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TABLE OF CONTENTS
Isolagen, Inc. (A Development Stage Company) Index to Consolidated Financial Statements

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Isolagen, Inc.
(Exact name of registrant as specified in its Charter.)

2500 Wilcrest, 5^th Floor
Houston, Texas 77042
(Address of principal executive offices, including zip code)

(713) 780-4754
(Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

        Indicate by check mark whether the registrant: (1) 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. ý Yes    o No

        Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2) oYes    ý No

        As of March 24, 2004, the aggregate market value of the issuer's common stock held by non-affiliates of the issuer based upon the price of at which such common stock was sold on the American Stock Exchange as of such date was $185,917,466.

        As of March 24, 2004, issuer had 26,768,893 shares of issued and outstanding common stock, par value $0.001.

        Documents Incorporated by Reference: Portions of the information set forth in the definitive proxy statement to be filed by the registrant within 120 days of the close of the fiscal year are incorporated by reference in Part III hereof.

TABLE OF CONTENTS

Forward-Looking Information

        This report contains forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause Isolagen, Inc.'s or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

        In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

        Although Isolagen, Inc. believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither Isolagen, Inc. nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Isolagen, Inc. is under no duty to update any of the forward-looking statements after the date of this report to conform its prior statements to actual results. Isolagen Inc.'s actual results could differ materially from its historical operating results and from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under "Business—Risk Factors" of this Form 10-K and those set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operation."

        We are under no obligation to 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.

Part I

Item 1. Business

Overview

        Isolagen Technologies, Inc. is a biopharmaceutical company located in Houston, Texas that specializes in the development and commercialization of autologous cellular therapy for hard and soft tissue regeneration. Our lead product candidate is in Phase III clinical development and has applications in cosmetic dermatology to correct and reduce the normal effects of aging, such as wrinkles, laugh lines, smokers' lines, fine lines and all types of depressed scars. We expect to file a Biologics License Application ("BLA") for this product in late 2004. Our second product candidate, which is being developed to treat periodontal disease, completed a Phase I clinical trial in late 2003.

        Autologous cellular therapy is the process whereby a patient's own cells are extracted, processed, and then reintroduced to the patient. The Isolagen Process is an autologous cellular therapy designed to replenish deficiencies caused through the loss of fibroblast cells. As the body ages, it loses approximately 1% of its fibroblast cells each year. Fibroblast cells are responsible for producing collagen and elastin, which support the skin. By the time a person is 40 years old, his or her body has lost approximately 40% of its fibroblast cells, leading to dermal depressions and wrinkles. In the Isolagen Process, the patient's cells are taken from a small skin sample from which millions of fibroblast cells are separated and reproduced and then injected into the patient in or around the areas to be treated. Following injection, the new fibroblast cells lead to the production of collagen and elastin, which diminish the depressions and wrinkles. The procedure is minimally invasive and non-surgical.

        Currently, there are multiple competitive alternatives to reduce the signs of aging. In this market area there have been a number of products developed over the years designed to treat the symptoms of

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this pathology. These products include various collagen formulations fabricated from animal and human cadaver, hyaluronic acid from animal and synthetic sources, plastic beads, and calcium, hydroxyapatite. Other therapies include paralysis of the underlying superficial musculature with Botulinum toxin and transplantation of autologous fat. These products are associated with clinical problems which vary from the one product to the other product such as short duration of action for collagen and Botulinum toxin products (3-6 months), immunological reactions, irregular correction of contour, and significant pain associated with the injection. Isolagen's process is designed to address many of these issues. As the cells used in the Isolagen process are derived from the patient's own skin, they express identical antigens to those of the cells in the treatment area, and therefore do not stimulate immune rejection.

        In addition to the United States, we plan to commercialize the Isolagen Process in other countries. In August 2001, we formed Isolagen Europe Limited, our subsidiary organized under the laws of the United Kingdom, for the purpose of marketing the Isolagen Process to patients located in Europe. We began commercialization in the United Kingdom in the first quarter of 2003. In August 2003, we received a license from Australia's Therapeutic Goods Administration ("TGA") to begin the manufacture of autologous fibroblast cells. Consequently, we commenced commercialization in Australia in the fourth quarter of 2003. We are also investigating commercialization in South Korea, Hong Kong, Italy and Mexico.

        Throughout 2003, Isolagen focused its market introduction activities in the UK and European markets on establishing a solid foundation for future growth. This consisted of introducing the Isolagen Process to selected leading medical practitioners, primarily plastic surgeons and dermatologists to the Isolagen Process who could offer the treatment to their patients. Periodically, training sessions were given throughout the year as well to train a broader group of practitioners.

        During this initial phase, Isolagen also gradually exposed potential patients to the therapy through articles in health and beauty journals. In the beginning of 2004 the landscape was sufficiently covered with trained physicians such that the public relations activities could be increased. An additional public relations firm was hired that had extensive contacts in broadcast media. Additionally, an agreement was reached with Emma Samms, the actress who played Falon on Dynasty, to represent Isolagen for 2004.

        As a result of this increased exposure, a marked increase in demand for Isolagen's dermal therapy was experienced in recent months. In January 2004, the London laboratory received more than a 30% increase in the number of biopsies from patients as compared to the 2003 monthly average. In February 2004, the number of biopsies received increased by more than 100% over January. . In the last week of February a major public relations campaign was started.. Isolagen was featured on a UK television talk show, in an article in which the actress Emma Samms was interviewed about her experience with Isolagen and in a feature story in the most widely read newspaper in the UK. The resultant increased demand far exceeded Isolagen's capacity.

        As part of Isolagen's continued marketing efforts, the Company is in negotiations with several British national medical clinics that are interested in providing enough patients that could increase the monthly demand substantially. The recent sharp increase in demand has outstripped the supply to such an extent that the Company, in March 2004, is scheduling patients as far out as August 2004. Additionally, the Company has had to suspend marketing and sales efforts in all European countries except the UK.

        Because of tremendous demand, the Company is expanding its European production facilities. With the introduction of the new more automated and scalable manufacturing system as well as the increase in capacity, the Company expects to be able to meet the increasing demand, not only from the UK but also from the other European countries.

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Market Opportunity

Cosmetic

        The Isolagen Process is directed primarily at the dermatological and plastic surgery markets. Options to ameliorate the signs of aging or to delay or avoid invasive surgery are becoming increasingly popular. According to statistics released in March 2004 by the American Society of Plastic Surgeons ("ASPS"), consumer demand jumped 41% in 2003 for minimally invasive plastic surgery, exceeding more than 6.9 million procedures. More than 8.7 million procedures were performed on people who took action to proactively manage signs of aging or enhance their appearance by choosing cosmetic plastic surgery in 2003, according to the statistics released in March 2004 by the ASPS, up 32% from nearly 6.6 million in 2002. Ultimately, the concept of cosmetic injectables has become more mainstream and accepted.

        The following table shows the top five minimally invasive cosmetic procedures in 2003:

*

most popular with both genders

        The 35-50 age group made up 46% of all minimally invasive procedures in 2003. The 51-64 age group made up 26% of the population receiving these procedures, while patients 19 to 34 made up 19% of the minimally invasive procedures. Botox was the most popular treatment among all three age groups.

        ASPS offers the most comprehensive, reliable statistics on plastic surgery procedures. For 2003, the ASPS statistics were collected through the first online national database for plastic surgery procedures called Tracking Operations and Outcomes for Plastic Surgeons ("TOPS"). This data combined with an annual survey sent to more than 17,000 board certified physicians in specialties most likely to perform plastic surgery procedures resulted in the most comprehensive report on plastic surgery procedures to date.

Dental

        In addition to the dermatological market, there is an extensive dental market opportunity. The Company's research shows that, in the United States, there are approximately 33,000 practitioners performing cosmetic procedures, whereas there are approximately 150,000 dentists.

        As our population has aged and conservative dentistry has improved, there has been an increasing demand for therapeutic options that preserve and replace teeth. The single greatest cause of bone and tooth loss in the mouth is periodontal disease. As the periodontal pockets deepen, the amount of debris and infection trapped leads to increasing inflammation and bone loss around the tooth. Any process which could lessen the depth of the pockets or reverse the progression of the disease would greatly decrease the root damage and tooth loss. Recent studies have shown that the Isolagen Process has the ability to decrease the size of pockets greater than 4 mm by as much as 2.4 mm (see below) providing a therapeutic tool to the family dentist that can be simply administered in the dental chair in a few brief sessions.

        While there have been dramatic improvements in restorative dentistry allowing us to maintain good dentition, there have not been corresponding improvements in the preservation of gum and soft tissue. The Isolagen Process can be used therapeutically for those patients with symptoms of

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periodontal disease such as deep pocket disease, papillary recession, and gingival recession in other areas.

        Papillary recession, also known as black triangles, is part of the progression of periodontal disease, and involves the recession of the triangular section of gum tissue between two teeth. To date, the Company is not aware of any documented effective treatment for this condition. In cases where the recession of the gum has progressed to an advanced stage, the accepted treatment is to surgically transfer a skin graft from the palate to the site of recession. This process is painful and can potentially create donor site defects. The results of this procedure have been varied and are not fully embraced by periodontists due to the donor site morbidity associated with the skin graft extraction.

        The vast majority of the population will experience periodontal disease at some point in their lives. Others will have a need for a tooth extraction or have a dry or contracted socket. Only a small percentage of the population, however, will elect to undergo a cosmetic procedure. For these reasons, we consider the Isolagen Process to be a viable solution for the dental market.

Our Solution

The Isolagen Process

        The Isolagen Process begins when the patient's doctor obtains a 3mm punch biopsy from behind the patient's ear. In the case of the dental product, a 1mm biopsy is taken from the patient's gingiva. The biopsy is then packed in an Isolagen-provided container at the doctor's office and is shipped overnight to the Isolagen laboratory. Upon arrival at the laboratory, the specimen is initiated into culture. Through a series of plastic culture vessels and growth media over a period of approximately six weeks, the fibroblasts within the specimen are cultured to tens of millions of cells. The fibroblasts are then harvested and put into a transport vial. After completion of a series of quality control tests, the cells are released to the physician and are shipped to the physician's office overnight. A total of three injections are supplied and administered to the patient over approximately one month. A patient may elect for Isolagen to cryogenically store a fibroblast culture for future treatments.

        Isolagen has developed a new cell culturing system and is in the final stages of a significant improvement in the manufacturing process as part of its cost reduction efforts. Through a collaboration with Applikon Biotechnology, the Company has developed a new system that permits an automated harvesting process in a closed loop sterile environment. The existing process separates cells manually utilizing centrifuge technology. This new harvesting process is expected to yield significant cost reductions and is a key component of a platform for scalable mass production.

        Historically, autologous cell companies have been hampered by manufacturing technologies that use traditional methodology for culturing cells through the utilization of plastic flasks. This methodology is labor intensive and slow and involves many sterile interventions and therefore is costly. Our focus over the past 27 months has been to automate the culturing technology incorporating newer technology and concepts common to the pharmaceutical industry particularly those that have already been well established in cGMP facilities.

        We have been collaborating with Applikon under a Joint Intellectual Property Collaboration that will allow Isolagen to patent the manufacturing system improvements beyond Applikon's existing patents. The system has been successful in research setting and we are now undertaking the design and fabrication of the massed-produced single-use (disposable) component. The production unit will then undergo validation testing prior to incorporation into the manufacturing process. The functioning unit, combined with novel application of existing manufacturing systems, should permit significant cost reduction.

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Dermal Application

        The primary application of the Isolagen Process is to repair dermal defects. Some of the advantages of the Isolagen Process are as follows:

•

The Isolagen product is a living cell therapy. Therefore, the fibroblasts in the dermis continue to multiply and produce matrix until the tissue reaches its optimal repair.



•

The cells are subject to the normal physiological controls of tissue and therefore can return the tissue to its youthful appearance but do not overcorrect or cause deformity to the area.



•

As it is autologous, it is devoid of immune rejection complications.



•

It is applicable to virtually every area of the face, unlike many competitor products, which, because of their mechanism of action, are restricted as to where they can be applied.



•

Fibroblast cells remain viable for many years and therefore the effects are likely to be long-lasting. A permanency claim is the subject of the extended portion of our clinical trials.



•

Fibroblasts are a general support cell for the tissue, and in addition to their direct production of collagen and matrix, produce endocrine factors which may assist in the growth or repair of surrounding tissues such as the overlying epithelium.

        Under prior management, William K. Boss, Jr., M.D., currently a director of the Company and a board certified plastic surgeon, began treating patients with the Isolagen Process to correct facial defects (e.g., wrinkles, depressions, and scars) in 1995. Dr. Boss, along with 200 other doctors, utilized the Isolagen Process on approximately 950 patients with positive results. Of these patients, totaling 2,000 procedures, the participating physicians documented no significant adverse reactions. The FDA notified Isolagen Technologies in 1999 that the Isolagen Process would require FDA approval as a regulated biologic product. Isolagen Technologies filed an investigational new drug application ("IND"), which was accepted by the FDA and commenced the FDA process.

        In January 2003, we commenced a two site Phase II study. The double blind trial consisted of forty patients and four dose regimens. The trial confirmed the therapeutic dosage used previously in the UK and produced significant information used in the design of the subsequent Phase III study.

        In July 2003, Isolagen commenced a Phase III clinical trial for dermal defects pursuant to the IND for the treatment of wrinkles and scars. The trial was conducted at ten sites and included 158 patients in the "Intent To Treat" group. It was a double-blind study with 75% of the patients receiving the therapeutic dosage and the remaining 25% receiving a placebo. Of the evaluable population, 77% of treatment group patients were responders whereas 36% of the placebo group were responders (Fisher's Exact test p< 0.0001). In this statistically significant result, response was determined by a change of two or more on a seven point photo guide scale. There were few adverse events related to Isolagen and none were classified as serious adverse events. The results confirmed statistically the early efficacy of the Isolagen process at 4 months. Most "fillers" have an immediate response but are then actively cleared by the body. In a recently reported study 73.3% of the patients treated with Hyalform® returned to baseline by 12 weeks. The Isolagen process is based on an approach of "curing the disease" rather than "covering the symptoms". The cells are instilled into the area and begin the reparative process. The cumulative injury causing the depletion of the fibroblasts may have taken several decades to occur. The cohort study conducted on UK patients demonstrated that the process shows 75% response rate by 2-4 months and a 100% response rate at 6 months. This response rate is still present at 12 months for the patients studied. We hope to confirm this ongoing improvement in the present and anticipated clinical trials.

        Isolagen has had numerous communications throughout 2003 with the FDA with regard to the IND. These communications include numerous submissions of data and protocols, meeting requests and

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annual reports. We had face to face meetings in April, September and December 2003 with senior FDA staff in the Center for Biologics Evaluation and Research and the review committee following the IND. Though this is the normal process for license application, we believe Isolagen has had a disproportionate degree of attention and level of interest reflecting the unique nature of the process as well as a great deal of support and encouragement from the FDA during this process.

        Some of the remaining issues stem from the fact that the product is not easily classified as a biologic as it so closely resembles a tissue graft and is inherently safe. Numerous issues have and are being resolved that may affect study design and the license application itself. Successful resolution of any study design issues and data related questions are critical for the eventual license application. The majority of issues are resolved simply by analysis of data from the existing trials.

        The discussions to date have been very productive. Following the recommendations of the FDA, Isolagen has simplified the study design and added some additional reports or studies including, establishing the "Clinical Meaningfullness" of the process and establishing the purity of the fibroblasts produced. In the latter case, the FDA requested that Isolagen demonstrate that greater than 98% of the cells were fibroblasts as part of an ongoing discussion with regard to purity testing. Data submitted to the FDA showed that 99.6% of all cells in the study showed positive for fibroblast antibody.

        Remaining study design issues will be determined largely from analysis of the results from the present Phase III trial. Such matters as to whether it is better to use the physician investigators or independent assessors can be evaluated from this data. The decisions will be presented with the supporting data to the FDA. In essence, most of the queries from the FDA relate to provision of supportive data for claims made by Isolagen. Objective supporting data is now available because of the successful completion of the acute phase of the trials.

Dental Application

        Isolagen has completed a Phase I clinical trial of twenty-one patients for dental applications treating gingival recession and deep periodontal pockets. The trial is a 12-month double blind clinical study conducted at the University of Texas Health Science Center (UTHSC) Dental Branch. In February 2004, we reported that the Isolagen Process demonstrated significant improvement in the oral therapeutic treatment of periodontal disease by reducing deep pocket areas in a majority of sites, whereas placebo treated sites showed only a nominal improvement. For pockets greater than 5 mm in depth the difference between placebo and therapeutic group was 2.4 mm. The study included areas with gingival recession between teeth, showing improvement at 20 of 21 Isolagen-treated sites, with deterioration of the gum height recorded at most placebo sites (14 of 21). Furthermore, no adverse event was related to the Isolagen Process.

        The Isolagen Dental Product also potentially provides a solution for problems that may develop when teeth are removed, such as dry socket or contracted socket. The accepted treatment by oral surgeons is to implant a cellular material to prevent these defects. Treatment often requires a follow-up surgical procedure for correction and to prevent additional soft tissue problems.

        Further studies are planned and protocols have been prepared to assess the efficacy and safety of treatment of the papilla and deep pockets. These studies are traditional placebo controlled double blinded studies on a statistically larger population and are designed to establish the therapeutic efficacy and safety of the Isolagen process. A smaller study to explore variations on the injection technique used with the papilla, is also anticipated. A second confirmatory study will probably be needed for license application in each area.

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Our Strategy

        Our goal is to become the industry leader in the research, development and commercialization of autologous cellular therapy for dermatological and dental applications. We will endeavor to increase and strengthen our market position in the following ways:

•

Working with regulatory agencies, on a country-by-country basis, to obtain the approval of the Isolagen Process and any future products. We are currently in late-stage clinical development in the United States. We have begun commercialization in the United Kingdom and Australia.



•

Expanding and solidifying our relationship with the approximately 200 physicians who have treated their patients with the Isolagen Process, as well as marketing our processes and products to other doctors (e.g., plastic surgeons, facial plastic surgeons, dermatologists and aestheticians). Currently, we are not approved to market our products in the United States.



•

Optimizing our manufacturing processes to achieve cost reductions and scalability. Through the Company's collaboration with Applikon Biotechnology, the Company has developed a new system that permits an automated cell harvesting process in a closed loop sterile system compared to the existing process of separating cells utilizing centrifuge technology. This new harvesting process is expected to yield significant cost reductions and allow the Company to move toward a platform that enables scalable mass production.



•

Developing new applications for the Isolagen Process beyond repair of facial dermal defects. The research capability that has produced the Isolagen Process could be applicable to other areas, such as gum rejuvenation and other dental applications, urology, bone marrow and other pigment-related maladies.



•

Investigating additional foreign countries to market the Isolagen Process and any future products. We are currently assessing the commencement of operations in Italy, South Korea, Hong Kong, Brazil, and Mexico. We are investigating regulatory and other requirements in these countries and evaluating potential joint venture partners and licensees.



•

Establishing strategic partnering relationships to enhance application-specific sales and distribution of our products.



•

Continuing our current research into the science of autologous cellular therapy.

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Intellectual Property

        Protecting our proprietary technology is vitally important to our competitive position. We currently hold the following patents:

        Effective January 31, 2003, the Company entered into an Intellectual Property Purchase Agreement to acquire two pending patent applications titled "Augmentation and Repair of Vocal Cord Tissue Defects" and "A Method of Using Autologous Fibroblasts to Promote Healing of Wounds and Fistulas.". As consideration, the Company issued the seller, on March 31, 2003, 100,000 shares of its Common Stock and royalty equal to (a) 5% of all revenues recognized by the Company or its Affiliates from commercial application of the Intellectual Property made, provided, distributed, sold or manufactured directly by the Company or its Affiliates, or (b) 25% of all revenues recognized by the Company or its Affiliates from licensing, sublicensing, transferring or selling the Intellectual Property to a third party, without offset or deduction for general and administrative or operating costs, subject to a total maximum royalty of $2 million. The Company has recorded an intangible asset of $540,000 related to the acquisition of the Intellectual Property and intends to amortize this cost over the life of any future patent granted.

        We are in the process of pursuing several other patent applications. We continue to seek ways to protect our proprietary technology and trade secrets, including entering into confidentiality or license agreements with our employees, consultants and corporate partners, and controlling access to and distribution of our technologies and other proprietary information.

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Competition

        Tissue regeneration companies compete in the dermatology and plastic surgery markets with substantially different treatments. These include silicone injections, laser procedures, facial surgical procedures (e.g., facelifts and eyelid surgeries), fat injections, dermabrasion, collagen injections, and botulisum toxin injections. Indirect competition comes from facial care treatment products. Items catering to the growing demand for therapeutic skin care products are facial scrubs, anti-aging treatments, tonics, astringents and skin-restoration formulas.

        The standard treatment for tissue regeneration has been bovine collagen, a foreign protein derived from cows, which is generally fully reabsorbed by a patient's body within a few months after application, leaving the patient with no visible signs of correction. As additional treatments with bovine collagen are performed, there may be an immune response that could compromise the treatment's effectiveness. Combined with the expense and the continued intrusiveness of ongoing treatments, we believe the value and benefit of bovine collagen injections are diminished.

        We believe that the benefits of the Isolagen Process counters the drawbacks of bovine collagen treatments, thereby extending the market potential for soft tissue regeneration to a broader population of patients. This broader population includes those who have tried and discontinued use of bovine collagen and those that never considered treatments due to potential drawbacks.

        Patients who might consider using the Isolagen Process could also consider the following products:

        We believe that many of our competitors have greater financial and other resources than we have. Although we are not aware of any similar products to the Isolagen Process that have received pre-market approval from the FDA, there may be other companies with greater financial resources that are developing or may develop similar products in the future.

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Government Regulation

        Our technologies are subject to extensive government regulation principally by the FDA and state and local authorities in the United States and by comparable agencies in certain foreign countries. Governmental authorities in the United States and other countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceutical products.

Domestic Regulation

        In the United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations subjects pharmaceutical and biologic products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our product candidates, and we may be criminally prosecuted. The FDA also has the authority to revoke previously granted marketing authorizations if we fail to comply with regulatory standards or if we encounter problems following initial marketing.

FDA Approval Process

        To obtain approval of a new product from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. This testing and the preparation of necessary applications and processing of those applications by the FDA are expensive and typically take many years to complete. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing any products we may develop. The FDA also may require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards or if we encounter problems following initial marketing. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which we will have the exclusive right to exploit the products or technologies.

        The FDA does not apply a single regulatory scheme to human tissues and the products derived from human tissue. On a case-by-case basis, the FDA may choose to regulate such products as transplanted human tissue, medical devices or biologics. A fundamental difference in the treatment of products under these classifications is that the FDA generally permits human tissue for transplantation to be commercially distributed without pre-market approval. In contrast, products regulated as medical devices or biologics usually require such approval.

        The process required by the FDA before a new drug or biologic may be marketed in the United States generally involves the following:

•

completion of preclinical laboratory testing;



•

submission of an IND, which must become effective before human clinical trials may begin;



•

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug or biologic for its intended use; and



•

submission and approval of a New Drug Application, or NDA, for a drug, or a Biologics License Application, or BLA, for a biologic.

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        The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap:

•

In Phase I clinical trials, the product is tested in a small number of patients or healthy volunteers, primarily for safety at one or more doses.



•

In Phase II, in addition to safety, the sponsor evaluates the efficacy of the product on targeted indications, and identifies possible adverse effects and safety risks, in a patient population somewhat larger than Phase I clinical trials.



•

Phase III clinical trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically-dispersed test sites.

        Clinical trials must be conducted in accordance with the FDA's Good Clinical Practices requirements. Prior to commencement of each clinical trial, the sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the approval of the committee responsible for overseeing clinical trials at one of the clinical trial sites. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The Institutional Review Board, or IRB, at each clinical site may also require the clinical trial at that site to be halted, either temporarily or permanently for the same reasons.

        The sponsor must submit to the FDA the results of the preclinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product, in the form of a new drug application, or NDA, or, in the case of a biologic, a BLA. The FDA has advised the Company it is regulating the Isolagen Process as a biologic. Therefore, we will be submitting BLAs to obtain approval of our product candidate. In a process that may take from several months to several years, the FDA reviews these applications and, when and if it decides that adequate data are available to show that the new compound is both safe and effective and that other applicable requirements have been met, approves the drug or biologic for marketing. The amount of time taken for this approval process is a function of a number of variables, including whether the product has received a fast track designation, the quality of the submission and studies presented, the potential contribution that the compound will make in improving the treatment of a condition in question, and the workload at the FDA. It is possible that our product candidates will not successfully proceed through this approval process or that the FDA will not approve them in any specific period of time, or at all.

        The FDA may, during its review of a NDA or BLA, ask for additional test data. If the FDA does ultimately approve the product, it may require post-marketing testing, including potentially expensive Phase IV studies, to monitor the safety and effectiveness of the drug. In addition, the FDA may, in some circumstances, impose restrictions on the use of the drug, which may be difficult and expensive to administer and may require prior approval of promotional materials.

Ongoing FDA Requirements

        Before approving an NDA or BLA, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facilities are in compliance with FDA's good manufacturing practice regulations which govern the manufacture, holding and distribution of a product. Manufacturers of biologics also must comply with FDA's general biological product standards. Following approval, the FDA periodically inspects drug and biologic manufacturing facilities to ensure continued compliance with the good manufacturing practices regulations. Manufacturers must continue to expend time, money and effort in the areas of production and quality control and record keeping and reporting to ensure full compliance with those requirements. Failure to comply with these requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product, or voluntary recall of product. Adverse experiences

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with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or market removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

        The labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be in compliance with FDA and Federal Trade Commission, or FTC, requirements which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the internet. The FDA and FTC have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the issuance of a Warning Letter directing the company to correct deviations from regulatory standards and enforcement actions that can include seizures, injunctions and criminal prosecution.

        Manufacturers are also subject to various laws and regulations governing laboratory practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances in connection with their research. In each of these areas, as above, the FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and deny or withdraw approvals.

International Regulation

        The regulation of our products, including the Isolagen Process, outside of the United States varies by country. Certain countries regulate human tissue products as a pharmaceutical product, which would require us to make extensive filings and obtain regulatory approvals before selling our products. Certain countries classify our products, including the Isolagen Process, as human tissue for transplantation but may restrict its import or sale. Other countries have no application regulations regarding the import or sale of products similar to our products, creating uncertainty as to what standards we may be required to meet. Management made inquiry to the Medicines Control Agency with respect to our proposed use of the Isolagen Process in cosmetic applications in the United Kingdom. Based on the written responses received from the Medicines Control Agency, management believes that the proposed use of the Isolagen Process in cosmetic applications in the United Kingdom does not require regulatory approval. We began commercialization of the Isolagen Process in the United Kingdom in the first quarter of 2003.

        In August 2003, we received a license from the Therapeutic Goods Administration, the agency that regulates medical drugs and devices in Australia, to begin the manufacture of autologous fibroblasts including the initiation of primary cultures of fibroblasts, the propagation of fibroblasts, the harvesting of cultured fibroblasts, the storage of cultured fibroblasts and release for supply of cultured fibroblasts. Consequently, we have commenced commercialization in Australia in the fourth quarter of 2004.

        In addition, we are assessing commercialization in Italy, South Korea, Hong Kong, Brazil and Mexico.

Corporate History

        On August 10, 2001, the Company, then known as American Financial Holding, Inc., acquired Isolagen Technologies through the merger of its wholly-owned subsidiary, Isolagen Acquisition Corp., and an affiliated entity, Gemini IX, Inc., with and into Isolagen Technologies (the "Merger"). As a result of the Merger, Isolagen Technologies became a wholly-owned subsidiary of the Company. On November 13, 2001, the Company changed its name to Isolagen, Inc.

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Research and Development

        Our research and development focus is not just limited to the dermal and dental product developments, but includes extensive activities for improved process science, manufacturing and cost reduction. Furthermore, we continue to explore applications for the Isolagen Process like therapies to regrow hair, to repair damaged nerves, and to heal burned skin. We expense research and development costs as they are incurred. For the years ending December 31, 2003, 2002 and 2001, we incurred research and development expenses of $3.3 million, $1.7 million, and $0.9 million, respectively.

Employees

        We presently employ fifty-five (55) people on a full-time basis including, thirty (30) in Houston, Texas, seventeen (17) in London, England, and eight (8) in Sydney, Australia. We anticipate hiring additional employees in the areas of quality assurance, manufacturing, marketing and research and development as the need arises. None of these individuals are covered by a collective bargaining agreement and management considers its relations with the company's employees to be good. We may also employ consultants on an as needed basis to supplement existing staff.

Risk Factors

        We Will Need to Raise Substantial Additional Capital To Fund Our Operations Over the Course of the Next Two Years. No Assurance Can Be Given That Any Such Financing, If Obtained, Will Be Adequate To Meet Our Ultimate Capital Needs and To Support Our Growth. Although we believe our current cash resources will be sufficient to fund our planned operations until June 30, 2005, we will require substantial additional capital to meet our long-term needs. Subsequent to June 30, 2005 we will require approximately $20 million of additional capital to bring our product to market in the United States and expand operations in the United Kingdom and Australia. This estimate assumes that no further testing requirements are imposed by the FDA, that FDA approval is forthcoming and that FDA approval is received during 2005. 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 or requires changes in our study protocols or in the event that the results of the studies are not consistent with our expectations, the process will be more expensive and time consuming. Due to the vagaries of the FDA approval process we are unable to predict what the cost of obtaining approval will be if FDA approval is not forthcoming in 2005. We recently commenced operations, are suffering losses from operations, have limited capital resources, do not have access to a line of credit or other debt facility, and will be unable to sustain operations absent substantial infusions of capital. We are actively assessing various financing opportunities. There can be no assurance that we will be successful in raising the necessary capital; or that we will be able to raise capital on acceptable terms. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet our ultimate capital needs and to support our growth. If adequate capital cannot be obtained on satisfactory terms, our operations could be materially and adversely impacted.

        The Need To Raise Additional Capital Will Expose Existing Shareholders To The Risk Of Substantial Dilution. In the event that we sell equity securities or securities convertible into our equity securities to raise additional capital, such sales will dilute the public ownership of the Company.

        Isolagen Has Not Demonstrated An Ability To Generate Significant Revenue, And There Is No Assurance That We Will Produce Any Material Revenues. Isolagen is a development stage company with a limited operating history and no significant revenues to date. Isolagen has not yet demonstrated its ability to generate significant revenue, and there is no assurance that we will produce any material revenues, or that we will ever operate on a profitable basis.

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        As A Result Of Our Limited Operating History And Because Of The Emerging Nature Of The Markets In Which We Will Compete, Our Financial Data Is Of Limited Value In Planning Future Operating Expenses. Our operating Expenses Are Difficult To Forecast Accurately. To The Extent That Such Expenses Precede Or Are Not Rapidly Followed By Increased Revenue, Our Business, Results Of Operations And Financial Condition May Be Materially Adversely Affected. As a result of our limited operating history and because of the emerging nature of the markets in which we will compete, our financial data is of limited value in planning future operating expenses. Our expense levels will be based in part on our expectations concerning future revenues. A significant portion of our revenue is anticipated to be derived from the Isolagen Process; however, the size and extent of such revenues are wholly dependent upon the choices and demand of individuals, which are difficult to forecast accurately. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, a significant shortfall in demand for the Isolagen Process could have an immediate and material adverse effect on our business, results of operations and financial condition. Further, business development and marketing expenses may increase significantly as we expand our operations. To the extent that such expenses precede or are not rapidly followed by increased revenue, our business, results of operations and financial condition may be materially adversely affected.

        The Development of the Isolagen Process and the Company's Other Products Involves a Lengthy and Complex Process, and the Company May be Unable to Commercialize the Isolagen Process or any of its Other Processes or Products Currently Under Development. Before the Company can commercialize the Isolagen Process or any other of its development-stage products or processes in the U.S., the Company will need to conduct substantial research and development; undertake preclinical and clinical testing; and pursue regulatory approvals, including but not limited to FDA approval of its IND for the Isolagen Process. This process involves a high degree of risk and may take several years. The Company's process and product development efforts may fail for many reasons, including: failure of the process or product in preclinical studies; clinical trial data that is insufficient to support the safety or effectiveness of the process or product; or the failure to obtain the required regulatory approvals. Specifically, the FDA may withhold approval of the IND for several years or reject the IND outright. For these reasons, and others, the Company may not successfully commercialize the Isolagen Process or any of its other processes or products currently under development. We are unable to determine whether or when the Isolagen Dental Process will prove to be medically effective or commercially viable, and whether or when FDA approval will occur.

        Obtaining FDA and Other Regulatory Approvals is Time Consuming and Expensive, And The Respective Outcomes Are Uncertain. The process of obtaining FDA and other regulatory approvals is time consuming and expensive. Clinical trials are required and the marketing and manufacturing of Company's products and services are subject to rigorous testing procedures. The Company may not be able to obtain FDA approval or other regulatory approval to conduct clinical trials or to manufacture and market any of the products it develops, acquires or licenses. Moreover, the costs to obtain approvals could be considerable and the failure to obtain or delays in obtaining an approval could significantly harm the Company's business performance and financial results. Even if pre-marketing approval from the FDA is received, the FDA is authorized to impose post-marketing requirements such as: (i) testing and surveillance to monitor a product and its continued compliance with regulatory requirements; (ii) submitting products for inspection and, if any inspection reveals that the product is not in compliance, prohibiting the sale of all products; (iii) suspending manufacturing; and (iv) withdrawing marketing clearance. In their regulation of advertising, the FDA and Federal Trade Commission (the "FTC") from time to time issue correspondence alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices, and the receipt of correspondence from the FDA alleging these practices could result in the following: (i) incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA's requirements; (ii) changes in

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the methods of marketing and selling products; (iii) taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians, rescinding previous advertisements or promotions; and (iv) disruption in the distribution of products and loss of sales until compliance with the FDA's position is obtained.

        Our Operating Results May Fluctuate Significantly In The Future As A Result Of A Variety Of Factors, Many Of Which Are Outside Of Our Control. Our Operating Results May Fall Below The Expectations Of Securities Analysts, Stockholders And Investors In Any Future Period. Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include: the level of demand for the Isolagen Process and other services and products that we may develop; our ability to attract and retain personnel with the necessary strategic, technical and creative skills required for effective operations; the amount and timing of expenditures by customers; the amount and timing of capital expenditures and other costs relating to the expansion of our operations; government regulation and legal developments regarding the use of the Isolagen Process; and general economic conditions. As a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on our quarterly results. Due to all of these factors, our operating results may fall below the expectations of securities analysts, stockholders and investors in any future period.

        We Anticipate That Losses Will Continue To Increase From Current Levels And That We Will Experience Negative Cash Flow, Which May Limit Or Delay Ability To Become Profitable. The Company expects to expend significant resources on consultants, technology, advertising, hiring of personnel and startup costs. As a result, the Company has incurred losses since its inception and expects to experience operating losses and negative cash flow for the foreseeable future. The Company anticipates its losses will continue to increase from current levels because it expects to incur additional costs and expenses related to brand development, consulting costs, laboratory development costs, FDA clinical trials, marketing and other promotional activities, the addition of customer service personnel, the continued development of its website, its computer network, and development of relationships with strategic business partners, including but not limited to doctors who might use the Isolagen Process. For the years ending December 31, 2003, 2002 and 2001, we incurred losses of $11.3 million, $5.4 million and $1.7 million, respectively. Since inception we have incurred losses of $20.9 million.

        Our Ability to Become Profitable May Be Limited or Delayed by a Number of Factors.    Inasmuch as we are still in the development stage, our operations are subject to all of the risks inherent in the establishment of a new business enterprise, the development of new processes, and the marketing of new products. As we have had virtually no sales or revenues to date and are in the process of developing initial operations in the UK related to our first product, we expect to continue to incur significant additional costs and expenses related to:

•

brand development;



•

consulting costs;



•

laboratory and manufacturing development and operation costs;



•

FDA clinical trials and regulatory approvals;



•

promotional and marketing activities;

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•

customer service and other personnel;



•

development of our website, computer network; and



•

development of relationships with strategic business partners, including doctors who might use the Isolagen Process.

        If we cannot adequately manage our costs and expenses, then we will continue to experience operating losses and negative cash flow for the foreseeable future. In particular, the costs to obtain regulatory approvals could be considerable and the failure to obtain or delays in obtaining such approvals could materially adversely affect our business performance and financial results. 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 or requires changes in our study protocols or in the event that the results of the studies are not consistent with our expectations, the process will be more expensive and time consuming. Due to the vagaries of the FDA approval process, we are unable to predict what the cost of obtaining approval will ultimately be.

        Our Inability to Increase Capacity in our UK Operations to Meet Increasing Demand in the UK Will Limit or Delay our Ability to Attain Profitability.    We began commercialization of the Isolagen Process in cosmetic applications in the UK in the first quarter of 2003. However, our facilities in the UK were designed to demonstrate the efficacy of the Isolagen Process. In light of increasing demand for the Isolagen Process in the UK, we will be required to expend additional funds to increase the capacity of the operation, including addition of personnel, introduction of systems enhancements and the establishment of new facilities. Large scale improvements in capacity and operating margins are largely dependent upon our successful completion of our ongoing efforts to automate the Isolagen Process. We anticipate that improved manufacturing practices as a result of our collaboration with Applikon Biotechnology will allow the Company's laboratories to have significantly greater through-put and reduce many of the Company's variable costs; however, there can be no assurance we will be successful in establishing suitable operations, automating the manufacturing process, obtaining the required scalability or achieving significant cost savings or profitable operations.

        We Are Subject to Extensive Governmental Regulation That May Significantly Affect Our Operating Results.    Human healthcare products and services companies are subject to significant regulation by a number of national, foreign, state and local agencies. The FDA has jurisdiction covering testing, manufacturing, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Failure to comply with applicable regulatory requirements could, among other things, result in: (i) fines; (ii) changes to advertising; (iii) suspensions of regulatory approvals of products; (iv) delays in product distribution, marketing and sale; and (iv) civil or criminal sanctions. The Company's products receive FDA review regarding their safety and effectiveness. However, the FDA is permitted to revisit and change its prior determinations. The Company cannot be sure that the FDA will not change its position with regard to the safety or effectiveness of its products. If the FDA's position changes, the Company may be required to change its labeling or cease to manufacture and market the challenged products. Even prior to any formal regulatory action, the Company could voluntarily decide to cease distribution and sale or recall any of its products if concerns about the safety or effectiveness develop.

        We Are Also Subject To A Variety Of Other Regulations In Various Foreign Markets That Could Have A Material Adverse Effect On Our Business In A Particular Market Or In General.    The Company is also subject to a variety of other regulations in various foreign markets. The Company's failure to comply, or assertions that the Company fails to comply, with these regulations could have a material adverse effect on the Company's business in a particular market or in general. To the extent the Company decides to commence or expand operations in additional countries, government regulations in those countries may prevent or delay entry into or expansion of operations in those

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markets. In addition, the Company may introduce additional products into the foreign markets. However, government regulations in both the Company's domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of the Company's products.

        Our Foreign Operations are Exposed to Risks Associated with Foreign Regulations, Exchange Rate Fluctuations, Trade Restrictions and Political, Economic and Social Instability.    A foreign government may impose trade or foreign exchange restrictions or increased tariffs, which could adversely affect our operations. We are also exposed to risks associated with foreign currency fluctuations. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries. As we continue to focus on expanding our existing international operations, these and other risks associated with international operations may increase. We are also subject to the risks of doing business abroad, including unexpected changes in regulatory requirements, export and import restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potential adverse tax consequences, exchange rate fluctuations, increased risks of piracy, limits on our ability to enforce our intellectual property rights, limits on repatriation of funds and political risks that may limit or disrupt international sales. Such limitations and interruptions could have a material adverse effect on our business, financial condition and results of operations. In addition, operations of our foreign subsidiaries are translated from local currency into U.S. dollars based on average monthly exchange rates. We currently do not hedge our foreign currency transactions and are therefore subject to the risk of changes in exchange rates.

        Terrorist Attacks or Acts of War May Seriously Harm the Company's Business.    Terrorist attacks or acts of war may cause damage or disruption to the Company, its employees, its facilities and its customers, which could impact the Company's revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect the Company's business, results of operations, and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect the Company's business, results of operations, and financial condition in ways that management currently cannot predict.

        Any Marketable Processes or Products that the Company Develops May Not be Commercially Successful.    Even if the Company obtains regulatory approval for the Isolagen Process or any of its other development-stage processes or products in the U.S. and other countries, those processes or products may not be accepted by the market. A number of factors may affect the rate and level of market acceptance of the Isolagen Process or our other processes or products, including: regulation by the FDA and other government authorities; market acceptance by doctors and hospital administrators; the effectiveness of the Company's sales force; the effectiveness of the Company's production and marketing capabilities; the success of competitive products; and the availability and extent of reimbursement from third-party payers. If the Isolagen Process or any other Company processes or products fail to achieve market acceptance, the Company's profitability and financial condition will suffer.

        Our Competitors in the Biotechnology and Pharmaceutical Industries May Have Superior Products, Manufacturing Capabilities or Marketing Position.    The human healthcare products and services industry is extremely competitive. The Company's competitors include major pharmaceutical companies and other biotechnology companies. Most of these competitors have more extensive research and development, marketing and production capabilities and greater financial resources than the Company. The Company's future success will depend on its ability to develop and market effectively its

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processes and products against those of its competitors. If the Company's processes and products receive marketing approval but cannot compete effectively in the marketplace, the Company's profitability and financial position will suffer.

        Difficulties Managing Growth Could Adversely Affect Our Business, Operating Results And Financial Condition.    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's ability to manage its operations and growth requires the continued improvement of operational, financial and management controls, reporting systems and procedures. In addition, the Company may find it necessary to hire additional management, financial and sales and marketing personnel to manage the Company's operations. 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.

        We Are Dependent On Our Key Officers and Employees.    The Company is dependent on the efforts of Frank DeLape (Chairman of the Board of Directors), William K. Boss, Jr. (Vice Chairman of the Board of Directors), Michael Macaluso, (Chief Executive Officer, President and Director), Jeffrey Tomz, (Chief Financial Officer and Secretary), Olga Marko (Senior Vice President and Director of Research), and Vaughan Clift, (Vice President of Operations). The loss of any of these officers or employees or our inability to recruit and train additional key service personnel in a timely manner, could materially and adversely affect our business and our future prospects. While no assurances can be given that the Company's current management resources will enable it to succeed as planned, a loss of one or more of its current officers or key employees could severely and negatively impact its operations. No assurances can be given that the Company will not suffer the loss of key human resources for one reason or another. The Company has employment agreements with certain of its officers, but some of its key management personnel are employed "at-will" and may elect to pursue other opportunities at any time. Specifically, the loss of Michael Macaluso, the Chief Executive Officer of the Company, or Frank DeLape, Chairman of the Board, could significantly harm the Company's business. The Company has no present intention of obtaining key man life insurance on any of the executive officers or management. We have had no difficulty hiring and retaining the necessary management and personnel in the recent past.

        We Will Need To Attract, Train Or Retain Additional Highly Qualified Technical And Managerial Personnel In The Future. Our Inability To Do So Could Have A Material Adverse Affect On Our Business, Operating Results And Financial Condition.    There can be no assurance that we will be able to attract, train or retain additional highly qualified technical and managerial personnel in the future, which could have a material adverse effect on the our business, financial condition and results of operations.

        Our Officers And Directors Have Effective Voting Control Of The Common Stock. Therefore, Our Other Stockholders Will Have Limited Participation In Our Affairs.    As of December 31, 2003, our present executive officers, directors and controlling stockholders beneficially hold 51.2% of the outstanding shares of Common Stock. Our officers, directors and controlling stockholders currently are, and in the foreseeable future will continue to be, in a position to control Isolagen by being able to nominate and elect a majority of our Board of Directors. The Board of Directors establishes corporate policies and has the sole authority to nominate and elect our officers to carry out those policies. Other stockholders therefore will have limited participation in our affairs.

        We Have Not Declared Any Dividends On Our Common Stock To Date And We Have No Intention Of Declaring Dividends In The Foreseeable Future. Investors In Our Common Stock Cannot Rely On Dividend Income.    The future payment by the Company of cash dividends on the Common Stock rests within the discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, its "unencumbered cash," its capital requirements and its financial condition, as

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well as other relevant factors. The Company does not anticipate making any cash distributions on the Common Stock in the foreseeable future. Investors in our common stock cannot rely on dividend income.

        If We Are Unable To Effectively Promote Our Brand And Establish A Leading Position In The Biotechnology Marketplace, Results Of Operation And Financial Condition Will Suffer.    The Company's brand name is new and unproven. If the Company is unable to effectively promote its brand and establish a leading position in the biotechnology marketplace, our results of operations and financial condition will suffer. Company management believes that the importance of brand recognition will increase over time. In order to gain brand recognition, the Company may increase its marketing and advertising budgets to create and maintain brand loyalty.

        We May Fail to Protect Adequately Our Proprietary Technology, Which Would Allow Competitors to Take Advantage of Its Research and Development Efforts.    The Company's long-term success largely depends on its ability to market technologically competitive processes and products. If the Company fails to obtain or maintain these protections it may not be able to prevent third parties from using its proprietary rights. The Company's currently pending or future patent applications may not result in issued patents. In the United States, patent applications are confidential until patents issue, and because third parties may have filed patent applications for technology covered by its pending patent applications without the Company being aware of those applications, the Company's patent applications may not have priority over any patent applications of others. In addition, the Company's issued patents may not contain claims sufficiently broad to protect the Company against third parties with similar technologies or products or provide the Company with any competitive advantage. If a third party initiates litigation regarding the Company's patents, and is successful, a court could revoke the Company's patents or limit the scope of coverage for those patents.

        The U.S. Patent and Trademark Office, commonly referred to as the USPTO, and the courts have not consistently treated the breadth of claims allowed in biotechnology patents. If the USPTO or the courts begin to allow broader claims, the incidence and cost of patent interference proceedings and the risk of infringement litigation will likely increase. On the other hand, if the USPTO or the courts begin to allow narrower claims, the value of the Company's proprietary rights may be limited. Any changes in, or unexpected interpretations of, the patent laws may adversely affect the Company's ability to enforce its patent position.

        The Company also relies upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. The Company protects this information with reasonable security measures, including the use of confidentiality agreements with its employees, consultants and corporate collaborators. It is possible that these individuals will breach these agreements and that any remedies for a breach will be insufficient to allow the Company to recover its costs. Furthermore, the Company's trade secrets, know-how and other technology may otherwise become known or be independently discovered by its competitors.

        We May Incur Substantial Costs as a Result of Litigation or Other Proceedings Relating to Patent and Other Intellectual Property Rights.    A third party may sue us, one of our subsidiaries or one of our strategic collaborators for infringing a third-party's patent rights. Likewise, we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of third-party proprietary rights.

        The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in the our favor, could be substantial, and the litigation would divert management's efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we do not prevail in this type of litigation, we or our strategic collaborators may be required to: pay monetary damages; stop

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commercial activities relating to the affected products or services; obtain a license in order to continue manufacturing or marketing the affected products or services; or compete in the market with a substantially similar product.

        Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations. In addition, a court may require that we pay expenses or damages and litigation could disrupt the Company's commercial activities.

        We May be Liable for Product Liability Claims Not Covered by Insurance.    Doctors who use the Company's processes and products, including but not limited to the Isolagen Process, and patients who have been treated by the Isolagen Process or any other process or products of the Company may bring product liability claims against the Company or its subsidiaries. While the Company has taken, and continues to take, what the Company believes are appropriate precautions, the Company may be unable to avoid significant liability exposure. The Company intends to obtain and keep in force product liability insurance sufficient to protect it from claims; however, the Company may be unable to obtain insurance in the future, or the Company may be unable to do so on acceptable terms. Any additional insurance the Company obtains may not provide adequate coverage against any asserted claims. In addition, regardless of merit or eventual outcome, product liability claims may result in: diversion of management's time and attention; expenditure of large amounts of cash on legal fees, expenses and payment of damages; decreased demand for the Company's products and services; and injury to the Company's reputation. At present, we believe we carry reasonably adequate insurance coverage against product liability claims.

        If We Are Unable To Keep Up With Rapid Technological Changes, Our Processes, Products Or Services May Become Obsolete And Unmarketable.    The field of biotechnology is characterized by significant and rapid technological change. Although we attempt to expand our technological capabilities in order to remain competitive, research and discoveries by others may make our processes, products or services obsolete. If we cannot compete effectively in the marketplace, our potential for profitability and financial position will suffer.

        Our Acquisitions Of Companies Or Technologies May Result In Disruptions In Business And Diversion Of Management Attention, Adversely Impacting Our Business, Results Of Operations and Financial Condition.    In the near future, the Company may make acquisitions of complementary companies, products or technologies. Any acquisitions will require the assimilation of the operations, products and personnel of the acquired businesses and the training and motivation of these individuals. Management may be unable to maintain and improve upon the uniform standards, controls, procedures and policies of the Company if it fails in this integration. Acquisitions may cause disruptions in operations and divert management's attention from day-to-day operations, which could impair the Company's relationships with current employees, customers and strategic partners. The Company may also have to, or choose to, incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities for an acquisition could be substantially dilutive to the Company's stockholders' holdings. In addition, profitability of the Company may suffer because of such acquisition-related costs or amortization costs for acquired goodwill and other intangible assets. If management is unable to fully integrate acquired businesses, products, technologies or personnel with existing operations, the Company may not receive the intended benefits of such acquisitions. We are not party to any agreements, written or oral, for the acquisition of any company, product or technology.

        Provisions in Our Bylaws Provide for Indemnification of Officers and Directors, Which Could Require Us to Direct Funds Away From Our Business and Products.    Our Bylaws provide for indemnification of officers and directors. We may be required to pay judgments, fines, and expenses incurred by an officer or director, including reasonable attorneys' fees, as a result of actions or proceedings in which such officers and directors are involved by reason of being or having been an officer or director. Funds paid in satisfaction of judgments, fines and expenses may be funds we need

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for the operation of our business and the development of our products, thereby affecting our ability to attain profitability. This could cause our stock price to drop.

        There Is A Limited Public Trading Market For The Common Stock That May Limit Or Preclude Your Ability To Sell Shares Of Common Stock.    There is a limited public trading market for the Common Stock, and there is no assurance that any established public trading market will develop for any of the Company's securities. Without such an active or public trading market, there can be no assurance of any liquidity or resale value of the Common Stock. The Common Stock may be illiquid for indefinite periods of time.

        Our Stock Price Is Highly Volatile, And Represents Significant Market Risk To An Investment In Our Common Stock.    The market price of the Common Stock is likely to be highly volatile due to risks and uncertainties described in this report, as well as other factors, including sales of substantial amounts of our stock by existing stockholders and price and volume fluctuations in the stock market which do not relate to our operating performance. During 2002, our common stock traded from $2.20 to $7.25. During 2003, our common stock traded from $4.00 to $11.00.

        Our Common Stock is Vulnerable to Pricing and Purchasing Actions That are Beyond Our Control And, Therefore, Persons Acquiring Our Shares May be Unable to Resell Their Shares At a Profit as a Result of This Volatility.    The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Announcements of delays in our testing, development or regulatory approval schedules, technological innovations or new products developed by us or our competitors and developments or disputes concerning patents or proprietary rights could have a significant and adverse impact on such market prices. Regulatory developments in the United States and foreign countries, economic and other external factors, all affect the market price of our securities. In addition, the realization of any of the risks described in these Risk Factors could have a significant and adverse impact on such market prices.

        Future Sales of Our Common Stock May Cause Our Stock Price to Decline. Therefore, Present Stock Prices May Not Be Indicative Of The Prices At Which You Will Be Able To Sell Shares Of Common Stock.    Our stock price may decline as a result of future sales of our shares or the perception that such sales may occur. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock's market price to decline.

Item 2. Properties

        The Company currently leases facilities in three locations: (a) Houston, Texas; (b) London, England, and (c) Sydney, Australia. The Houston facility is located at 2500 Wilcrest, 5^th Floor, Houston, Texas 77042 and houses the corporate headquarters as well as laboratory space used for research and development and as the U.S. processing laboratory for cosmetic and dental trials.

        In September 2002, we opened our London cellular laboratory to demonstrate the efficacy of the Isolagen Process in the U. K. market. The new cellular facility, located at 59/61 Park Royal, London, NW10 7JJ, England began operations in the fourth quarter of 2002. In light of increasing demand for the Isolagen Process, we will be required to expend additional funds to increase the capacity of the operation, including addition of personnel, introduction of systems enhancements, the establishment of new facilities, and the like. While we believe that suitable facilities will be available or can be developed to suit our requirements, we are unable to estimate the cost of suitable facilities at the present time.

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        In August 2003, we opened our Australia cellular laboratory in the city of Sydney to serve the Australian market, and various markets in the Pacific Rim if required regulatory approvals are received. The new cellular facility, located at 2 Lincoln Street, Lane Cove, New South Wales, Australia, 2066, began operations in August 2003.

        Our laboratories are designed as cGMP laboratories to process autologous cultured fibroblast cells for therapeutic injections used in our procedures and clinical and pivotal trials. We believe our laboratories meet FDA facilities requirements under Center for Biologics Evaluation and Research ("CBER"). The following table summarizes the approximate amount of space in square feet utilized by us at each location: