	—	$	—	$	55,556	—	$	—	$	—	$	—		$	55,556
Issuance of common stock for services on 11/1/01	—	—		—	—		145,933	146		218,754		—	—		—		—			218,900
Uncompensated contribution of services—4th quarter	—	—		—	—		—	—		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
Uncompensated contribution of services—1st quarter	—	—		—	—		—	—		100,000		—	—		—		—			100,000
Issuance of preferred stock for cash on 4/26/02	905,000	905		—	—		—	—		2,817,331		—	—		—		—			2,818,236
Issuance of preferred stock for cash on 5/16/02	890,250	890		—	—		—	—		2,772,239		—	—		—		—			2,773,129
Issuance of preferred stock for cash on 5/31/02	795,000	795		—	—		—	—		2,473,380		—	—		—		—			2,474,175
Issuance of preferred stock for cash on 6/28/02	229,642	230		—	—		—	—		712,991		—	—		—		—			713,221
Uncompensated contribution of services—2nd quarter	—	—		—	—		—	—		100,000		—	—		—		—			100,000
Issuance of preferred stock for cash on 7/15/02	75,108	75		—	—		—	—		233,886		—	—		—		—			233,961
Issuance of common stock for cash on 8/1/02	—	—		—	—		38,400	38		57,562		—	—		—		—			57,600
Issuance of warrants for services on 9/06/02	—	—		—	—		—	—		103,388		—	—		—		—			103,388
Uncompensated contribution of services—3rd quarter	—	—		—	—		—	—		100,000		—	—		—		—			100,000
Uncompensated contribution of services—4th quarter	—	—		—	—		—	—		100,000		—	—		—		—			100,000
Issuance of preferred stock for dividends	143,507	144		—	—		—	—		502,517		—	—		—		(502,661		)	—
Deemed dividend associated with beneficial conversion of preferred stock	—	—		—	—		—	—		10,178,944		—	—		—		(10,178,944		)	—
Comprehensive income:
Net loss	—	—		—	—		—	—		—		—	—		—		(5,433,055		)	(5,433,055		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—	—		—		—	—		13,875		—			13,875
Comprehensive loss	—	—		—	—		—	—		—		—	—		—		—			(5,419,180		)
Balance, 12/31/02	3,038,507	$	3,039	—	$	—	15,227,963	$	15,228	$	25,573,999	—	$	—	$	13,875	$	(20,399,211	)	$	5,206,930

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

	Series A Preferred Stock					Series B Preferred Stock					Common Stock					Additional			Treasury Stock			Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares		Amount			Number of Shares		Amount			Number of Shares		Amount			Paid-In Capital			Number of Shares	Amount		Comprehensive Income		Development Stage			Equity (Deficit)
Issuance of common stock for cash on 1/7/03	—		$	—		—		$	—		61,600		$	62		$	92,338		—	$	—	$	—	$	—		$	92,400
Issuance of common stock for patent pending acquisition on 3/31/03	—		—			—		—			100,000		100			539,900			—	—		—		—			540,000
Cancellation of common stock on 3/31/03	—		—			—		—			(79,382	)	(79		)	(119,380		)	—	—		—		—			(119,459		)
Uncompensated contribution of services—1st quarter	—		—			—		—			—		—			100,000			—	—		—		—			100,000
Issuance of preferred stock for cash on 5/9/03	—		—			110,250		110			—		—			2,773,218			—	—		—		—			2,773,328
Issuance of preferred stock for cash on 5/16/03	—		—			45,500		46			—		—			1,145,704			—	—		—		—			1,145,750
Conversion of preferred stock into common stock—2nd qtr	(70,954	)	(72		)	—		—			147,062		147			40,626			—	—		—		—			40,701
Conversion of warrants into common stock—2nd qtr	—		—			—		—			114,598		114			(114		)	—	—		—		—			—
Uncompensated contribution of services—2nd quarter	—		—			—		—			—		—			100,000			—	—		—		—			100,000
Issuance of preferred stock dividends	—		—			—		—			—		—			—			—	—		—		(1,087,200		)	(1,087,200		)
Deemed dividend associated with beneficial conversion of preferred stock	—		—			—		—			—		—			1,244,880			—	—		—		(1,244,880		)	—
Issuance of common stock for cash—3 rd qtr	—		—			—		—			202,500		202			309,798			—	—		—		—			310,000
Issuance of common stock for cash on 8/27/03	—		—			—		—			3,359,331		3,359			18,452,202			—	—		—		—			18,455,561
Conversion of preferred stock into common stock—3 rd qtr	(2,967,553	)	(2,967		)	(155,750	)	(156		)	7,188,793		7,189			(82,875		)	—	—		—		—			(78,809		)
Conversion of warrants into Common stock—3 rd qtr	—		—			—		—			212,834		213			(213		)	—	—		—		—			—
Compensation expense on warrants issued to non-employees	—		—			—		—			—		—			412,812			—	—		—		—			412,812
Issuance of common stock for cash—4 th qtr	—		—			—		—			136,500		137			279,363			—	—		—		—			279,500
Conversion of warrants into Common stock—4 th qtr	—		—			—		—			393		—			—			—	—		—		—			—
Comprehensive income:
Net loss	—		—			—		—			—		—			—			—	—		—		(11,268,294		)	(11,268,294		)
Other comprehensive income, foreign currency translation adjustment	—		—			—		—			—		—			—			—	—		360,505		—			360,505
Comprehensive loss	—		—			—		—			—		—			—			—	—		—		—			(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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional			Treasury Stock				Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital			Number of Shares	Amount			Comprehensive Income		Development Stage			Equity (Deficit)
Conversion of warrants into common stock—1 st qtr	—	$	—	—	$	—	78,526	$	79	$	(79	)	—	$	—		$	—	$	—		$	—
Issuance of common stock for cash in connection with exercise of stock options—1 st qtr	—	—		—	—		15,000	15		94,985			—	—			—		—			95,000
Issuance of common stock for cash in connection with exercise of warrants—1 st qtr	—	—		—	—		4,000	4		7,716			—	—			—		—			7,720
Compensation expense on options and warrants issued to non-employees and directors—1 st qtr	—	—		—	—		—	—		1,410,498			—	—			—		—			1,410,498
Issuance of common stock in connection with exercise of warrants—2 nd qtr	—	—		—	—		51,828	52		(52		)	—	—			—		—			—
Issuance of common stock for cash—2 nd qtr	—	—		—	—		7,200,000	7,200		56,810,234			—	—			—		—			56,817,434
Compensation expense on options and warrants issued to non-employees and directors—2 nd qtr	—	—		—	—		—	—		143,462			—	—			—		—			143,462
Issuance of common stock in connection with exercise of warrants—3 rd qtr	—	—		—	—		7,431	7		(7		)	—	—			—		—			—
Issuance of common stock for cash in connection with exercise of stock options—3 rd qtr	—	—		—	—		110,000	110		189,890			—	—			—		—			190,000
Issuance of common stock for cash in connection with exercise of warrants—3 rd qtr	—	—		—	—		28,270	28		59,667			—	—			—		—			59,695
Compensation expense on options and warrants issued to non-employees and directors—3 rd qtr	—	—		—	—		—	—		229,133			—	—			—		—			229,133
Issuance of common stock in connection with exercise of warrants—4 th qtr	—	—		—	—		27,652	28		(28		)	—	—			—		—			—
Compensation expense on options and warrants issued to non-employees, employees, and directors—4 th qtr	—	—		—	—		—	—		127,497			—	—			—		—			127,497
Purchase of treasury stock—4 th qtr	—	—		—	—		—	—		—			4,000,000	(25,974,000		)	—		—			(25,974,000		)
Comprehensive income:
Net loss	—	—		—	—		—	—		—			—	—			—		(21,474,469		)	(21,474,469		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—	—		—			—	—			79,725		—			79,725
Other comprehensive income, net unrealized gain on available-for-sale investments	—	—		—	—		—	—		—			—	—			10,005		—			10,005
Comprehensive loss	—	—		—	—		—	—		—			—	—			—		—			(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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional			Treasury Stock				Accumulated Other			Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital			Number of Shares	Amount			Comprehensive Income (Loss)			Development Stage			Equity (Deficit)
Issuance of common stock for cash in connection with exercise of stock options—1 st qtr	—	$	—	—	$	—	25,000	$	25	$	74,975		—	$	—		$	—		$	—		$	75,000
Compensation expense on options and warrants issued to non-employees—1 st qtr	—	—		—	—		—	—		33,565			—	—			—			—			33,565
Conversion of warrants into common stock—2 nd qtr	—	—		—	—		27,785	28		(28		)	—	—			—			—			—
Compensation expense on options and warrants issued to non-employees—2 nd qtr	—	—		—	—		—	—		(61,762		)	—	—			—			—			(61,762		)
Compensation expense on options and warrants issued to non-employees—3 rd qtr	—	—		—	—		—	—		(137,187		)	—	—			—			—			(137,187		)
Conversion of warrants into common stock—3 rd qtr	—	—		—	—		12,605	12		(12		)	—	—			—			—			—
Compensation expense on options and warrants issued to non-employees—4 th qtr	—	—		—	—		—	—		18,844			—	—			—			—			18,844
Compensation expense on acceleration of options—4 th qtr	—	—		—	—		—	—		14,950			—	—			—			—			14,950
Compensation expense on restricted stock award issued to employee—4 th qtr	—	—		—	—		—	—		606			—	—			—			—			606
Conversion of predecessor company shares	—	—		—	—		94	—		—			—	—			—			—			—
Comprehensive loss:
Net loss	—	—		—	—		—	—		—			—	—			—			(35,777,584		)	(35,777,584		)
Other comprehensive loss, foreign currency translation adjustment	—	—		—	—		—	—		—			—	—			(1,372,600		)	—			(1,372,600		)
Foreign exchange gain on substantial liquidation of foreign entity																	133,851						133,851
Other comprehensive loss, net unrealized gain on available-for-sale investments	—	—		—	—		—	—		—			—	—			(10,005		)	—			(10,005		)
Comprehensive loss	—	—		—	—		—	—		—			—	—			—			—			(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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock					Additional		Treasury Stock				Accumulated Other			Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares		Amount			Paid-In Capital		Number of Shares	Amount			Comprehensive Income (Loss)			Development Stage			Equity (Deficit)
Compensation expense on options and warrants issued to non-employees—1 st qtr	—	$	—	—	$	—	—		$	—		$	42,810	—	$	—		$	—		$	—		$	42,810
Compensation expense on option awards issued to employee and directors—1 st qtr	—	—		—	—		—		—			46,336		—	—			—			—			46,336
Compensation expense on restricted stock issued to employees—1 st qtr	—	—		—	—		128,750		129			23,368		—	—			—			—			23,497
Compensation expense on options and warrants issued to non-employees—2 nd qtr	—	—		—	—		—		—			96,177		—	—			—			—			96,177
Compensation expense on option awards issued to employee and directors—2 nd qtr	—	—		—	—		—		—			407,012		—	—			—			—			407,012
Compensation expense on restricted stock to employees—2 nd qtr	—	—		—	—		—		—			4,210		—	—			—			—			4,210
Cancellation of unvested restricted stock — 2 nd qtr	—	—		—	—		(97,400	)	(97		)	97		—	—			—			—			—
Issuance of common stock for cash in connection with exercise of stock options—2 nd qtr	—	—		—	—		10,000		10			16,490		—	—			—			—			16,500
Compensation expense on options and warrants issued to non-employees—3 rd qtr	—	—		—	—		—		—			25,627		—	—			—			—			25,627
Compensation expense on option awards issued to employee and directors—3 rd qtr	—	—		—	—		—		—			389,458		—	—			—			—			389,458
Compensation expense on restricted stock to employees—3 rd qtr	—	—		—	—		—		—			3,605		—	—			—			—			3,605
Issuance of common stock for cash in connection with exercise of stock options—3 rd qtr	—	—		—	—		76,000		76			156,824		—	—			—			—			156,900
Compensation expense on options and warrants issued to non-employees—4 th qtr	—	—		—	—		—		—			34,772		—	—			—			—			34,772
Compensation expense on option awards issued to employee and directors—4 th qtr	—	—		—	—		—		—			390,547		—	—			—			—			390,547
Compensation expense on restricted stock to employees—4 th qtr	—	—		—	—		—		—			88		—	—			—			—			88
Cancellation of unvested restricted stock award—4 th qtr	—	—		—	—		(15,002	)	(15		)	15		—	—			—			—			—
Comprehensive loss:
Net loss	—	—		—	—		—		—			—		—	—			—			(35,821,406		)	(35,821,406		)
Other comprehensive gain, foreign currency translation adjustment	—	—		—	—		—		—			—		—	—			657,182			—			657,182
Comprehensive loss	—	—		—	—		—		—			—		—	—			—			—			(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.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional		Treasury Stock				Accumulated Other		Accumulated Deficit During			Total Shareholders’
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Paid-In Capital		Number of Shares	Amount			Comprehensive Income (Loss)		Development Stage			Equity (Deficit)
Compensation expense on options and warrants issued to non-employees—1 st qtr	—	$	—	—	$	—	—	$	—	$	39,742	—	$	—		$	—	$	—		$	39,742
Compensation expense on option awards issued to employee and directors—1 st qtr	—	—		—	—		—	—		448,067		—	—			—		—			448,067
Compensation expense on restricted stock issued to employees—1 st qtr	—	—		—	—		—	—		88		—	—			—		—			88
Issuance of common stock for cash in connection with exercise of stock options—1 st qtr	—	—		—	—		15,000	15		23,085		—	—			—		—			23,100

Expense in connection with modification of employee stock options —1 st qtr	—	—		—	—		—	—		1,178,483		—	—			—		—			1,178,483
Compensation expense on options and warrants issued to non-employees—2 nd qtr	—	—		—	—		—	—		39,981		—	—			—		—			39,981
Compensation expense on option awards issued to employee and directors—2 nd qtr	—	—		—	—		—	—		462,363		—	—			—		—			462,363
Compensation expense on restricted stock issued to employees—2 nd qtr	—	—		—	—		—	—		88		—	—			—		—			88
Compensation expense on option awards issued to employee and directors—3 rd qtr	—	—		—	—		—	—		478,795		—	—			—		—			478,795
Compensation expense on restricted stock issued to employees—3 rd qtr	—	—		—	—		—	—		88		—	—			—		—			88
Issuance of common stock upon exercise of warrants—3 rd qtr	—	—		—	—		492,613	493		893,811		—	—			—		—			894,304
Issuance of common stock for cash, net of offering costs—3 rd qtr	—	—		—	—		6,767,647	6,767		13,745,400		—	—			—		—			13,752,167
Issuance of common stock for cash in connection with exercise of stock options—3 rd qtr	—	—		—	—		1,666	2		3,164		—	—			—		—			3,166

Comprehensive loss:

Net loss	—	—		—	—		—	—		—		—	—			—		(28,480,725		)	(28,480,725		)
Other comprehensive gain, foreign currency translation adjustment	—	—		—	—		—	—		—		—	—			481,312		—			481,312

Comprehensive loss	—	—		—	—		—	—		—		—	—			—		—			(27,999,413		)

Balance 9/30/07	—	$	—	—	$	—	41,639,657	$	41,640	$	128,829,716	4,000,000	$	(25,974,000	)	$	353,850	$	(155,553,769	)	$	(52,302,563	)

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

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,						Cumulative Period from December 28, 1995 (date of inception) to September 30,
	2007			2006			2007
Cash flows from operating activities:
Net loss	$	(28,480,725	)	$	(24,721,045	)	$	(142,540,084	)
Adjustments to reconcile net loss to net cash used in operating activities:
Expense related to equity awards	2,647,694			1,038,732			7,514,034
Uncompensated contribution of services	—			—			755,556
Depreciation and amortization	1,127,949			1,612,180			7,337,858
Provision for doubtful accounts	11,732			61,054			330,047
Amortization of debt issue costs	561,929			561,930			2,185,281
Amortization of debt discounts on investments	—			—			(508,983		)
Loss on disposal or impairment of property and equipment	20,803			718,405			4,570,034
Foreign exchange gain on substantial liquidation of foreign entity	—			—			(133,851		)
Minority interest	(282,846		)	(27,838		)	(360,978		)
Change in operating assets and liabilities, excluding effects of acquisition:
Decrease (Increase) in restricted cash	763,152			719,630			(720,045		)
Decrease (increase) in accounts receivable	(94,111		)	875,239			(63,303		)
Decrease in other receivables	291,914			32,168			171,478
Decrease (increase) in inventory	(425,457		)	129,162			(628,034		)
Decrease (increase) in prepaid expenses	773,182			588,189			(316,426		)
Decrease (increase) in other assets	99,551			(13,248		)	117,906
Increase (decrease) in accounts payable	(563,465		)	(942,579		)	629,627
Increase (decrease) in accrued expenses and other liabilities	887,472			(65,128		)	4,500,942
Decrease in deferred revenue	(317,008		)	(1,251,013		)	(18,462		)
Net cash used in operating activities	(22,978,234		)	(20,684,162		)	(117,177,403		)
Cash flows from investing activities:
Acquisition of Agera, net of cash acquired	—			(2,009,841		)	(2,009,841		)
Purchase of property and equipment	(126,460		)	(1,031,991		)	(25,423,755		)
Proceeds from the sale of property and equipment	925			6,595			41,820
Purchase of investments	—			(2,700,000		)	(152,998,313		)
Proceeds from sales and maturities of investments	—			25,700,000			153,507,000
Net cash provided by (used in) investing activities	(125,535		)	19,964,763			(26,883,089		)
Cash flows from financing activities:
Proceeds from convertible debt	—			—			91,450,000
Offering costs associated with the issuance of convertible 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			173,400			93,753,857
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 financing activities	14,672,737			173,400			167,326,996
Effect of exchange rate changes on cash balances	(751		)	(65,326		)	85,258
Net increase (decrease) in cash and cash equivalents	(8,431,783		)	(611,325		)	23,351,762
Cash and cash equivalents, beginning of period	31,783,545			41,554,203			—
Cash and cash equivalents, end of period	$	23,351,762		$	40,942,878		$	23,351,762

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,575,000		$	1,575,000		$	7,990,283
Non-cash investing and financing activities:
Deemed dividend associated with beneficial conversion of preferred stock	$	—		$	—		$	11,423,824
Preferred stock dividend	—			—			1,589,861
Uncompensated contribution of services	—			—			755,556
Common stock issued for intangible assets	—			—			540,000
Equipment acquired through capital lease	$	—		$	—		$	167,154

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

Isolagen, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Note 1—Basis of Presentation, Business and Organization

Isolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware corporation (“Isolagen”) is the parent company of Isolagen Technologies, Inc., a Delaware corporation (“Isolagen Technologies”) and Agera Laboratories, Inc., a Delaware corporation (“Agera”). Isolagen Technologies is the parent company of Isolagen Europe Limited, a company organized under the laws of the United Kingdom (“Isolagen Europe”), Isolagen Australia Pty Limited, a company organized under the laws of Australia (“Isolagen Australia”), and Isolagen International, S.A., a company organized under the laws of Switzerland (“Isolagen Switzerland”). The common stock of the Company, par value $0.001 per share, (“Common Stock”) is traded on the American Stock Exchange (“AMEX”) under the symbol “ILE.”

T he accompanying consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes contained within the Company’s Report of Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on August 14, 2007. That Form 8-K/A contained financial information which had been retrospectively adjusted from the information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 to reflect the treatment of the United Kingdom, Switzerland and Australian operations as discontinued operations (see Note 4). Specifically retrospectively adjusted in the Form 8-K/A filed on August 14, 2007 were the Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures about Market Risk and the Company’s consolidated financial statements.

The Company is an aesthetic and therapeutic company focused on developing novel skin and tissue rejuvenation products. The Company’s clinical development product candidates are designed to improve the appearance of skin injured by the effects of aging, sun exposure, acne and burns with a patient’s own, or autologous, fibroblast cells produced in the Company’s proprietary Isolagen Process. The Company also develops and markets an advanced skin care line with broad application in core target markets through its Agera subsidiary.

The Company acquired 57% of the outstanding common shares of Agera on August 10, 2006. Agera offers a complete line of skincare systems based on a wide array of proprietary formulations, trademarks and nano-peptide technology. These technologically 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’s operations and cash flows have been included in the consolidated financial statements from the date of the acquisition. The assets and liabilities of Agera have been included in the consolidated balance sheet since the date of the acquisition.

In October 2006, the Company reached an agreement with the FDA on the design of a Phase III pivotal study protocol for the treatment of nasolabial folds. The randomized, double-blind protocol was submitted to the FDA under the agency’s Special Protocol Assessment (“SPA”) regulations. Pursuant to this assessment process, the FDA has agreed that the Company’s study design for two identical trials, including patient numbers, clinical endpoints, and statistical analyses, is acceptable to the FDA to form the basis of an efficacy claim for a marketing application. The randomized, double-blind, pivotal Phase III trials will evaluate the efficacy and safety of Isolagen Therapy against placebo in approximately 400 patients with approximately 200 patients enrolled in each trial. The Company completed enrollment of the study and commenced injection of subjects in early 2007.

In March 2004, the Company announced positive results of a first Phase III exploratory clinical trial for the Company’s lead facial aesthetics product candidate, and in July 2004 we commenced a 200 patient Phase III study of Isolagen Therapy for facial wrinkles consisting of two identical, simultaneous trials. The study was concluded during the second half of 2005. In August 2005 we announced that results of this study failed to meet co-primary endpoints. Based on the results of this study, the Company commenced preparations for our second Phase III pivotal study discussed in the preceding paragraph.

During 2006, 2005 and 2004, the Company sold its aesthetic product primarily in the United Kingdom. However, during the fourth quarter of fiscal 2006, the Company decided to close the United Kingdom operation. The Company completed the closure of the United Kingdom operation on March 31, 2007, and as of March 31, 2007, the United Kingdom, Swiss and Australian operations were presented as discontinued operations for all periods presented, as more fully discussed in Note 4.

Through September 30, 2007, the Company has been primarily engaged in developing its initial product technology and recruiting personnel. In the course of its development activities, the Company has sustained losses and expects such losses to continue through at least 2008. The Company expects to finance its operations primarily through its existing cash and any future financing. However, as described in Note 2, there exists substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to operate profitably is largely contingent upon its success in obtaining regulatory approval to sell one or a variety of applications of the Isolagen Therapy, upon its successful development of markets for its products and upon the development of profitable scaleable manufacturing processes. The Company will be required to obtain additional capital in the future to continue and expand its operations. No assurance can be given that the Company will be able to obtain such regulatory approvals, successfully develop the markets for its products or develop profitable manufacturing methods. There is no assurance that the Company will be able to obtain any such additional capital as it needs to finance these efforts, through asset sales, equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support the Company’s growth. If adequate capital cannot be obtained on satisfactory terms, the Company’s operations would be negatively impacted.

If the Company achieves growth in its operations in the next few years, such growth could place a strain on its management, administrative, operational and financial infrastructure. The Company may find it necessary to hire additional management, financial and sales and marketing personnel to manage the Company’s expanding operations. In addition, the Company’s ability to manage its current operations and future growth requires the continued improvement of operational, financial and management controls, reporting systems and procedures. If the Company is unable to manage this growth effectively and successfully, the Company’s business, operating results and financial condition may be materially adversely affected.

Acquisition and merger and basis of presentation

On 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, ISO Acquisition 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 Isolagen Technologies (the “Merger Agreement”), AFH (i) issued 5,453,977 shares of its common stock, par value $0.001 to acquire, in a privately 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) of Isolagen Technologies, and (ii) issued 3,942,400 shares of its common stock to acquire 100% of the issued and outstanding common stock of Gemini. Pursuant to the terms of the Merger Agreement, Merger Sub, together with Gemini, merged with and into Isolagen Technologies (the “Merger”), and AFH was the surviving corporation. AFH subsequently changed its name to Isolagen, Inc. on November 13, 2001. Prior to the Merger, Isolagen Technologies had no active business and was seeking funding to begin FDA trials of the Isolagen Therapy. AFH was a non-operating, public shell company with limited assets. Gemini was a non-operating private company with limited assets and was unaffiliated with AFH.

The consolidated financial statements presented include Isolagen, Inc., its wholly-owned subsidiaries and its majority-owned subsidiary. All significant intercompany transactions and balances have been eliminated. Isolagen Technologies was, for accounting purposes, the surviving entity of the Merger, and accordingly for the periods prior to the Merger, the financial statements reflect the financial position, results of operations and cash flows of Isolagen Technologies. The operations and cash flows of AFH and Gemini are included in the unaudited, cumulative consolidated statements of operations and cash flows from August 10, 2001 onward.

The consolidated financial statements included herein as of September 30, 2007, and for each of the three and nine months ended September 30, 2007 and 2006, have been prepared by the Company without an audit, pursuant to accounting principles generally accepted in the United States, and the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The information presented reflects all adjustments consisting solely of normal recurring adjustments which are, in the opinion of management, considered necessary to present fairly the financial position, results of operations, and cash flows for the periods discussed above. Operating results for the three and nine months ended September 30, 2007, are not necessarily indicative of the results which will be realized for the year ending December 31, 2007.

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 Concern

At September 30, 2007 and December 31, 2006, the Company had cash, cash equivalents and restricted cash of $24.1 million and $33.3 million, respectively. The Company believes that its existing capital resources are adequate to finance its operations through at least June 30, 2008. The Company estimates that it will require additional cash resources during the third quarter of 2008 based upon its current operating plan and condition. This estimate excludes any proceeds that would be realized upon the sale of the Swiss corporate campus (see further discussion below and at Note 3).

Through September 30, 2007, the Company has been primarily engaged in developing its initial product technology and recruiting personnel. In the course of its development activities, the Company has sustained losses and expects such losses to continue through at least 2008. The Company expects to finance its operations primarily through its existing cash and any future financing. However, there exists substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to operate profitably is largely contingent upon its success in obtaining regulatory approval to sell one or a variety of applications of the Isolagen Therapy, upon its successful development of markets for its products and upon the development of profitable scaleable manufacturing processes. The Company will be required to obtain additional capital in the future to continue and expand its operations. No assurance can be given that the Company will be able to obtain such regulatory approvals, successfully develop the markets for its products or develop profitable manufacturing methods. There is no assurance that the Company will be able to obtain any such additional capital as it needs to finance these efforts, through asset sales, equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support the Company’s growth. If adequate capital cannot be obtained on satisfactory terms, the Company’s operations would be negatively impacted.

The Company filed a shelf registration statement on Form S-3 during June 2007, which was subsequently declared effective by the SEC. The shelf registration allowed the Company 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 more future public offerings. In August 2007, the Company sold under this shelf registration statement 6,746,646 shares of common stock to institutional investors, raising proceeds of $13.8 million, net of offering costs. The Company may offer and sell up to an additional $36.2 of common stock pursuant to this shelf registration.

The Company’s ability to complete additional offerings, including any additional offerings under its 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 of the Company and the offering terms. The Company’s ability to commence an offering may be dependent on its ability to complete the registration process, which is subject to the SEC’s regulatory calendar, as well as the Company’s ability to timely respond to any SEC comments that have been or may be issued. The Company is also continuing its efforts to sell its Swiss corporate campus (see Note 3). The Company will add any proceeds from the sale of the Swiss corporate campus to its working capital, which would partially alleviate the Company’s need to obtain financing from other sources . 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 above discussed conditions, and in accordance with generally accepted accounting principles in the United States, there exists substantial doubt about the Company’s ability to continue as a going concern, and the Company’s ability to continue as a going concern is contingent upon its ability to secure additional adequate financing or capital prior to or during the third quarter of 2008. If the Company is unable to obtain additional sufficient funds during this time, 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 improvements and/or delay the expansion of its sales and marketing capabilities. Any of these actions would have an adverse affect on the Company’s operations, the realization of its assets and the timely satisfaction of its liabilities. The Company’s financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that the Company is unable to continue as a going concern.

Note 3—Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue 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 7) and estimates and assumptions related to equity-based compensation expense (see Note 8). Actual results may differ materially from those estimates.

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiaries are determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each 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 other comprehensive income in shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings and have not been material in any one period.

Balances of related after-tax components comprising accumulated other comprehensive income included in shareholders’ equity at September 30, 2007 and December 31, 2006 are related to foreign currency translation adjustments. Upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the amount attributable to that entity and accumulated in the translation adjustment component of equity is removed from the separate component of equity and is reported as gain or loss for the period during which the sale or liquidation occurs.

Statement of cash flows

For purposes of the statements of cash flows, the Company considers all highly liquid investments (i.e., investments which, when purchased, have original maturities of three months or less) to be cash equivalents. At September 30, 2007 and December 31, 2006, the Company had $0.7 million and $1.5 million of cash restricted for the payment of its Exton, Pennsylvania facility lease.

Concentration of credit risk

The Company maintains its cash primarily with major U.S. domestic banks. The amounts held in these banks generally exceed the insured limit of $100,000. The terms of these deposits are on demand to minimize risk. The Company invests its cash equivalent funds primarily in U.S. government securities.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of collectibility. Management reviews its accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. Management analyzes historical collection trends and changes in its customer payment patterns, customer concentration, and creditworthiness when evaluating the adequacy of its allowance for doubtful accounts. In its overall allowance for doubtful accounts, the Company includes any receivable balances that are determined to be uncollectible. Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs might exceed the recorded allowance.

Inventory

Inventory of Agera consists of packaging components and finished goods. Agera purchases its packaging components from a third-party, and its final finished goods inventory is purchased from a contract manufacturer. As such, Agera does not maintain work in progress inventory. Agera accounts for its inventory on the first-in-first-out method.

Assets of discontinued operations held for sale

In April 2005, the Company acquired land and a two-building, 100,000 square foot corporate campus in Bevaix, Canton of Neuchâtel, Switzerland for $10 million. The Company subsequently spent approximately $1.8 million on the first phase of a renovation. In April 2006, management decided to place the corporate campus on the market for sale in order to conserve capital. The Company commenced its selling efforts during June of 2006. As of September 30, 2007, the net book value of the corporate campus was $10.8 million, reflecting management’s estimate of the realizable value of the corporate campus. The corporate campus is included in assets of discontinued operations held for sale on the consolidated balance sheets for all periods presented.

Although the corporate campus was not being actively marketed for sale as of March 31, 2006 and therefore had not been reclassified as held for sale as of March 31, 2006, at that date management assessed whether the book value of the corporate campus was impaired based on its estimate of the realizable value of the corporate campus, and made a determination to write down the corporate campus by $0.7 million. The Company subsequently recorded a further impairment charge of $0.4 million during the fourth quarter of 2006 to reflect management’s estimate of the realizable value of the corporate campus at December 31, 2006. Accordingly, total impairment charges of $1.1 million have been recorded related to the Switzerland corporate campus, which charges are reflected in loss from discontinuing operations in the consolidated statement of operations.

In March 2007, the Company completed the closing of its United Kingdom manufacturing facility. As described in Note 4, the Company recorded a fixed asset impairment charge related to its United Kingdom operation of $1.4 million during the fourth quarter of 2006, which is included in loss from discontinued operations in the cumulative consolidated statement of operations. The carrying value of the impaired United Kingdom fixed assets is less than $0.2 million at September 30, 2007, reflecting management’s estimate of realizable value. The United Kingdom fixed assets are included in assets of discontinued operations held for sale on the accompanying consolidated balance sheets for all periods presented (see Note 4 for further discussion of the Company’s discontinued operations).

Property and equipment

Property and equipment is carried at cost less accumulated depreciation and amortization. Generally, depreciation and amortization for financial reporting purposes is provided by the straight-line method over the estimated useful life of three years, except for leasehold improvements which are amortized using the straight-line method over the remaining lease term or the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an expense as incurred.

Intangible assets

I ntangible assets primarily include proprietary formulations and trademarks, which were acquired in connection with the acquisition of Agera (see Note 5), as well as certain in-process patents. Proprietary formulations

and trademarks are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 13 to 18 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value determined by discounted cash flows.

Intangible assets are comprised as follows:

	September 30,			December 31,
	2007			2006
Proprietary formulations	$	3,101,100		$	3,101,100
Trademarks	1,511,400			1,511,400
Other intangibles	705,800			705,800
	5,318,300			5,318,300
Less: Accumulated amortization	(626,926		)	(381,795		)
Intangible assets, net	$	4,691,374		$	4,936,505

Debt Issue Costs

The 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 the effective interest method over five years, through November 2009. Debt issuance costs, net of amortization, were approximately $1.6 million at September 30, 2007 and approximately $2.1 million at December 31, 2006 and were included in other assets, net, in the accompanying consolidated balance sheets.

The Company filed registration statements on Form S-3 and Form S-4 (the “Combined Registration Statements”) during July 2007. The Combined Registration Statements related to (1) a proposed exchange offer of new 3.5% convertible senior notes due 2024 to the holders of the currently outstanding $90 million, in principal amount, 3.5% convertible subordinated notes due 2024 and (2) a proposed offer to the public of an additional $30 million, in principal amount, of new 3.5% convertible senior notes due 2024. In August, 2007 the Company decided not to proceed with the offerings covered by the Combined Registration Statements, and the Combined Registration Statements were subsequently withdrawn by the Company in August 2007 prior to being declared effective by the SEC. During the nine months ended September 30, 2007, the Company incurred $0.8 million of costs related to the Combined Registration Statements. As a result of the Company’s withdrawal of the Combined Registration Statements in August 2007, such $0.8 million of costs were expensed and are included in selling, general and administrative expenses in the consolidated statement of operations for the three and nine months ended September 30, 2007.

Treasury Stock

The Company utilizes the cost method for accounting for its treasury stock acquisitions and dispositions.

Revenue recognition

The Company recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In general, SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred 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 upon shipment of the product to the customer. The Company believes that the requirements of SAB 104 are met when the ordered product is shipped, as the risk of loss transfers to our customer at that time, the fee is fixed and determinable and collection is reasonably assured. Any advanced payments are deferred until shipment.

Discontinued operations: The Isolagen Therapy was administered, in the United Kingdom, to each patient using a recommended regimen of injections. Due to the short shelf life, each injection is cultured on an as needed basis and shipped prior to the individual injection being administered by the physician. The Company believes each injection had stand alone value to the patient. The Company invoiced the attending physician when the physician sent his or her patient’s tissue sample to the Company which created a contractual arrangement between the Company and the medical professional. The amount invoiced varied directly with the dose and number of injections requested. Generally, orders were paid in advance by the physician prior to the first injection. There was no performance provision under any arrangement with any physician, and there is 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 the risk of loss transferred to our physician customer at that time, the fee was fixed and determinable and collection was reasonably assured. Advance payments were deferred until shipment of the injection(s). The amount of the revenue deferred represented the fair 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 for arrangements that involve the delivery of multiple products or services. If the physician discontinued the regimen prematurely, all remaining deferred revenue was recognized. Since the closure of the United Kingdom operation on March 31, 2007, Isolagen Therapy has only been administered in connection with clinical trials, and as such, has had no associated revenue earned or recognized after that date.

Shipping and handling costs

Agera charges its customers for shipping and handling costs. Such charges to customers are presented net of the costs of shipping and handling, as selling, general and administrative expense, and are not significant to the consolidated statements of operations.

Advertising cost

Advertising costs are expensed as incurred and include the costs of public relations and certain marketing related activities. These costs are included in selling, general and administrative expenses.

Research and development expenses

Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities costs. Research and development costs also include costs to develop manufacturing, cell collection and logistical process improvements.

Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. The Company accrues the costs of services rendered in connection with third-party contractor activities based on its estimate of management fees, site management and monitoring costs and data management costs. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.

Stock-based compensation

Effective 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 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 for expected forfeitures. The Company adopted SFAS No. 123(R) using the modified prospective application method. Under the modified prospective application method, the fair value measurement requirements of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that were outstanding as of January 1, 2006 is recognized as the requisite 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 value of equity awards 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 APB No. 25 to account for its employee stock options. Historically, substantially all stock options have been granted with an exercise price equal to the fair market value of the common stock on the date of grant. Accordingly, no compensation expense was recognized from substantially all option grants to employees and directors. Compensation expense was recognized in connection with the issuance of stock options to non-employee consultants in accordance with EITF 96-18, “Accounting for Equity 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 with equity based incentive arrangements (refer to Note 8 for further stock-based compensation discussion).

Income taxes

An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards (“NOLs”). If it is more likely than not 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 record such 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 September 30, 2007, the Company has no accrued interest related to uncertain tax positions.

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. No material 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 our effective tax rate if recognized. At September 30, 2007, the Company has $50.7 million of unrecognized tax benefits, the large majority of which relates to loss carryforwards for which we have provided a full valuation allowance. The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject.

Loss per share data

Basic loss per share is calculated based on the weighted average common shares outstanding during the period, after giving effect to the manner in which the merger was accounted for as described in Note 1. Diluted earnings per share also gives effect to the dilutive effect of stock options, warrants (calculated based on the treasury stock method) and convertible notes and convertible preferred stock. The Company does not present diluted earnings per share for periods in which it incurred net losses as the effect is antidilutive.

At September 30, 2007, options and warrants to purchase 8.8 million shares of common stock at exercise prices ranging from $1.50 to $9.81 per share were outstanding, but were not included in the computation of diluted earnings per share as their effect would be antidilutive. Also, 9.8 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.

At September 30, 2006, options and warrants to purchase 11.1 million shares of common stock at exercise prices ranging from $1.50 to $11.38 per share were outstanding, but were not included in the computation of diluted earnings per share as their effect would be antidilutive. Also, 9.8 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.

Comprehensive loss

Comprehensive loss encompasses all changes in equity other than those with shareholders and consists of net loss and foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketable debt securities. The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries.

	Three Months Ended September 30,
	2007			2006
Net loss	$	(7,798,473	)	$	(6,671,880	)
Other comprehensive income (loss), foreign currency translation adjustment	574,167			(51,286		)
Comprehensive loss	$	(7,224,306	)	$	(6,723,166	)

	Nine Months Ended September 30,
	2007			2006
Net loss	$	(28,480,725	)	$	(24,721,045	)
Other comprehensive income (loss), foreign currency translation adjustment	481,312			434,117
Comprehensive loss	$	(27,999,413	)	$	(24,286,928	)

Fair Value of Financial Instruments

The Company’s primary financial instruments consist of accounts receivable, accounts payable and convertible subordinated debentures. The fair values of the Company’s accounts receivable and accounts payable approximate, in the Company’s opinion, their respective carrying amounts. The Company’s convertible subordinated debentures were quoted at approximately 80% and 73% of par value at September 30, 2007 and December 31, 2006, respectively. Accordingly, the fair value of our convertible subordinated debentures was approximately $72.0 million and $65.7 million at September 30, 2007 and December 31, 2006, respectively.

Recently Issued Accounting Standards Not Yet Effective

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement,” which is effective for the Company’s fiscal year beginning January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but simplifies and codifies related guidance within GAAP. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The adoption of this statement is not currently expected to have a material impact on the Company’s financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. The Company is currently evaluating the impact SFAS 159 will have on its consolidated financial position.

Note 4—Discontinued Operations

As part of the Company’s continuing efforts to evaluate the best uses of its resources, in the fourth quarter of 2006 the Company’s Board of Directors approved the proposed closing of the Company’s United Kingdom operation. After a full business analysis, management and the Board determined that the best use of resources was to focus on the Company’s strategic opportunities. As such, the Company’s first priority is to advance the United States pivotal Phase III clinical trial for the use of Isolagen Therapy for the treatment of certain facial wrinkles, and then, with regulatory agencies’ agreement, initiate clinical studies in other therapeutic and aesthetic areas.

On March 31, 2007, the Company completed the closure of its United Kingdom manufacturing facility. The United Kingdom operation was located in London, England with two locations; a manufacturing site and an administrative site. Both sites are under operating leases. The manufacturing site lease expires February 2010 and, as of September 30, 2007, the remaining lease obligation approximated $0.5 million. The administrative site lease expired April 2007. As of September 30, 2007, fixed assets of less than $0.2 million related to the United Kingdom operations are reflected as assets held for sale of discontinued operations on the consolidated balance sheet.

The assets, liabilities and results of operations of the United Kingdom, Switzerland and Australian operations are reflected as discontinued operations in the accompanying consolidated financial statements. All prior period information has been restated to reflect the presentation of discontinued operations.

The following sets forth the components of assets and liabilities of discontinued operations as of September 30, 2007 and December 31, 2006:

	September 30,		December 31,
(in millions)	2007		2006
Inventory	$	—	$	0.1
Value-added tax refund due	—		0.3
Other current assets	—		0.3
Total current assets	—		0.7
Assets held for sale	11.0		10.5
Long term assets	0.1		0.2
Total assets	$	11.1	$	11.4

Accounts payable	$	0.0	$	0.5
Accrued expenses and other current liabilities	0.2		1.4
Total current liabilities	0.2		1.9
Long term liabilities	0.2		0.1
Total liabilities	$	0.4	$	2.0

The following sets forth the results of operations of discontinued operations for the three months ended September 30, 2007 and September 30, 2006:

	Three Months Ended September 30,
(in millions)	2007			2006
Net revenue	$	—		$	1.4
Gross loss	—			(0.3		)
Operating loss	(0.2		)	(1.9		)
Other income	0.1			0.1
Loss from discontinued operations	$	(0.1	)	$	(1.8	)

The following sets forth the results of operations of discontinued operations for the nine months ended September 30, 2007 and September 30, 2006:

	Nine Months Ended September 30,
(in millions)	2007			2006
Net revenue	$	0.2		$	4.8
Gross loss	(0.3		)	(0.8		)
Operating loss	(1.7		)	(8.8		)
Other income	0.2			0.3

Loss from discontinued operations	$	(1.5	)	$	(8.5	)

In addition to the results of operations of discontinued operations set forth above, the following sets forth information about the major components of the United Kingdom operation exit costs incurred through September 30, 2007:

	Costs Incurred,
	Nine Months Ended		Cumulative Costs
	September 30, 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 nine months ended September 30, 2007:

	Accrued Liability		Costs Charged		Costs Paid		Accrued Liability
	January 1, 2007		to Expense		or Settled		September 30, 2007
Employee severance	$	284,096	$	183,222	$	467,318	$	—
Total	$	284,096	$	183,222	$	467,318	$	—

Excluding the manufacturing lease, which expires in February 2010 unless terminated sooner, i t is expected that the majority of all remaining costs to be incurred will be recognized during 2007. However, no assurances can be given with respect to the total cost of closing the United Kingdom operation or the timing of such costs. The Company believes that the amount of all future charges associated with the United Kingdom operation shutdown, such as potential lease exit costs and professional fees, among other items, cannot be precisely estimated at this time. However, as of September 30, 2007, remaining future charges are expected to be approximately $0.6 million (both before and after tax), including $0.5 million of remaining lease obligations, but excluding potential claims or contingencies unknown or which cannot be estimated at this time.

Note 5—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 will complement the Company’s Isolagen Therapy and will broaden the Company’s position in the skincare market as Agera has a comprehensive range of technologically advanced skincare products that can be packaged to offer anti-aging, anti-pigmentary and acne treatment systems.

The acquisition has been accounted for as a purchase. Accordingly, the bases in Agera’s assets and liabilities have been 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’s operations 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 acquisition contributed $0.3 million to the working capital of Agera. Included in the purchase price was an option to acquire an additional 8% of Agera’s outstanding common shares for an exercise price of $0.5 million in cash. This option expired unexercised in February 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 the selling shareholder in future periods. No amounts have yet been paid with respect to the additional purchase price.

The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. These assets and liabilities were included in the consolidated balance sheet as of the acquisition date.

Current assets	$	1,531,926
Intangible assets	4,522,120
Total assets acquired	6,054,046

Current liabilities	30,284
Deferred tax liability, net	190,754
Other long—term liabilities	695,503
Minority interest	2,182,505
Total liabilities assumed and minority interest	3,099,046
Net assets acquired	$	2,955,000

Of the $4.5 million, net, of acquired intangible assets, $4.4 million, net, was assigned to product formulations and trademarks, which have a weighted average useful life of approximately 16 years. No amount of the purchase price was assigned to goodwill.

The unaudited pro forma financial information below assumes that the Agera acquisition occurred on January 1 of the periods presented and includes the effect of amortization of intangibles from that date. The unaudited pro forma results of operations are being furnished solely for informational purposes and are not intended to represent or be indicative of the consolidated results of operations that would have been reported had these transactions been completed as of the dates and for the periods presented, nor are they necessarily indicative of future results.

	Three months ended,			Nine months ended,
(in millions, except per share data)	September 30, 2006			September 30, 2006
Pro forma revenue	$	0.3		$	0.9
Pro forma net loss	(6.7		)	(24.6		)
Pro forma basic and diluted loss per share	$	(0.22	)	$	(0.81	)

Note 6—Available-for-Sale Investments

The Company had no available-for-sale investments at September 30, 2007 or December 31, 2006, and as such, there were no sales of available-for-sale marketable debt securities during the three and nine months ended September 30, 2007. Proceeds from the sale of available-for-sale marketable debt securities were $9.0 million and $25.7 million for the three and nine months ended September 30, 2006, respectively. No realized gains and losses (based on specific identification) were included in the results of operations upon those sales.

Note 7—Commitments and Contingencies

Federal Securities Litigation

The Company and certain of its current and former officers and directors are defendants in class action cases pending in 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 on behalf of a putative class of purchasers of publicly traded Isolagen securities between March 3, 2004 and August 1, 2005. These lawsuits were Elliot Liff v. Isolagen, Inc. et al. , C.A. No. H-05-2887, filed in the United States District Court for the Southern District of Texas; Michael Cummiskey v. Isolagen, Inc. et al. , C.A. No. 05-cv-03105, filed in the United States District Court for the Southern District of Texas; Ronald A. Gargiulo v. Isolagen, Inc. et al. , C.A. No. 05-cv-4983, filed in the United States District 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.

derivative case (described below) to the United States District Court for the Eastern District of Pennsylvania. The Liff and Cummiskey actions were stayed on 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 in the Southern District of Texas were transferred to the Eastern District of Pennsylvania, where they have been captioned In re Isolagen, 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 Asset Management, LLC, Silverback Master, Ltd., Silverback Life Sciences Master Fund, Ltd., Context Capital Management, LLC and Michael F. McNulty as Lead Plaintiffs, and the law firms of Bernstein Litowitz Berger & Grossman LLP and Kirby McInerney & 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 on behalf of a putative class of persons or entities who purchased or otherwise acquired Isolagen common stock or convertible debt securities between March 3, 2004 and August 9, 2005. The complaint purports to assert claims for securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Isolagen and certain of its former officers and directors. The complaint also purports to assert claims for violations of Section 11 and 12 of the Securities Act of 1933 against the Company and certain of its current and former directors and officers in connection with the registration and sale of certain shares of Isolagen common stock and certain convertible debt securities. The complaint also purports to assert claims against CIBC World Markets Corp., Legg Mason Wood Walker, Inc., Canaccord Adams, Inc. and UBS Securities LLC as underwriters in connection with an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. On November 1, 2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied the Company’s motions to dismiss the complaint, and the Company expects the parties will commence discovery shortly.

The Company intends to defend these lawsuits vigorously. However, the Company cannot currently estimate the amount of loss, if any, that may result from the resolution of these actions, and no provision has been recorded in the consolidated financial statements. The Company will expense its legal costs as they are incurred and will record any insurance recoveries on such legal costs in the period the recoveries are received.

The Company has received requests for reimbursement of costs of defense of approximately $0.3 million from Mr. Jeffrey Tomz, the Company’s former Chief Financial Officer, who is named as a defendant in the litigation described above. The Company and Mr. Tomz have a dispute with respect to the Company’s indemnification obligations to Mr. Tomz. The Company’s view is that under its separation agreement with Mr. Tomz it owes Mr. Tomz only those benefits required to be provided to a former officer under Delaware law. Mr. Tomz’ view apparently is that the Company owes him more than the minimum required by Delaware law and is obliged to advance his costs of defense. In the event of a final adjudication of a matter in which Mr. Tomz is a defendant, the Company will be obliged to reimburse Mr. Tomz for the cost of defense, provided that he was successful, he acted in good faith in the circumstances underlying the case, and that his legal expenses are reasonable and are documented in a manner proscribed by the Delaware courts. As previously disclosed, a final determination in favor of all of the defendants, including Mr. Tomz, has been made in one of the derivative actions filed against certain current and former officers and directors, the Fordyce case. In the event that Mr. Tomz is able to satisfy the standards described above for reimbursement of his legal defense costs incurred in connection with the Fordyce case, the Company will be obligated to pay them. To date the Company has not reimbursed any of Mr. Tomz’ defense costs, and it has recorded no charge in its consolidated statements of operation other than a reserve of approximately $20,000 in connection with the Fordyce case.

Derivative Actions

The Company is the nominal defendant in derivative actions (the “Derivative Actions”) pending in State District Court in Harris County, Texas, the United States District Court for the Eastern District of Pennsylvania, and the Court of Common Pleas of Chester County, Pennsylvania.

the Company against certain of the Company’s current and former officers and directors. The Plaintiff alleges that the individual defendants breached their fiduciary duties to the Company and engaged in other wrongful conduct. Certain individual defendants are accused of improper trading in Isolagen stock. The plaintiff did not make a demand on the Board of Isolagen prior to bringing the action and plaintiff alleges that a demand was excused under the law as futile.

On December 2, 2005, the Company filed its answer and special exceptions pursuant to Rule 91 of the Texas Rules of Civil Procedure based on pleading defects inherent in the Vitale petition. The plaintiff filed an amended petition on February 15, 2006, to which the defendants renewed their special exceptions. On September 6, 2006, the Court granted the special exceptions and permitted the plaintiff thirty days to attempt to replead. Thereafter the plaintiff moved the Court for an order compelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the Court entered an order explaining 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, the plaintiff moved for reconsideration of the dismissal with prejudice of the second amended petition, for a new trial, and for leave to further amend the petition, and the defendants opposed that motion on September 20, 2007. On October 23, 2007, that motion was deemed denied by operation of law because the court had not acted on it by that date.

On October 8, 2005, Richard Keene, filed an action styled, C.A. No. H-05-3441, Richard Keene v. Frank M. DeLape et al., in the United States District Court for the Southern District of Texas. This action makes substantially similar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior to filing the action is excused as futile.

The Company sought to transfer the Keene action to the United States District Court for the Eastern District of Pennsylvania as part of the MDL Motion. On January 21, 2006, the court stayed the Keene action pending resolution of the MDL Motion. On February 23, 2006, the Keene action was transferred with the Federal Securities Actions from the Southern District 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 for leave to file a second amended complaint, and on September 15, 2006, defendants filed an opposition to that motion. On January 24, 2007, the court denied the plaintiff’s motion to file a second amended complaint, and on April 10, 2007 the court granted the defendants’ motion to dismiss and dismissed the amended complaint without prejudice. On May 9, 2007, plaintiff filed a notice of appeal from the January 24, 2007 order denying plaintiff’s motion to file a second amended complaint, and from the April 10, 2007 order dismissing plaintiff’s amended complaint without prejudice. The parties are currently briefing the plaintiff’s appeal.

On October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432, William Thomas Fordyce v. Frank M. DeLape, et al., in the Court of Common Pleas of Chester County, Pennsylvania. This action makes substantially similar allegations as the original complaint in the Vitale action. The plaintiff also alleges that his failure to make a 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 Court of Common Pleas entered an opinion and order sustaining the preliminary objections and dismissing the complaint with prejudice. On September 19, 2006, Fordyce filed a motion for reconsideration, which the Court of Common Pleas denied. On September 28, 2006, Fordyce filed a notice of appeal to the Superior Court of Pennsylvania. On July 27, 2007, the Superior Court affirmed the decision of the Court of Common Pleas.

The Derivative Actions are purportedly being prosecuted on behalf of the Company and any recovery obtained, less any attorneys’ fees awarded, will go to the Company. The Company is advancing legal expenses to certain current and former directors and officers of the Company who are named as defendants in the Derivative Actions and expects to receive reimbursement for those advances from its insurance carriers. The Company will expense its legal costs as they are incurred and will record any insurance recoveries on such legal costs in the period the recoveries are received. The Company cannot currently estimate the amount of loss, if any, that may result from the resolution of these actions, and no provision has been recorded in the consolidated financial statements.

On October 17, 2007, a purported shareholder named Mr. Ronald Beattie sent a letter to the Company’s chairman and Chief Executive Officer demanding that the Company take action against the former officers and directors named as defendants in the derivative actions described above for purportedly wrongful acts materially identical to those alleged in the derivative actions described above, and declaring he will file a shareholder derivative action if the Company does not commence an action on its own behalf within a reasonable time. The Company has not yet responded to this letter.

Dispute with Former President and Member of the Board of Directors

On March 16, 2007, the Company disclosed in its Form 10-K for the year ended December 31, 2006 (the “Form 10-K”), that the Company and Susan Ciallella had reached an understanding pursuant to which Ms. Ciallella would resign from the Company in all capacities. The understanding, which was described in the Form 10-K, was subject to the negotiation and execution 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 claims against the Company in connection with her separation from the Company. On June 8, 2007, the Company and Ms. Ciallella participated in a voluntary mediation before a former federal judge. Upon conclusion of the mediation, the Company and Ms. Ciallella entered into a Settlement Agreement and Release (the “Settlement Agreement”) pursuant to which the parties agreed to settle and resolve all claims that Ms. Ciallella may have against the Company as well as all aspects of Ms. Ciallella’s separation from the Company. The Settlement Agreement provided Ms. Ciallella the following:

(i) severance payments as follows: (a) $450,000, which was paid by June 2007; (b) $240,000 paid on September 17, 2007; and (c) $40,000 per month to be paid each month beginning October 17, 2007 through July 15, 2008 with a $20,000 payment 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 claims relating to her termination;

(iii) $5,000 paid during June 2007 in connection with Ms. Ciallella’s release of claims under the Age Discrimination in Employment Act;

(iv) $159,245 paid during June 2007 for the reimbursement of Ms. Ciallella’s legal fees in connection with the negotiation 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 $55,000 had been paid as of September 30;

(vi) Ms. Ciallella retained 300,000 of the 400,000 performance options issued to her in June 2006, which expire in June 2016; Ms. Ciallella retained 160,000 of the options issued to her in April 2006, which expire in April 2016 and which were fully vested; and Ms. Ciallella retained her vested 300,000 options, which were issued to her in April 2005 and expire in April 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; and Ms. 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 to reflect the March 16, 2007 understanding between the parties, which were included in selling, general, and administrative expenses. As a result of the June 2007 Settlement Agreement, during the three months ended June 30, 2007 the Company recorded an additional $2.0 million of termination costs, which are also included in selling, general, and administrative expenses. No such expenses were incurred during the three months ended September 30, 2007. Accordingly, during the nine months ended September 30, 2007, the Company recorded total termination costs of approximately $4.6 million, as follows:

	Three months ended,		Three months ended,
(in millions)	March 31, 2007		June 30, 2007			Total
Salary and severance	$	1.2	$	1.6		$	2.8
Consulting fee	0.3		(0.1		)	0.2
Legal fee reimbursement to Ms. Ciallella	—		0.2			0.2
Company legal fees	—		0.3			0.3
Stock option modifications (see Note 8)	1.1		—			1.1
	$	2.6	$	2.0		$	4.6

Of the $0.3 million of Company legal fees discussed above, approximately $133,000 related to the Board of Directors’ Special Committee legal counsel retained in connection with the Ciallella matter and was paid directly by the Company. Less than $10,000 related to the legal fees of one the Company’s Board members in connection with the Ciallella matter was paid directly by the Company. Also, less than $10,000 related to the legal fees of our Chief Executive Officer in connection with the Ciallella matter was paid directly by the Company. The Company is pursuing reimbursement of the amounts paid in excess of Ms. Ciallella’s contractual severance, plus defense costs, from its insurance carriers. There can be, however, no assurance that there will be a recovery or if there is, of the amount thereof. As of September 30, 2007, $0.6 million remains due to Ms. Ciallella and is recorded in accrued expenses on the consolidated balance sheet.

United Kingdom Customer Settlement

During 2005, the Company began an informal study and surveyed a number of patients who had previously received the Isolagen treatment to assess patient satisfaction. Some patients surveyed reported sub-optimal results from treatment. One hundred forty-nine patients who claimed to have received sub-optimal results were retreated for the purpose of determining the reasons for sub-optimal results. Only those patients who completed the survey, provided adequate medical records including before and after photographs and who were deemed both to have received a sub-optimal result from a first treatment administered according to the Isolagen protocol and who were considered to be appropriate patients for treatment with the Isolagen Therapy received re-treatment. No one completing the survey was offered re-treatment unless they agreed to these conditions. Following re-treatment, a number of patients reported better results than first obtained through the initial treatment by their initial treating physician.

During the first quarter of 2006, the Company received a number of complaints from certain patients who had learned of the limited re-treatment program and also learned that a number of physicians with dissatisfied patients were generating public ill-will as a result of the Company’s decision to limit the number of patients offered re-treatment and were encouraging dissatisfied patients to seek recourse against the Company. In response, in March 2006 the Company decided that it was in its best 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 to retreat the patient pursuant to the same criteria stated above or pay £1,000 (approximately US$1,750) to the patients identified to the Company as having received a sub-optimal result. In order to qualify for re-treatment and in addition to the criteria set forth above, the patient will be treated by a physician identified by the Company who will treat these patients pursuant to a protocol. In addition, these patients must have agreed to follow-up visits and assessments of their response to treatment. No patient unlikely to benefit from Isolagen Therapy has been or will be retreated.

The Company made this offer to approximately 290 patients during late March 2006. Accordingly, the Company believed its range of liability was between £290,000 (or approximately $0.5 million), assuming all 290 patients were to choose the £1,000 payment, and approximately £580,000 (or approximately $1.0 million), assuming all 290 patients elected to be retreated. The estimated costs for retreatment include the cost of treatment, physician fees and other ancillary costs. The Company estimated that 60% of the patients would elect the £1,000 offer and 40% would elect to be retreated. Accordingly, the Company recorded a charge reflected under loss from discontinued operations for the three months ended March 31, 2006 of $0.7 million. During the three months ended June 30, 2006, an additional 31 patients were entered into the settlement program, resulting in an additional charge reflected under loss from discontinued operations of $0.1 million.

During the year ended December 31, 2006, payments to patients and retreatments reduced the accrual by $0.6 million. During the three months ended March 31, 2007 and June 30, 2007, payments and retreatments to patients reduced the accrual by approximately $0.1 million and $0.0 million, respectively. As of September 30, 2007, the accrual, which is included in current liabilities of discontinued operations in the consolidated balance sheet, was $0.1 million. The estimates related to this liability may change in future periods and the effects of any changes will be accounted for in the period in which the estimate changes.

Subsequent to the Company’s public announcement regarding the closure of the United Kingdom operation, the Company received negative publicity and negative correspondence from former patients in the United Kingdom that previously received our treatment. To date, no legal court actions have been brought against the Company since the closure of the United Kingdom operation, and no provision has been recorded in the consolidated financial statements other than that discussed in the preceding paragraph.

Other Litigation

The Company is involved in various other legal matters that are being defended and handled in the ordinary course of business. Although it is not possible to predict the outcome of these other matters, management currently believes that the results will not have a material impact on the Company’s financial statements.

Note 8—Equity-based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued 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 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 for expected forfeitures. The Company adopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective application method. Under the modified prospective application method, the fair value measurement requirements of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that were outstanding as of January 1, 2006 is recognized as the requisite 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 value of equity awards 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 APB No. 25 to account for its employee stock options. Historically, substantially all stock options have been granted with an exercise price equal to the fair market value of the common stock on the date of grant. Accordingly, no compensation expense was recognized from option grants to employees and directors. Compensation expense was recognized in connection with the issuance of stock options to non-employee consultants in accordance with EITF 96-18, “Accounting for Equity 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 with equity based incentive arrangements.

The Company utilizes the straight-line attribution method for recognizing stock-based compensation expense under SFAS No. 123(R). The Company recorded $0.5 million and $0.4 million of compensation expense, net of tax, during the three months ended September 30, 2007 and September 30, 2006, respectively, for stock option awards made to employees and directors, based on the estimated fair values at the grant dates of the awards. The Company recorded $1.4 million and $0.8 million of compensation expense, net of tax, during the nine months ended September 30, 2007 and September 30, 2006, respectively, for stock option awards made to employees and directors, based on the estimated fair values at the grant dates of the awards. Further, in connection with the separation agreement with the Company’s former President and related modification of the former President’s stock options (see Note 7), the Company recorded $1.1 million in stock option modification expense during the three months ended March 31, 2007, as discussed further below.

The weighted average fair market value using the Black-Scholes option-pricing model of the options granted was $1.91 and $1.35 for the nine months ended September 30, 2007 and September 30, 2006, respectively. The fair market value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Nine Months Ended September 30,		Nine Months Ended September 30,
	2007		2006
Expected life (years)	4.0 years		5.5 years
Interest rate	4.9	%	4.9	%
Dividend yield	—		—
Volatility	76	%	80	%

The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options. Expected volatility is based on the Company’s historical experience. Expected life represents the period of time that options are expected to be outstanding and is based on the Company’s historical experience or the simplified method, as permitted by SEC Staff Accounting Bulletin No. 107 where appropriate. Expected dividend yield was not considered in the option pricing formula since the Company does not pay dividends and has no current plans to do so in the future. The forfeiture rate used was based upon historical experience. As required by SFAS No. 123(R), the Company will adjust the estimated forfeiture rate based upon actual experience.

During December 2005, the Company’s Board of Directors approved the full vesting of all unvested, outstanding stock options issued to current employees and directors. The Board decided to take this action (the “acceleration event”) in anticipation of the adoption of SFAS No. 123 (Revised 2004). As a result of this acceleration event, approximately 1.4 million stock options were vested that would have otherwise vested during 2006 and later periods. At the time of the acceleration event, the unamortized grant date fair value of the affected options was approximately $3.6 million (for SFAS No. 123 and SFAS No. 148 pro forma disclosure purposes), which was charged to pro forma expense in the fourth quarter of 2005. As the Company accelerated the vesting of outstanding employee and director stock options during December 2005, there was no remaining expense related to such options to be recognized in the Company’s statements of operations in future periods.

There were 16,666 stock options exercised during the nine months ended September 30, 2007, resulting in cash proceeds to the Company of approximately $26,265. The options exercised had an intrinsic value of $17,133. There were 86,000 stock options exercised during the nine months ended September 30, 2006, resulting in cash proceeds to the Company of $0.2 million. The options exercised had an intrinsic value of $0.2 million. A summary of option activity for the nine months ended September 30, 2007 is as follows:

Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding at January 1, 2007	10,474,833		$	4.17
Nine months ended September 30, 2007:
Granted	687,500		3.26
Exercised	(16,666	)	1.58
Forfeited	(2,508,334	)	5.75
Outstanding at September 30, 2007	8,637,333		3.65		5.43	$	2,988,670
Options exercisable at September 30, 2007	5,526,328		$	4.38	4.58	$	1,251,236

The following table summarizes the status of the Company’s non-vested stock options since January 1, 2007:

	Non-vested Options
	Number of Shares		Weighted- Average Fair Value
Non-vested at January 1, 2007	3,571,089		$	1.41
Granted	687,500		1.91
Vested	(1,044,250	)	1.53
Forfeited	(103,334	)	1.36
Non-vested at September 30, 2007	3,111,005		1.49

The total fair value of shares vested during the nine months ended September 30, 2007 and September 30, 2006 was $1.6 million and $0.8 million, respectively. As of September 30, 2007 and December 31, 2006, there were $2.6 million and $2.9 million of total unrecognized compensation cost, respectively, related to non-vested director and employee stock options which vest over time. That remaining cost at September 30, 2007 is expected to be recognized over a weighted-average period of 1.9 years. As of September 30, 2007 and December 31, 2006, there was $1.1 million and $1.5 million, respectively, of total unrecognized compensation cost related to performance-based, non-vested employee stock options. That cost will begin to be recognized when the performance criteria within the respective performance-base option grants become probable of achievement.

2001 Stock Option and Stock Appreciation Rights Plan

Effective August 10, 2001, the Company adopted the Isolagen, Inc. 2001 Stock Option and Stock Appreciation Rights Plan (the “2001 Stock Plan”). The 2001 Stock Plan is discretionary and allows for an aggregate of up to 5,000,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The 2001 Stock Plan is administered by the Compensation Committee of the Company’s Board of Directors, who has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted. As of September 30, 2007, there were 2,639,000 options outstanding under the Stock Plan and 1,735,334 options available to be issued under the Stock Plan.

During the three months ended March 31, 2007, the Company issued, under the 2001 Stock Plan, 395,000 options to employees and Board of Director members, with exercise prices ranging from $2.37 to $3.10 and with contractual lives of 5 years for employees and 10 years for Board members. During the three months ended March 31, 2006, the Company issued to four independent Board of Director members, under the 2001 Stock Plan, a total of 120,000 options to purchase its common stock with an exercise price of $2.14 per share and a ten year maximum contractual life. The options vested over the four fiscal quarters of 2006. Also during the three months ended March 31, 2006, the Company issued, under the 2001 Stock Plan, a total of 10,000 options to purchase its common stock with an exercise price of $1.84 per share to one employee with a five year maximum contractual life. These options vest over a three year period from the date of grant.

During the three months ended June 30, 2007, the Company issued, under the 2001 Stock Plan, 140,000 options to three employees, with exercise prices ranging from $4.20 to $4.55 and with contractual lives of 5 years. During the three months ended June 30, 2006, the Company issued, under the 2001 Stock Plan, (1) a total of 91,500 options to eight employees to purchase its common stock at exercise prices ranging from $1.89 to $2.06 per share, which have a five year maximum contractual life and which vest annually over a three year period from the date of grant, (2) 160,000 options to purchase its common stock with an exercise price of $1.89 per share to the Company’s President, which have a ten year maximum contractual life and which originally vested each fiscal quarter end over a three year period from the date of grant (and which were subsequently modified and fully vested in March 2007, as discussed below) and (3) 50,000 options to purchase its common stock with an exercise price of $1.89 per share to a non-employee service provider, which have a five year maximum contractual life and which fully vested after one year from the date of grant.

Also during the three months ended June 30, 2006, the Company modified 100,000 stock options previously granted to the former CFO of the Company during 2005, such that the options will expire five years from the date of grant, as opposed to 90 days after termination. In connection with this modification, the Company recorded a charge of $0.1 million to selling, general and administrative expenses in the consolidated statement of operations for the three and six months ended June 30, 2006.

During the three months ended September 30, 2007, the Company issued, under the 2001 Stock Plan, (1) a total of 102,500 options to four employees with an exercise price of $3.38 per share, which have a five year maximum contractual life and which vest annually over a three year period from the date of grant and (2) a total of 50,000 performance-based options to one employee with an exercise price of $3.38 per share and which have a maximum contractual life of five years. With respect to these 50,000 performance-based stock options, no compensation expense will be recorded until the performance-based vesting event is probable of occurrence. The grant date fair value of this award was less than $0.1 million. During the three months ended September 30, 2006, the Company issued, under the 2001 Stock Plan, (1) a total of 105,000 options to three employees to purchase its common stock at exercise prices ranging from $3.70 to $3.79 per share, which have a five year maximum contractual life and which vest annually over a three year period from the date of grant, and (2) a total of 75,000 options to four independent Board of Director members to purchase its common stock at an exercise price of $3.76 per share and which have a ten year maximum contractual life. The Director options vest quarterly over one year beginning November 30, 2006.

2003 Stock Option and Stock Appreciation Rights Plan

On January 29, 2003, the Company’s Board of Directors approved the 2003 Stock Option and Appreciation Rights Plan (the “2003 Stock Plan”). The 2003 Stock Plan is discretionary and allows for an aggregate of up to 2,250,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The 2003 Stock Plan is administered by the Compensation Committee of the Company’s Board of Directors, who has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted. As of September 30, 2007, there were 2,125,000 options outstanding under the 2003 Stock Plan and 125,000 shares were available for issuance under the 2003 Stock Plan. No options were granted under the 2003 Stock Plan during the three months and nine months ended September 30, 2007 or September 30, 2006.

2005 Equity Incentive Plan

On April 26, 2005, the Company’s Board of Directors approved the 2005 Equity Incentive Plan (the “2005 Stock Plan”). The 2005 Stock Plan is discretionary and allows for an aggregate of up to 2,100,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options, stock units, stock awards, stock appreciation rights and other stock-based awards. The 2005 Stock Plan is administered by the Compensation Committee of the Company’s Board of Directors, who has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted. As of September 30, 2007, there were 305,000 options outstanding and 1,712,652 shares were available for issuance under the 2005 Stock Plan. No stock options were issued under the 2005 Stock Plan during both the three and nine months ended September 30, 2007.

During the three months ended June 30, 2006, the Company issued 400,000 options to purchase its 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, upon the occurrence of any of the following events: (i) upon the closing of the sale of substantially all of the assets of the Company or the reorganization, consolidation or the merger of the Company; provided that the event results in the payment or distribution of consideration valued in good faith by the Board of Directors at $25 per share or more; or (ii) upon the closing of a tender offer or exchange offer to purchase 50% or more of the issued and outstanding shares of common stock of the Company at a price per share 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 not subsequently redeemed by the Company or that the Rights Plan is not subsequently amended to preclude exercise of the rights issued thereunder, prior to the Distribution Date, as that term is defined in the Rights Pan), or (iv) at such other time as the Board of Directors, in its sole discretion, deems appropriate; provided in each case that the President is employed by the Company at the time of said event. The 400,000 share option grant was considered a grant of a performance stock option. No compensation cost was recorded during 2006 for this grant as the Company did not believe that the vesting events were probable of occurrence. The 2006 grant date fair value of the award was approximately $0.6 million. Subsequently, this 400,000 share option grant was modified during the three months ended March 31, 2007, as discussed below under Modification of Stock Options.

Restricted Stock

During the three months ended March 31, 2006, the Company issued 126,750 shares of restricted stock awards to various employees under the 2005 Equity Incentive Plan. The restricted common stock vested quarterly over three years, beginning on March 31, 2006 and ending on December 31, 2008. On March 31, 2006, 10,557 shares of the 126,750 shares of restricted stock vested. During the three months ended June 30, 2006, 2,752 shares of the restricted stock were cancelled due to terminations, 94,648 shares of restricted stock were cancelled in a Board approved exchange for 206,500 stock options (which were issued under the 2001 Plan) and 3,707 shares of restricted stock vested.

During the three and nine months ended September 30, 2007, respectively, 42 shares and 126 shares of restricted stock vested. As of September 30, 2007, 208 shares of unvested restricted stock were outstanding, which vest quarterly through March 31, 2009.

Other Stock Options

During both the three and nine months ended September 30, 2007, the Company did not issue any options outside the 2001 Stock Plan, the 2003 Stock Plan or the 2005 Stock Plan. During the three months ended March 31, 2006, the Company did not issue any options outside the 2001 Stock Plan, the 2003 Stock Plan or the 2005 Stock Plan.

During the three months ended June 30, 2006 , the Company issued (1) 2,000,000 options to purchase its common stock with an exercise price of $1.88 per share to the Company’s CEO, which have a ten year maximum contractual life and which vest each fiscal quarter end over a three year period from the date of grant, (2) 325,000 options to purchase its common stock with an exercise price of $1.87 per share to the Company’s CFO, which have a five year maximum contractual life and vest annually over a three year period from the date of grant and (3) 200,000 options to purchase its common stock with an exercise price of $1.87 per share to a separate employee, which have a five year maximum contractual life and vest annually over a three year period from the date of grant.

In addition, during the three months ended June 30, 2006 the Company issued 500,000 options to purchase its common stock with an exercise price of $1.88 per share to the Company’s CEO. These options have a ten year maximum contractual life and the options have identical vesting terms to the Performance Stock Option Grant issued under the 2005 Stock Plan discussed above. No compensation cost has been recorded for this grant as the Company does not currently believe that the vesting events are probable of occurrence. The grant date fair value of the award was approximately $0.7 million. This fair value of $0.7 million, or any portion thereof, will not be recognized as compensation expense until the vesting of the award becomes probable.

As of September 30, 2007, there were 3,568,333 nonqualified stock options outstanding outside of the shareholder approved plans discussed above.

Modification of Stock Options

In connection with the separation of the Company’s President (see Note 7), the Company agreed on March 16, 2007 to modify certain 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 extended such that the 300,000 options would expire 10 years from the original grant date, as opposed to expiring upon termination of employment. The 300,000 performance based stock options would continue to be subject to the same performance based vesting requirements. 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 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 during the months ended March 31, 2007. One other employee stock option modification resulted in less than $0.1 million charge to selling, general and administrative expense during the three months ended March 31, 2007. No stock option modifications occurred during the either the three months ended June 30, 2007 or three months ended September 30, 2007.

As discussed previously under 2001 Stock Option and Stock Appreciation Rights Plan, during the three months ended June 30, 2006, the Company modified 100,000 stock options previously granted to the former CFO of the Company during 2005, such that the options will expire five years from the date of grant, as opposed to 90 days after termination. In connection with this modification, the Company recorded a charge of $0.1 million to selling, general and administrative expenses in the consolidated statement of operations for the three and six months ended June 30, 2006.

Equity Instruments Issued for Services

As of September 30, 2007, the Company had outstanding 603,600 warrants and options issued to non-employees under consulting agreements. The following sets forth certain information concerning these warrants and options:

		Vested
Warrants and options outstanding		603,600
Range of exercise prices		$1.50-6.00
Weighted average exercise price		$4.17
Expiration dates		2009-2013

Expense related to these contracts was zero for the three months ended September 30, 2007 and less than $0.1 million for the three months ended September 30, 2006. Expense related to these contracts was less than $0.1 million for the nine months ended September 30, 2007 and was $0.2 million for the nine months ended September 30, 2006. The expense was calculated using the Black Scholes option-pricing model based on the following weighted average assumptions for the nine months ended September 30, 2007:

Expected life (years)		4-5 Years
Interest rate		4.0-4.97%
Dividend yield		—
Volatility		71-83%

Further, there were 168,246 and 688,256 warrants outstanding as of September 30, 2007 and as of December 31, 2006, which were primarily issued in connection with past equity offerings. There were no warrants converted or forfeited during the three and nine months ended September 30, 2006.

During the three and nine months ended September 30, 2007, there were 520,010 warrants exercised. 463,370 of these warrants were exercised via cash 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 as a result of these warrants exercised and $0.9 million of cash proceeds were received by the Company in connection with the payment of the related warrant exercise price. The intrinsic value of the warrants exercised during the three and nine months ended September 30, 2007 was $1.1 million.

Note 9—Segment Information and Geographical information

Since the acquisition of Agera on August 10, 2006 (see Note 5), the Company has operated two reportable segments: Isolagen Therapy and Agera. Prior to the acquisition of Agera, the Company reported one reportable segment. The Isolagen Therapy segment specializes in the development of autologous cellular therapies for soft tissue regeneration. The Agera segment maintains proprietary rights to a scientifically-based advanced line of skincare products. The operations of the Agera segment were not material to the three months ended September 30, 2006. The following table provides operating financial information for the Company’s two reportable segments:

	Segment
(in millions)	Isolagen Therapy			Agera			Consolidated
Three months ended September 30, 2007
External revenue	$	—		$	0.3		$	0.3
Intersegment revenue	—			—			—
Total operating revenue	—			0.3			0.3
Cost of revenue	—			0.1			0.1
Selling, general and administrative expense	3.7			0.3			4.0
Research and development expense	3.1			—			3.1
Management fee	(0.2		)	0.2			—
Total operating expenses	6.6			0.5			7.1
Operating loss	(6.6		)	(0.3		)	(6.9		)
Interest income and other	0.2			—			0.2
Interest expense	(1.0		)	—			(1.0		)
Minority interest	—			—			—
Segment loss from continuing operations	$	(7.4	)	$	(0.3	)	$	(7.7	)

Nine months ended September 30, 2007
External revenue	$	—		$	1.0		1.0
Intersegment revenue	—			—			—
Total operating revenue	—			1.0			1.0
Cost of revenue	—			0.5			0.5
Selling, general and administrative expense	14.9			1.1			16.0
Research and development expense	9.6			—			9.6
Management fee	(0.5		)	0.5			—
Total operating expenses	24.0			1.6			25.6
Operating loss	(24.0		)	(1.1		)	(25.1		)
Interest income and other	0.8			—			0.8
Interest expense	(2.9		)	—			(2.9		)
Minority interest	—			0.3			0.3
Segment loss from continuing operations	$	(26.1	)	$	(0.8	)	$	(26.9	)

Supplemental information:
for the three months ended September 30, 2007:

	Segment
	Isolagen Therapy	Agera	Consolidated

Depreciation and amortization expense	0.3	0.1	0.4
Capital expenditures	—	—	—
Equity awards issued for services	0.5	—	0.5
Amortization of debt issuance costs	0.2	—	0.2
Total assets (1)	29.9	5.4	35.3
Property and equipment, net	3.6	—	3.6
Intangible assets, net	0.5	4.2	4.7

Supplemental information:
for the nine months ended September 30, 2007:

	Segment
(in millions)	Isolagen Therapy	Agera	Consolidated

Depreciation and amortization expense	0.9	0.2	1.1
Capital expenditures	0.1	—	0.1
Equity awards issued for services and equity award modifications	2.6	—	2.6
Amortization of debt issuance costs	0.6	—	0.6

(1) Total assets on the consolidated balance sheet at September 30, 2007 are approximately $46.4 million, which includes assets of continuing operations of $35.3 million and assets of discontinued operations of $11.1 million. An intercompany receivable of $1.0 million, due from the Agera segment to the Isolagen Therapy segment, is eliminated in consolidation. This intercompany receivable is primarily due to the intercompany management fee charge to Agera by Isolagen, as well as Agera working capital needs provided by Isolagen, and has been excluded from total assets of the Isolagen Therapy segment in the above table.

Geographical information concerning the Company’s operations and assets is as follows:

	Revenue Three months ended September 30,
(in millions)	2007		2006
United States	$	0.1	$	—
United Kingdom	0.2		0.1
Other	—		—
	$	0.3	$	0.1

	Revenue Nine months ended September 30,
	2007		2006
United States	$	0.3	$	—
United Kingdom	0.7		0.1
Other	—		—
	1.0		$	0.1

	Property and Equipment, net
	September 30,		December 31,
	2007		2006
United States	$	3.6	$	4.3
	$	3.6	$	4.3

	Intangible Assets, net
	September 30,		December 31,
	2007		2006
United States	$	4.7	$	4.9
	$	4.7	$	4.9

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements, including the notes thereto.

Forward-Looking Information

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to Isolagen that is based on management’s exercise of business judgment and assumptions made by and information currently available to management. When used in this document and other documents, releases and reports released by us, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying 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 or results described in such statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements. Several of these factors include, without limitation:

• our ability to develop autologous cellular therapies that have specific applications in cosmetic dermatology, and our ability to explore (and possibly develop) applications for periodontal disease, reconstructive dentistry, treatment of restrictive scars and burns and other health-related markets;

• whether our clinical human trials relating to autologous cellular therapy applications for the treatment of dermal defects, gingival recession, and such other indications as we may identify and pursue can be conducted within the timeframe that we expect, whether such trials will yield positive results, or whether additional applications for the commercialization of autologous cellular therapy can be identified by us and advanced into human clinical trials;

• higher than anticipated dropout rates of subjects in our clinical trials which could adversely affect trial results and make it more difficult to obtain regulatory approval;

• whether the results of our full Phase III pivotal study will support a successful BLA filing;

• our ability to finance our business;

• our ability to provide and deliver any autologous cellular therapies that we may develop, on a basis that is competitive with other therapies, drugs and treatments that may be provided by our competitors;

• our ability to decrease our manufacturing costs for our Isolagen Therapy product candidates through the improvement of our manufacturing process, and our ability to validate any such improvements with the relevant regulatory agencies;

• our ability to reduce our need for fetal bovine calf serum by improved use of less expensive media combinations and different media alternatives;

• our ability to improve our historical pricing model;

• a stable currency rate environment in the world, and specifically the countries we are doing business in or plan to do business in;

• our ability to meet requisite regulations or receive regulatory approvals in the United States, Europe, Asia and the Americas, and our ability to retain any regulatory approvals that we may obtain; and the absence of adverse regulatory developments in the United States, Europe, Asia and the Americas or any other country where we plan to conduct commercial operations;

• continued availability of supplies at satisfactory prices;

• new entrance of competitive products or further penetration of existing products in our markets;

• the effect on us from adverse publicity related to our products or the Company itself;

• any adverse claims relating to our intellectual property;

• the adoption of new, or changes in, accounting principles;

• adverse results from, or changes in, any pending legal proceedings;

• our ability to maintain compliance with the AMEX requirements for continued listing of our common stock;

• the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;

• our ability to efficiently integrate our recent acquisition and future acquisitions, if any, or any other new lines of business that we may enter in the future;

• our issuance of certain rights to our shareholders that may have anti-takeover effects;

• our dependence on physicians to correctly follow our established protocols for the safe administration of our Isolagen Therapy;

• our ability to effectively and efficiently manage the closing of our UK operation;

• whether current or future amendments to our Informed Consent Forms, based on new knowledge obtained during the execution of our clinical trials or based on changes to the basic design or administration of our clinical trials, give rise to delays in our clinical study timelines; and

• other risks referenced from time to time elsewhere in this report and in our filings with the SEC, including, without limitation, the risks and uncertainties described in Item 1A of our Form 10-K for the year ended December 31, 2006, as well as Part II, Item 1A of our Form 10-Q for the three and six months ended June 30, 2007.

These factors are not necessarily all of the important factors that could cause actual results of operations to differ materially from those expressed in these forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. We cannot assure you that projected results will be achieved.

General

We are an aesthetic and therapeutic company focused on developing novel skin and tissue rejuvenation products. Our clinical development product candidates are designed to improve the appearance of skin injured by the effects of aging, sun exposure, acne and burns with a patient’s own, or autologous, fibroblast cells produced in our proprietary Isolagen Process. Our clinical development programs encompass both aesthetic and therapeutic indications. Our most advanced indication utilizing the Isolagen Process is for the treatment of wrinkles and is currently in Phase III clinical development. We are in the process of initiating a Phase III study in acne scars. We also have ongoing Phase II trials in full face rejuvenation and periodontal disease and plan to initiate an additional Phase II trial for burn scars. We also develop and market an advanced skin care product line through our Agera Laboratories, Inc. subsidiary, in which we acquired a 57% interest in August 2006.

We have adopted an eight-point business strategy created by the new management team put in place in June 2006. The objectives of this business strategy are to achieve regulatory milestones, position the company and its products properly, create a commercial operations infrastructure, and exploit complementary business opportunities by:

• Targeting areas of skin and tissue rejuvenation with compelling market potential.

• Advancing existing clinical development programs and identifying other strategic indications.

• Developing manufacturing efficiencies and effective process improvements.

• Pursuing opportunities to in-license or purchase complementary products and/or technologies.

• Acquiring small businesses or creating co-marketing arrangements aligned with our overall business strategy.

• Optimizing the value of our intellectual property and business relationships through partnerships to exploit synergies.

• Focusing our management resources on building our business from the United States outward, intending ultimately to move into or operate in foreign markets where business opportunities then exist.

• Adding proven and experienced biotechnology and health care professionals to our management team.

We sometimes refer to our product candidates in the aggregate as Isolagen Therapy. From 2002 through 2006, we made Isolagen Therapy available to physicians primarily in the United Kingdom. In the fourth quarter of 2006, our Board of Directors approved closing our United Kingdom operation. Our United Kingdom operation was shutdown on March 31, 2007 (as more fully discussed in Note 4 in Notes to the Consolidated Financial Statements and below). We have refocused our management and capital resources on building our business in the United States. As our operations mature in the United States we expect to enter foreign markets when business opportunities that are consistent with our business strategy present themselves.

We market and sell an advanced skin care line through our majority-owned subsidiary, Agera, which we 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 technologically 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).

We are considered to be a “development stage” enterprise.

Clinical Development Programs

Our product development programs are focused on the aesthetic and therapeutic markets. These programs are supported by a number of clinical trial programs at various stages of development.

Our aesthetics development programs include product candidates (1) to treat targeted areas or wrinkles, and (2) to provide full-face rejuvenation that includes the improvement of fine lines, wrinkles, skin texture and appearance. Our therapeutic development programs are designed to treat restrictive burn scars, acne scars and dental papillary recession. All of our product candidates are non-surgical and minimally invasive. Although the discussions below include estimates of when we expect trials to be completed, the prediction of when a clinical trial will complete is subject to a number of factors and uncertainties.

Aesthetic Development Programs

Wrinkles/Nasolabial Folds - Phase III Trials : In October 2006, we reached an agreement with the U.S. Food and Drug Administration, or FDA, on the design of a Phase III pivotal study protocol for the treatment of nasolabial folds (lines which run from the sides of the nose to the corners of the mouth). The randomized, double-blind protocol was submitted to the FDA under the agency’s Special Protocol Assessment, or SPA. Pursuant to this assessment process, the FDA has agreed that our study design for two identical trials, including patient numbers, clinical endpoints, and statistical analyses, is adequate to provide the necessary data that, depending on the outcome, could form the basis of an efficacy claim for a marketing application. The pivotal Phase III trials will evaluate the efficacy and safety of Isolagen Therapy against placebo in approximately 400 subjects total with approximately 200 subjects enrolled in each trial. We completed enrollment of the study and commenced injection of subjects in early 2007. As we have previously disclosed, we encountered certain delays related to manufacturing and scheduling in connection with the study. We conferred with the FDA regarding these issues, and based on our findings and our dialogue with the FDA, we submitted an amendment to our study protocol and chemistry, manufacturing and control (CMC) submission. On June 1, 2007, we received approval of the amendment and the related Informed Consent Forms from the Investigational Review Board. On July 11, 2007, the FDA notified us that our proposed changes to the protocol were acceptable and within the scope of the original SPA review. We expect that injections related to this study will be completed during January 2008.

Refer to Part II, Item 1A of this Form 10-Q for an update of our risk factor “Higher than anticipated dropout rates of subjects in our clinical trials could adversely affect trial results and make it more difficult to obtain regulatory approval.”

Full Face Rejuvenation - Phase II Trial: In March 2007 we commenced an open label (unblinded) trial of approximately 50 subjects. Injections of Isolagen Therapy began to be administered in July 2007. This trial is designed to further evaluate the safety and use of Isolagen Therapy to treat fine lines and wrinkles for the full face. All 45 remaining subjects have been enrolled and biopsied. Five investigators across the United States are participating in this trial. The subjects will receive two series of injections approximately one month apart. The

subjects will be followed for six months following each subject’s last injection. We expect to complete all injections by the end of 2007.

Therapeutic Development Programs

Acne Scars - Phase III Trials: We are preparing for an acne scar Phase III trial program. This program will encompass two identical Phase III trials with approximately 120 patients in each trial. These placebo controlled trials are designed to evaluate the use of our Isolagen Therapy to correct or improve the appearance of acne scars. Each subject will serve as their own control, receiving Isolagen Therapy on one side of their face and placebo on the other. The subjects will receive three injections two weeks apart. The follow-up and evaluation period will be complete four months after each subject’s last injection. In connection with this acne scar program, we have recently developed a validated photo guide for use in the evaluators' assessment of acne study subjects. Our evaluator assessment scale and photo guide have never been utilized in a phase III trial.

A pre- Investigational New Drug application, or pre-IND, meeting with the FDA was held on March 2, 2007 to discuss our trial design to study the Isolagen Therapy for the treatment of acne scarring. Based on our discussion with the FDA, we filed an IND for a Phase III clinical trial program in July 2007 together with our protocol. In September 2007, the IND was accepted by the FDA. We have scheduled the investigator meeting for early November 2007 and expect to commence the clinical program shortly thereafter.

Restrictive Burn Scars - Phase II Trial: In January 2007, we met with the FDA to discuss our clinical program for the use of Isolagen Therapy for restrictive burn scar patients. We filed an IND for Isolagen Therapy to treat restrictive burn scars in February 2007. Based on our discussions with the FDA, we are preparing to initiate a Phase II trial to evaluate the use of Isolagen Therapy to improve range of motion, function and flexibility, among other parameters, in existing restrictive burn scars. We plan to commence this demonstration trial, of approximately 20 patients, during the fourth quarter of 2007.

Dental Study - Phase II Trial: In late 2003, we completed a Phase I clinical trial for the treatment of condition relating to periodontal disease, specifically to treat Interdental Papillary Insufficiency. In the second quarter of 2005, we concluded the Phase II dental clinical trial with the use of Isolagen Therapy and subsequently announced that investigator and subject visual analog scale assessments demonstrated that the Isolagen Therapy was statistically superior to placebo at four months after treatment. Although results of the investigator and subject assessment demonstrated that the Isolagen Therapy was statistically 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. This single site study includes 11 subjects and the trial is expected to be completed and the data evaluated during the first half of 2008. We are identifying a development strategy for this application.

Closure of the United Kingdom Operation

As part of our continuing efforts to evaluate the best uses of our resources, in the fourth quarter of 2006 our Board of Directors approved the proposed closing of the United Kingdom operation. After a full business analysis, management and the Board determined that the best use of resources was to focus on our strategic opportunities. As such, our first priority is to advance the United States pivotal Phase III clinical trial for the use of Isolagen Therapy for the treatment of certain facial wrinkles, and then, with regulatory agencies’ agreement, initiate clinical studies in other therapeutic and aesthetic areas.

On March 31, 2007, we completed the closure of the United Kingdom manufacturing facility. The United Kingdom operation was located in London, England with two locations; a manufacturing site and an administrative site. Both sites are under operating leases. The manufacturing site lease expires February 2010 and, as of September 30, 2007, the remaining lease obligation approximated $0.5 million. The administrative site lease expired in April 2007.

Excluding the manufacturing lease, which ends February 2010 unless terminated sooner, i t is expected that the majority of all remaining costs to be incurred will be recorded during 2007. However, no assurances can be given with respect to the total cost of closing the United Kingdom operation or the timing of such costs. The Company believes that the amount of all future charges associated with the United Kingdom operation shutdown,

such as potential lease exit costs and professional fees, among other items, cannot be precisely estimated at this time. However, as of September 30, 2007, remaining future charges are expected to be approximately $0.6 million (both before and after tax), including $0.5 million of remaining lease obligations, but excluding potential claims or contingencies unknown at this time.

With the closure of the United Kingdom operation on March 31, 2007, our European operations (both the United Kingdom and Switzerland) and Australian operations have been presented in the financial statements as discontinued operations for all periods presented. See Note 4 of Notes to Consolidated Financial Statements.

Critical Accounting Policies

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 3 of the Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, our management 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 of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. The following discusses our significant accounting policies and estimates.

Stock-Based Compensation : In December 2004, the Financial Accounting Standards Board (“FASB”) issued 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 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 for expected forfeitures.

We adopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective application method. Under the modified prospective application method, the fair value measurement requirements of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that were outstanding as of January 1, 2006 is recognized as the requisite 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 value of equity awards granted before January 1, 2006 are precluded.

The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for awards in footnote disclosures required under SFAS No. 123. Prior to the adoption of SFAS No. 123(R), we followed the intrinsic value method in accordance with APB No. 25 to account for our employee and director stock options. Historically, substantially all stock options have been granted with an exercise price equal to the fair market value of the common stock on the date of grant. Accordingly, no compensation expense was recognized from substantially all option grants to employees and directors prior to the adoption of SFAS No. 123(R). However, compensation expense was recognized in connection with the issuance of stock options to non-employee consultants in accordance with EITF 96-18, “Accounting for Equity 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 with equity based incentive arrangements.

The adoption of SFAS No. 123(R) requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangement. This change in

accounting resulted in the recognition of compensation expense of $0.5 million and $0.4 million for three months ended September 30, 2007 and 2006, respectively, and $1.4 million and $0.8 million for the nine months ended September 30, 2007 and 2006, respectively, related to our employee and director stock options. During the three months ended September 30, 2007, we granted stock options to purchase 0.2 million shares of our common stock. As of September 30, 2007, there was $2.6 million of total unrecognized compensation cost related to non-vested director and employee stock options which vest over time. That cost is expected to be recognized over a weighted-average period of 1.9 years. As of September 30, 2007, there was $1.1 million of total unrecognized compensation cost related to performance-based, non-vested employee stock options. That cost will begin to be recognized when the performance criteria within the respective performance-base option grants become probable of achievement.

During December 2005, the board of directors approved the full vesting of all unvested, outstanding stock options issued to current employees and directors. The board decided to take this action (the “acceleration event”) in anticipation of the adoption of SFAS No. 123 (R). As a result of this acceleration event, stock options to purchase approximately 1.4 million shares of our common stock were vested that would have otherwise vested during 2006 and later periods. At the time of the acceleration event, the unamortized grant date fair value of the affected options was approximately $3.6 million (for SFAS No. 123 and SFAS No. 148 pro forma disclosure purposes), which was charged to pro forma expense in the fourth quarter of 2005. Substantially all of the unvested employee stock options that were subject to the acceleration event had exercise prices above market price of our common stock at the time the board approved the acceleration event. However, in accordance with SFAS 123 (R) if we had not completed this acceleration event in December 2005, the majority of the $3.6 million amount discussed above would have been charged against the future results of operations, beginning in the first quarter of fiscal 2006 and continuing through later periods as the options vested. As discussed above, substantially all of the unvested employee stock options which were accelerated had exercise prices above market price at the time of acceleration. For the purposes of applying APB No. 25 to such stock options in the statement of operations for the year ended December 31, 2005, the acceleration event was treated as the acceleration of the vesting of employee and director options that otherwise would have vested as originally scheduled, and accordingly was not a modification requiring the remeasurement of the intrinsic value of the options, or the application of variable option accounting, under APB No. 25. For stock options that had exercise prices below market price at the time of acceleration and that would not have vested originally, a charge of approximately $15,000 was recorded in the statement of operations for the year ended December 31, 2005.

In March 2007, and in connection with the separation of the Company’s President, the Company agreed to modify certain 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 extended such that the 300,000 options would expire 10 years from the original grant date, as opposed to expiring upon termination of employment. The 300,000 performance based stock options will continue to be subject to the same performance based vesting requirements. 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 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 during the months ended March 31, 2007. One other employee stock option modification resulted in less than $0.1 million charge to selling, general and administrative expense during the three months ended March 31, 2007.

Federal Securities and Derivative Actions: As discussed in Note 7 of Notes to Consolidated Financial Statements, set forth elsewhere in this Report, we are currently defending ourselves against various class and derivative actions. We intend to defend ourselves vigorously against these actions. We cannot currently estimate the amount of loss, if any, that may result from the resolution of these actions, and no provision has been recorded in our consolidated financial statements. Generally, a loss must be both reasonably estimable and probable in order to record a provision for loss. We will expense our legal costs as they are incurred and will record any insurance recoveries on such legal costs in the period the recoveries are received. Although we have not recorded a provision for loss regarding these matters, a loss could occur in a future period.

We are involved in various other legal matters that are being defended and handled in the ordinary course of business. Although it is not possible to predict the outcome of these matters, management believes that the results will not have a material impact on our financial statements.

Research and Development Expenses: Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities cost. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of management fees, site management and monitoring costs and data management costs. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.

Going Concern

As of September 30, 2007, we had cash, cash equivalents and restricted cash of $24.1 million and working capital of $19.9 million (including our cash, cash equivalents and restricted cash). We believe our existing capital resources are adequate to finance our operations through June 30, 2008; however, our long-term viability is dependent upon successful operation of our business, our ability to improve our manufacturing process, the approval of our products and the ability to raise additional debt and/or equity to meet our business objectives. We estimate that we will require additional cash resources during the third quarter of 2008 based upon our current operating plan and condition. This estimate excludes any proceeds that would be realized from the sale of our Swiss corporate campus (discussed further below).

We filed a shelf registration statement on Form S-3 during June 2007, which was declared effective by the Securities and Exchange Commission (“SEC”). In August 2007, we raised $13.8 million, net of offering costs, under this shelf registration via the sale of 6.8 million shares of our common stock to institutional investors. The shelf registration allowed 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 more future public offerings. As of September 30, 2007 we can offer and sell up to an additional $36.2 million of common stock pursuant to this shelf registration.

Our ability to complete an offering, 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 of Isolagen and the offering terms. Our ability to commence an offering may be dependent on our ability to complete the registration process, which is subject to the SEC’s regulatory calendar, as well as our ability to timely respond to any SEC comments that have been or will be issued. We are also continuing our efforts to sell our Swiss corporate campus. We will add any proceeds from the sale of the Swiss corporate campus to our working capital, which would partially alleviate our need to obtain financing from other sources. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.

As a result of the above discussed conditions, and in accordance with generally accepted accounting principles in the United States, there exists substantial doubt about our ability to continue as a going concern, and our ability to continue as a going concern is contingent upon our ability to secure additional adequate financing or capital prior to or during the third quarter of 2008. If we are unable to obtain additional sufficient funds prior to this time, we will be required to terminate or delay regulatory approval of one, more than one, or all of our product candidates, curtail or delay the implementation of manufacturing process improvements or delay the expansion of our sales and marketing capabilities. Any of these actions would have an adverse affect on our operations, the realization of our assets and the timely satisfaction of our liabilities. Our financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.

Results of Operations

Comparison of the three months ended September 30, 2007 and 2006

REVENUES. Revenue increased $0.2 million to $0.3 million for the three months ended September 30, 2007, as compared to $0.1 million for the three months ended September 30, 2006. Our revenue from continuing operations is from the operations of Agera which we acquired on August 10, 2006. Agera markets and sells a

complete line of advanced skin care systems based on a wide array of proprietary formulations, trademarks and non-peptide technology. On a pro forma basis, assuming that Agera had been acquired on January 1, 2006, our revenue would have been $0.3 million for the quarter ended September 30, 2006. Due to our financial statement presentation of our United Kingdom operation as a discontinued operation, our revenue for the three months ended September 30, 2006 is representative of only Agera, as all historical United Kingdom revenue is reflected in loss from discontinued operations.

COST OF SALES. Costs of sales increased to $0.2 million for the three months ended September 30, 2007, as compared to $0.1 million for the three months ended September 30, 2006. Our cost of sales relates to the operation of Agera.

As a percentage of revenue, Agera cost of sales were approximately 48% for the three months ended September 30, 2007. On a pro forma basis, assuming Agera had been acquired on January 1, 2006, our cost of sales as a percentage of revenue would have been 50%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased approximately $1.3 million, or 48%, to $4.0 million for the three months ended September 30, 2007, as compared to $2.7 million for the three months ended September 30, 2006. The increase in selling, general and administrative expense is primarily due to the following:

a) Corporate expense increased $1.0 million to $1.2 million for the three months ended September 30, 2007, as compared to $0.2 million for the three months September 30, 2006 due to the following non-recurring costs incurred during the current quarter: $0.8 million of expense related to our debt exchange offer (such as legal, accounting and printer costs), which we withdrew and terminated during the three months ended September 30, 2007 (see further discussion in Unaudited Notes to the Consolidated Financial Statements, Footnote 3, Debt Issue Costs); and less than $0.2 million related to business development activities.

b) Legal expenses increased by approximately $0.4 million to $0.4 million for the three months ended September 30, 2007. During the three months ended September 30, 2006, we received a reimbursement of $0.7 million from our insurance carrier for reimbursement of defense cost related to the class action and derivative action matters. If we had not received this $0.7 million reimbursement, our legal expenses would have been approximately $0.6 million for the three months ended September 30, 2006. During the three months ended September 30, 2007, we received a reimbursement of less than $0.1 million from our insurance carrier for reimbursement of defense cost related to the class action and derivative action matters. If we had not received this reimbursement, our legal expenses would have been approximately $0.5 million for the three months ended September 30, 2007. In general, our legal expense, net, fluctuates primarily as a result of the level of class action and derivative action defense costs incurred during a particular period and as a result of the timing of related insurance carrier reimbursements for defense costs. Such reimbursements are recorded when received.

c) Compensation expense decreased $0.2 million to $1.1 million for the three months ended September 30, 2007, as compared to $1.3 million for the three months ended September 30, 2006 primarily due to lower bonus expense earned, as well as to compensation expense savings related to the departure of our former President, who was not replaced.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $1.2 million for the three months ended September 30, 2007 to $3.1 million, as compared to $1.8 million for the three months ended September 30, 2006. Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for our Isolagen Therapy for specific dermal applications in the United States, as well as costs related to other potential indications for our Isolagen Therapy. Also, research and development expense includes costs to develop manufacturing, cell collection and logistical process improvements.

Assessment (“SPA”) regulations. We completed enrollment of our Phase III wrinkle/nasolabial fold study and commenced injections in early 2007. Research and development costs primarily include personnel and laboratory costs related to these FDA trials and certain consulting costs. The total inception to date cost of research and development as of September 30, 2007 was $40.2 million. The FDA approval process is extremely complicated and is dependent upon our study protocols and the results of our studies. In the event that the FDA requires additional studies for our dermal product candidate or requires changes in our study protocols or in the event that the results of the studies are not consistent with our expectations, as occurred during 2005 with respect to our previously conducted Phase III wrinkle/nasolabial fold trial, the process will be more expensive and time consuming. Due to the complexities of the FDA approval process, we are unable to predict what the cost of obtaining approval for our dermal product candidate will be at this time, or any other product candidate. We have other research projects currently underway. However, research and development costs related to these other projects were not material during the three months ended September 30, 2007 and 2006.

The major changes in research and development expense are due primarily to the following:

a) Consulting expense increased by approximately $0.7 million to $1.4 million for the three months ended September 30, 2007, as compared to $0.7 million for the three months ended September 30, 2006, as a result of increased expenditures related to our current wrinkle/nasolabial fold study and preparations related to other clinical trials;

b) Salaries, bonuses and payroll taxes increased by approximately $0.2 million to $0.8 million for the three months ended September 30, 2007, as compared to $0.6 million for the three months ended September 30, 2006, as a result of increased employees engaged in research and development activities;

c) Laboratory costs increased by approximately $0.1 million to $0.3 million for the three months ended September 30, 2007, as compared to $0.2 million for the three months ended September 30, 2006, as a result of increased clinical activities in our Exton, Pennsylvania location; and

d) Contract labor support related to our clinical manufacturing operation increased to $0.2 million for the three months ended September 30, 2007, as compared to zero for the three months ended September 30, 2006, as a result of increased clinical activities in our Exton, Pennsylvania location.

e) Facilities, depreciation and travel costs remained unchanged for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006, at $0.4 million.

LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations decreased by approximately $1.7 million for the three months ended September 30, 2007 to $0.1 million, as compared to $1.8 million for the three months ended September 30, 2006. As previously discussed under “—Closure of the United Kingdom Operation,” during the three months ended December 31, 2006, the Board of Directors approved the closure of our United Kingdom operation. On March 31, 2007, the United Kingdom operation was closed. As such, during the three months ended September 30, 2007, costs related to the United Kingdom operation decreased to $0.1million, which primarily consisted of facility expense, legal expense and public relations costs, as compared to normal, pre-close operations during the three months ended September 30, 2006.

INTEREST INCOME. Interest income decreased approximately $0.4 million to $0.2 million for the three months ended September 30, 2007, as compared to $0.6 million for the three months ended September 30, 2006. The decrease in interest income of $0.4 million resulted principally from a decrease in the amount of cash, restricted cash and short-term investment balances, as a result of our use of these balances to fund our normal operating activities primarily related to our efforts to gain FDA approval for our Isolagen Therapy.

INTEREST EXPENSE. Interest expense remained constant at $1.0 million for the three months ended September 30, 2007, as compared to the three months ended September 30, 2006. Our interest expense is related to our $90.0 million, 3.5% convertible subordinated notes, as well as the related amortization of deferred debt issuance costs of $0.2 million for the three months ended September 30, 2007 and 2006, respectively.

NET LOSS. Net loss increased $1.1 million to $7.8 million for the three months ended September 30, 2007, as compared to a net loss of $6.7 million for the three months ended September 30, 2006. This increase in net loss primarily represents the effects of the increases in our selling, general and administrative expenses and research and development expenses, offset by our decrease in loss from discontinued operation, as discussed above.

Comparison of the nine months ended September 30, 2007 and 2006

REVENUES. Revenue increased $0.9 million to $1.0 million for the nine months ended September 30, 2007, as compared to $0.1 million for the nine months ended September 30, 2006. Our revenue from continuing operations is from the operations of Agera which we acquired on August 10, 2006. On a pro forma basis, assuming that Agera had been acquired on January 1, 2006, our revenue would have been $0.9 million for the nine months ended September 30, 2006. Due to our financial statement presentation of our United Kingdom operation as a discontinued operation, our revenue for the nine months ended September 30, 2007 and 2006 is representative of only Agera, as all historical United Kingdom revenue is reflected in loss from discontinued operations.

COST OF SALES. Costs of sales increased to $0.4 million to $0.5 million for the nine months ended September 30, 2007, as compared to $0.1 million for the nine months ended September 30, 2006. Our cost of sales relates to the operation of Agera.

As a percentage of revenue, Agera cost of sales were approximately 48% for the nine months ended September 30, 2007. On a pro forma basis, assuming Agera had been acquired on January 1, 2006, our cost of sales would have been $0.5 million, or 49% as a percentage of revenue, for the nine months ended September 30, 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased approximately $7.3 million, or 83%, to $16.1 million for the nine months ended September 30, 2007, as compared to $8.8 million for the nine months ended September 30, 2006. This increase included $1.1 million of selling, general and administrative expenses related to Agera (which was acquired in August 2006) for the nine months ended September 30, 2007, as compared to $0.6 million of selling, general and administrative expenses related to Agera for the nine months ended September 30, 2006. Including Agera, the increase in selling, general and administrative expense is primarily due to the following:

a) Additional severance expense associated with the termination of our President, and the related settlement agreement executed in June 2007, resulted in an additional $3.2 million of selling, general and administrative expense for the nine months ended September 30, 2007 ( see Notes 7 and 8 of Notes to Consolidated Financial Statements).

b) Salaries, bonuses and payroll taxes increased by approximately $1.9 million to $5.3 million for the nine months ended September 30, 2007, as compared to $3.4 million for the nine months ended September 30, 2006, due to an increase in the number of our employees, primarily at the executive management level, which resulted in higher salary and bonus expenses.

c) Marketing expense increased by approximately $0.5 million to $0.8 million for the nine months ended September 30, 2007, as compared to $0.3 million during the nine months ended September 30, 2006 due primarily to marketing and promotional efforts related to marketing and selling our Agera line of advanced skin care systems.

d) Travel expense increased by approximately $0.2 million to $0.6 million for the nine months ended September 30, as compared to $0.4 million for the nine months ended September 30, 2006 due to the increase in the number of our employees, primarily at the executive management level, and increase in business development activities.

e) Other general and administrative operating costs increased by approximately $1.9 million to $5.5 million for the nine months ended September 30, 2007, as compared to $3.6 million for the nine months ended September 30, 2006 due primarily to costs of approximately $0.8 million related to our withdrawn and terminated debt offering, increased business development activities and increased investor relations costs for the nine months ended September 30, 2007, as well as the addition of general expenses related to our August

2006 acquisition of Agera. We incurred non-cash amortization expense related to our Agera intangible assets of approximately $0.2 million for the nine months ended September 30, 2007.

f) Legal expenses decreased by approximately $0.4 million to $0.6 million for the nine months ended September 30, 2007, as compared to $1.0 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007 and September 30, 2006, we received $1.6 million and $0.7 million, respectively, of reimbursements from our insurance carrier as reimbursement for defense costs related to our class action and derivative matters. If we had not received these reimbursements, our legal expenses would have been $2.2 million for the nine months ended September 30, 2007 and $1.8 million for the nine months ended September 30, 2006. Excluding the insurance carrier reimbursement, legal expenses increased $0.4 million for the nine months ended September 30, 2007, as compared to nine months ended September 30, 2006, primarily due to $0.3 million of increased legal costs related to the termination of our President. In general, our legal expense, net, fluctuates primarily as a result of the level of class action and derivative action defense costs incurred during a particular period and as a result of the timing of related insurance carrier reimbursements for defense costs. Such reimbursements are recorded when received.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $3.1 million for the nine months ended September 30, 2007 to $9.6 million, as compared to $6.4 million for the nine months ended September 30, 2006. Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for our Isolagen Therapy for specific dermal applications in the United States, as well as costs related to other potential indications for our Isolagen Therapy. Also, research and development expense includes costs to develop manufacturing, cell collection and logistical process improvements.

Our initial pivotal Phase III wrinkle/nasolabial fold trial and our Phase II dental trial concluded during the first half of 2005. We subsequently commenced preparations for a Phase III wrinkle/nasolabial fold trial during the fourth quarter of 2005. In October 2006, we reached an agreement with the FDA on the design of our Phase III wrinkle/nasolabial fold study protocol. The protocol was submitted to the FDA under the agency’s Special Protocol Assessment (“SPA”) regulations. We completed enrollment of our Phase III wrinkle/nasolabial fold study and commenced injections in early 2007. Research and development costs primarily include personnel and laboratory costs related to these FDA trials and certain consulting costs. The total inception to date cost of research and development as of September 30, 2007 was $40.2 million. The FDA approval process is extremely complicated and is dependent upon our study protocols and the results of our studies. In the event that the FDA requires additional studies for our dermal product candidate or requires changes in our study protocols or in the event that the results of the studies are not consistent with our expectations, as occurred during 2005 with respect to our previously conducted Phase III wrinkle/nasolabial fold trial, the process will be more expensive and time consuming. Due to the complexities of the FDA approval process, we are unable to predict what the cost of obtaining approval for our dermal product candidate will be at this time. We have other research projects currently underway. However, research and development costs related to these other projects were not material during the nine months ended September 30, 2007 and 2006.

The major changes in research and development expenses are due primarily to the following:

a) Consulting expense increased by approximately $2.0 million to $4.5 million for the nine months ended September 30, 2007, as compared to $2.5 million for the nine months ended September 30, 2006, as a result of increased expenditures related to our current wrinkle/nasolabial fold study and preparations related to other clinical trials;

b) Salaries, bonuses and payroll taxes increased by approximately $0.5 million to $2.4 million for the nine months ended September 30, 2007, as compared to $1.9 million for the nine months ended September 30, 2006, as a result of increased employees engaged in research and development activities; and

c) Laboratory costs increased by approximately $0.5 million to $1.1 million for the nine months ended September 30, 2007, as compared to $0.6 million for the nine months ended September 30, 2006, as a result of increased clinical activities in our Exton, Pennsylvania location.

d) Contract labor support related to our clinical manufacturing operation increased $0.2 million to $0.3 million for the nine months ended September 30, 2007, as compared to less than $0.1 million for the nine months ended September 30, 2006, as a result of increased clinical activities in our Exton, Pennsylvania location.

e) Facilities, depreciation and travel costs decreased $0.2 million to $1.3 million for the nine months ended September 30, 2007, as compared to $1.5 million for the nine months ended September 30, 2006.

LOSS FROM DISCONTINUED OPERATIONS. As discussed above under “—Closure of the United Kingdom Operation,” during the three months ended December 31, 2006, the Board of Directors approved the closure of our United Kingdom operation. The United Kingdom operation was closed in March 2007, as compared to normal operations during the nine months ended September 30, 2006.

The loss from discontinued operations decreased by approximately $7.0 million for the nine months ended September 30, 2007 to $1.5 million, as compared to $8.5 million for the nine months ended September 30, 2006. The $1.5 million loss from discontinued operations during the nine months ended September 30, 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 $0.4 million of second and third quarter 2007 losses (which, after closure of the operation, primarily consisted of facility expense, legal expense and public relations costs). The $1.1 million loss from discontinued operations during the three months ended March 31, 2007 primarily consisted of the following:

a) Salaries, severance expense and payroll taxes were approximately $0.3 million for the three months ended March 31, 2007.

b) Other general and administrative operating costs were approximately $0.5 million primarily related to lease expense 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 production volumes during the shutdown period and due to the write-off of unrealizable inventory used in the manufacturing process.

INTEREST INCOME. Interest income decreased approximately $1.1 million to $0.7 million for the nine months ended September 30, 2007, as compared to $1.8 million for the nine months ended September 30, 2006. The decrease in interest income of $1.1 million resulted principally from a decrease in the amount of cash, restricted cash and short-term investment balances, as a result of our use of these balances to fund our normal operating activities primarily related to our efforts to gain FDA approval for our Isolagen Therapy.

INTEREST EXPENSE. Interest expense remained constant at $2.9 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. Our interest expense is related to our $90.0 million, 3.5% convertible subordinated notes, as well as the related amortization of deferred debt issuance costs of $0.6 million for each of the nine months ended September 30, 2007 and 2006, respectively.

NET LOSS. Net loss increased $3.8 million to $28.5 million for the nine months ended September 30, 2007, as compared to a net loss of $24.7 million for the nine months ended September 30, 2006. This increase in net loss primarily represents the effects of the increases in our selling, general and administrative expenses and research and development expenses, reductions in interest income, offset by our decrease in loss from discontinued operation and additional gross profit of $0.4 million, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2007 and 2006, respectively, were as follows:

	Nine Months Ended September 30,
	2007			2006
	(in millions)
Cash flows from operating activities	$	(23.0	)	$	(20.7	)
Cash flows from investing activities	(0.1		)	20.0
Cash flows from financing activities	14.7			0.2

Operating Activities

Cash used in operating activities during the nine months ended September 30, 2007 amounted to $23.0 million, as compared to the $20.7 million of cash used in operating activities during the nine months ended September 30, 2006. The increase in the cash used in operations of $2.3 million is primarily due to our increase in net loss, adjusted for noncash items, of $3.6 million. Our net loss, adjusted for noncash items, increased from $20.8 million during the nine months ended September 30, 2006 to $24.4 million during the nine months ended September 30, 2007. This increase in net loss, adjusted for noncash items, was offset by changes in net operating assets and liabilities, which positively impacted cash flows by $1.3 million. During the nine months ended September 30, 2007, our changes in net operating assets and liabilities resulted in a cash inflow of $1.4 million, as compared to a cash inflow of $0.1 million during the nine months ended September 30, 2006. For the nine months ended September 30, 2007, we financed our operating cash flow needs from our cash on hand at the beginning of the period, which were primarily the result of previously completed debt and equity offerings, as well as from our August 2007 common stock sale (discussed below), which resulted in $13.8 million of proceeds, net of offering costs.

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2007 amounted to approximately $0.1 million as compared to cash provided in investing activities of $20.0 million during the nine months ended September 30, 2006. Investing activities for the nine months ended September 30, 2007 related primarily to $0.1 million of capital expenditures. The cash inflows of $20.0 million during the nine months ended September 30, 2006 were provided by the sale of available-for-sale investments, net, of $23.0 million, offset by the acquisition of Agera for $2.0 million, net, and capital expenditures of $1.0 million.

Financing Activities

Cash proceeds from financing activities during the nine months ended September 30, 2007 amounted to $14.7 million, as compared to $0.2 million during the nine months ended September 30, 2006. 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 nine months ended September 30, 2007, we received cash proceeds of approximately $0.9 million as a result of stock option and warrant exercises. Cash proceeds from financing activities were less than $0.2 million during the nine months ended September 30, 2006, which related to cash proceeds from stock option exercises.

Cash Flows Related to Discontinued Operations

Cash flows related to discontinued operations, which are included in the table of cash flows above, were as follows:

	Nine Months Ended September 30,
	2007			2006
	(in millions)
Cash flows from operating activities	$	(2.4	)	$	(7.9	)
Cash flows from investing activities	—			(0.3		)
Cash flows from financing activities	—			—

Cash flows used in discontinued operations during the nine months ended September 30, 2007 was $2.4 million, of which substantially the entire cash outflow was incurred during the three months ended March 31, 2007. Our United Kingdom operation was in operation during the three months ended March 31, 2007, and was shutdown on March 31, 2007. The net loss from our United Kingdom operation during the three months ended March 31, 2007 was $1.1 million. In addition, accrued expenses and deferred revenue decreased by $1.2 million during this shutdown period (cash outflows), primarily related to the payment of severance and refunds to customers. The United Kingdom net loss and the large decrease in United Kingdom accrued expenses and United Kingdom deferred

revenue are what primarily generated $2.1 million of cash outflow from discontinued operations for the three months ended March 31, 2007. Cash outflows related to the nine months ended September 30, 2006 related primarily to the normal, historical operation of the United Kingdom and Swiss operations, prior to the decision to shutdown the United Kingdom operation.

Working Capital

$90.0 million, 3.5% Convertible Subordinated Notes

In November 2004, we issued $90.0 million in principal amount of 3.5% convertible subordinated notes due November 1, 2024.

The notes are our general, unsecured obligations. The notes are subordinated in right of payment, which means that they will rank in right of payment behind other indebtedness 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 is 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 on November 1, 2024, unless the notes have been previously redeemed or repurchased as discussed below. The initial conversion rate (which is subject to adjustment) for the notes is 109.2001 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $9.16 per share. Holders of notes called for redemption or submitted for repurchase will be entitled to convert the notes up to and including the business day immediately preceding the date fixed for redemption or repurchase.

At any time on or after November 1, 2009, we may redeem some or all of the notes at a redemption price equal to 100% of the principal amount of such notes plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the redemption date.

The note holders will have the right to require us to repurchase their notes on November 1 of 2009, 2014 and 2019. In addition, if we experience a fundamental change (which generally will be deemed to occur upon the occurrence of a change in control 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-whole premium to holders that require us to purchase their notes in connection with such fundamental change.

Factors Affecting Our Capital Resources

In April 2005, we acquired land and a two-building, 100,000 square foot corporate campus in Bevaix, Canton of Neuchâtel, Switzerland for $10 million. We spent approximately $1.8 million to date on the first phase of the renovation. During April 2006, management decided to place the corporate campus on the market for sale in order to consolidate European operations into one location and to conserve capital. We commenced selling efforts during the second quarter of 2006. During 2006, management assessed whether the book value of the corporate campus was impaired and made a determination to write down the corporate campus by $1.1 million, which is reflected in loss from discontinued operations in the consolidated statement of operations. The net book value of the corporate campus at September 30, 2007 was $11.0 million, reflecting management’s estimate of the realizable value of the corporate campus.

An adverse result related to our class action matter, derivative action matter (see Note 7 in Notes to Consolidated Financial Statements) could materially, adversely affect our working capital, thereby materially impacting the financial position of the Company.

Inflation did not have a significant impact on the Company’s results during the three months ended September 30, 2007.

Off-Balance Sheet Transactions

We do not engage in material off-balance sheet transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates or interest rates. We are exposed to market risk in the form of foreign exchange rate risk and interest rate risk.

Foreign Exchange Rate Risk

We have $11.1 million in foreign assets. Our Swiss corporate campus held for sale, with a currently estimated value of $11.0 million at September 30, 2007, accounts for the large majority of these foreign assets. Our consolidated shareholders’ deficit will fluctuate depending on the weakening or strengthening of the U.S. dollar against the respective foreign currency, especially the Swiss franc.

Our accumulated other comprehensive income of $0.4 million at September 30, 2007 has varied $0.5 million from accumulated other comprehensive loss of $0.1 million at December 31, 2006. However, this $0.4 million gain is considered unrealized and is reflected on the Consolidated Balance Sheet. Accordingly, this unrealized loss may increase or decrease in the future, based on the movement of foreign currency exchange rates, but will not have an impact on net income (loss) until the related foreign capital investments are sold or otherwise realized.

Interest Rate Risk

Our 3.5%, $90.0 million convertible subordinated notes, pay interest at a fixed rate and, accordingly, we are not exposed to interest rate risk as a result of this debt. However, the fair value of our $90.0 million convertible subordinated notes does vary based upon, among other factors, the price of our common stock and current interest rates on similar instruments.

We do not enter into derivatives or other financial instruments for trading or speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer (the “Certifying Officers”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in this quarterly report is made known to them by others on a timely basis and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Federal Securities Litigation

The Company and certain of its current and former officers and directors are defendants in class action cases pending in the United States District 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 were consolidated on November 29, 2005. On November 18, 2005, the Company filed a motion with the Judicial Panel on Multidistrict Litigation (the “MDL Motion”) to transfer the Federal Securities Actions and the Keene derivative case (described below) to the United States District Court for the Eastern District of Pennsylvania. The Liff and Cummiskey actions were stayed on 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 in the Southern District of Texas were transferred to the Eastern District of Pennsylvania, where they have been captioned In re Isolagen, Inc. Securities & Derivative Litigation , MDL No. 1741 (the “Federal Securities Litigation”).

On July 14, 2006, Lead Plaintiffs filed a Consolidated Class Action Complaint in the Federal Securities Litigation on behalf of a putative class of persons or entities who purchased or otherwise acquired Isolagen common stock or convertible debt securities between March 3, 2004 and August 9, 2005. The complaint purports to assert claims for securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Isolagen and certain of its former officers and directors. The complaint also purports to assert claims for violations of Section 11 and 12 of the Securities Act of 1933 against the Company and certain of its current and former directors and officers in connection with the registration and sale of certain shares of Isolagen common stock and certain convertible debt securities. The complaint also purports to assert claims against CIBC World Markets Corp., Legg Mason Wood Walker, Inc., Canaccord Adams, Inc. and UBS Securities LLC as underwriters in connection with an April 2004 public offering of Isolagen common stock and a 2005 sale of convertible notes. On November 1, 2006, the defendants moved to dismiss the complaint. On September 26, 2007, the court denied our motions to dismiss the complaint, and the Company expects the parties will commence discovery shortly.

Derivative Actions

On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840, Carmine Vitale v. Frank DeLape, et al. in the 55 ^th Judicial District Court of Harris County, Texas and in February 2006 Mr. Vitale filed an amended petition. In this action, the plaintiff purports to bring a shareholder derivative action on behalf of the Company against certain of the Company’s current and former officers and directors. The Plaintiff alleges that the individual defendants breached their fiduciary duties to the Company and engaged in other wrongful conduct. Certain individual defendants are accused of improper trading in Isolagen stock. The plaintiff did not make a demand on the Board of Isolagen prior to bringing the action and plaintiff alleges that a demand was excused under the law as futile.

Other Litigation

The Company is involved in various other legal matters that are being defended and handled in the ordinary course of business. Although it is not possible to predict the outcome of these matters, management currently believes that the results will not have a material impact on the Company’s financial statements.

ITEM 1A. RISK FACTORS

In addition to the Risk Factors disclosed in our June 30, 2007 Form 10-Q, investors should consider the following risks and uncertainties, or updates to such risks and uncertainties, prior to making an investment decision with respect to our securities.

Higher than anticipated dropout rates of subjects in our clinical trials could adversely affect trial results and make it more difficult to obtain regulatory approval.

Enrollment of 421 patients in our Phase III nasolabial/wrinkle trials was completed in February 2007. Our Phase III clinical trials include three separate treatment sessions for each subject followed by a 26 week observation period. Patient dropouts are expected and can occur for a variety of reasons. A subject who drops out of the trial prior to the 26 week post-treatment observation would, under the current protocol, be considered a “failure to respond” in the results of the clinical trial. As fewer patients complete a trial, a higher positive response rate to the therapy must be obtained for the group of remaining treated subjects in order to demonstrate statistically significant benefit compared to placebo. Our Phase III nasolabial/wrinkle trial consists of two studies, 006 and 005. Our 006 study enrolled 218 subjects and, as of November 1, 2007, has 191 remaining. Our 005 study enrolled 203 subjects and, as of November 1, 2007, has 168 remaining. The Company continues to focus its efforts to prevent additional dropouts in both trials.

Recently, we made a decision to remove certain subjects from the trial for whom adequate cell yields could not be obtained within a certain timeframe. These dropouts included subjects who were assigned to active and placebo treatment on approximately a one-to-one ratio. In October 2007, we submitted a protocol amendment to the FDA which, among other things, redefines the intent-to-treat population to exclude subjects for whom adequate cell yields could not be obtained for treatment. The FDA has 45 days to respond to our request for protocol amendment.

Higher than anticipated dropout rates may result in additional time, expense and uncertainty which may also affect our ability to obtain FDA clearance of our product and which could ultimately adversely affect our profitability and financial position.

Clinical trials may fail to demonstrate the safety or efficacy of our product candidates, which could prevent or significantly delay regulatory approval and/or prevent us from raising additional financing.

Prior to receiving approval to commercialize any of our product candidates, we must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities in the United States and abroad, that our product candidates are both safe and effective. We will need to demonstrate our product candidates’ efficacy and monitor their safety throughout the process. We are conducting a pivotal Phase III clinical trial related to our lead facial aesthetic product candidate. The success of prior pre-clinical or clinical trials does not ensure the success of these trials, which are being conducted in populations with different racial and ethnic demographics than our previous trials. If our current trials or any future clinical trials are unsuccessful, our business and reputation would be harmed and the price at which our stock trades could be adversely affected.

All of our product candidates are subject to the risks of failure inherent in the development of biotherapeutic products. The results of early-stage clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despite having successfully progressed through initial clinical testing. Even if we believe the data collected from clinical trials of our product candidates is promising, this data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatory approval. Pre-clinical and clinical data can be interpreted in different ways. Accordingly, FDA officials could reach different 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 any time.

Unlike our Phase III Nasolabial/Wrinkle trial, our Phase III Acne Scar trial is not subject to a Special Protocol Assessment ("SPA") with the FDA. Isolagen has validated a photo guide for use in the evaluators' assessment of acne study subjects. Our evaluator assessment scale and photo guide have not yet been used in a phase III clinical trial.

Any failure or delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the sale of any product candidates, has the potential to harm our business, and may prevent us from raising necessary, additional financing that we may need in the future.

ITEM 6. EXHIBITS

(a) Exhibits

EXHIBIT NO.		IDENTIFICATION OF EXHIBIT

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.