UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

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 of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

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

(713) 780-4754
(Registrant’s telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) o Yes ý No

As of November 8, 2004, issuer had 30,174,801 shares of issued and outstanding common stock, par value $0.001.

TABLE OF CONTENTS

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets
	September 30, 2004 (unaudited) and December 31, 2003

	Consolidated Statements of Operations
	Nine months ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited) and cumulative period from inception to September 30, 2004 (unaudited)

	Three months ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited)

	Consolidated Statements of Shareholders’ Equity
	From inception to September 30, 2004 (unaudited)

	Consolidated Statements of Cash Flows
	Nine months ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited) and cumulative period from inception to September 30, 2004 (unaudited)

	Notes to Unaudited Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

Part II.	Other Information

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Item 6.	Exhibits and Reports on Form 8-K

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Isolagen, Inc.

(A Development Stage Company)

Consolidated Balance Sheets

	September 30, 2004			December 31, 2003
	(unaudited)
Assets

Current assets
Cash and cash equivalents	$	62,024,226		$	15,935,558
Accounts receivable, net of allowance for doubtful accounts	1,468,236			207,202
Inventory	877,081			259,695
Other receivables	375,907			91,545
Prepaid expenses	623,130			254,508

Total current assets	65,368,580			16,748,508

Property and equipment, net	3,006,059			2,221,838

Intangible assets	540,000			540,000

Other assets	730,355			134,119

Total assets	$	69,644,994		$	19,644,465

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable	$	3,795,884		$	1,460,478
Accrued expenses	2,401,605			535,975
Deferred revenue	1,870,930			384,287

Total current liabilities	8,068,419			2,380,740

Long term liabilities	503,205			—

Total liabilities	8,571,624			2,380,740

Commitments and contingencies

Shareholders’ equity
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $.001 par value; 50,000,000 shares authorized; 34,167,247 and 26,672,192 shares issued and outstanding, respectively	34,167			26,672
Additional paid-in capital	109,807,705			50,862,258
Other comprehensive income (foreign currency translation)	392,560			374,380
Accumulated deficit during development stage	(49,161,062		)	(33,999,585		)

Total shareholders’ equity	61,073,370			17,263,725

Total liabilities and shareholders’ equity	$	69,644,994		$	19,644,465

The accompanying notes are an integral part of these 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, 2004
	2004			2003

Revenues
Sales	$	2,176,407		$	158,371		$	4,063,201
License fees	—			—			260,000

Total revenues	2,176,407			158,371			4,323,201

Cost of sales	1,510,143			79,161			2,069,561

Gross profit	666,264			79,210			2,253,640

Selling, general and administrative expenses	12,520,650			5,201,411			27,662,066
Research and development	3,548,500			2,292,675			10,619,961

Operating loss	(15,402,886		)	(7,414,876		)	(36,028,387		)

Other income (expense)
Interest income	241,409			19,404			519,189
Other income	—			55,663			88,084
Loss on sale of property and equipment	—			—			(414,635		)
Interest expense	—			—			(311,628		)

Net loss	(15,161,477		)	(7,339,809		)	(36,147,377		)

Deemed dividend associated with beneficial conversion of preferred stock	—			(1,244,880		)	(11,423,824		)
Preferred stock dividends	—			(1,087,200		)	(1,589,861		)
Net loss attributable to common shareholders	$	(15,161,477	)	$	(9,671,889	)	$	(49,161,062	)

Per share information
Net loss – basic and diluted	$	(0.51	)	$	(0.44	)	$	(4.11	)
Deemed dividend associated with beneficial conversion of preferred stock	—			(0.07		)	(1.30		)
Preferred stock dividends	—			(0.06		)	(0.18		)
Net loss attributable to common shareholders – basic and diluted	$	(0.51	)	$	(0.57	)	$	(5.59	)

Weighted average number of basic and diluted common shares outstanding	29,600,021			16,824,001			8,797,513

The accompanying notes are an integral part of these statements.

	Three Months Ended September 30,
	2004			2003

Revenues	$	1,342,804		$	78,575

Cost of sales	868,237			30,300

Gross profit	474,567			48,275

Selling, general and administrative expenses	5,545,074			1,678,355
Research and development	1,566,695			1,088,137

Operating loss	(6,637,202		)	(2,718,217		)

Other income
Interest income	201,788			8,784

Net loss	(6,435,414		)	(2,709,433		)

Deemed dividend associated with beneficial conversion of preferred stock	—			—
Preferred stock dividends	—			(676,011		)
Net loss attributable to common shareholders	$	(6,435,414	)	$	(3,385,444	)

Per shares information
Net loss – basic and diluted	$	(0.19	)	$	(0.14	)
Deemed dividend associated with beneficial conversion of preferred stock	—			—
Preferred stock dividends	—			(0.03		)
Net loss attributable to common shareholders – basic and diluted	$	(0.19	)	$	(0.17	)

Weighted average number of basic and diluted common shares outstanding	34,050,563			19,726,478

The accompanying notes are an integral part of these statements.

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Shareholders’ Equity

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Number of Shares	Amount		Total Shareholders’ 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 statements.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Treasury Stock				Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Number of Shares	Amount			Total Shareholders’ 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		$	(518,693	)	$	—	2,400	$	(50,280	)	$	(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		$	(1,825,471	)	$	—	2,400	$	(50,280	)	$	(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		$	(2,632,547	)	$	—	2,400	$	(50,280	)	$	(2,228,467	)

The accompanying notes are an integral part of these statements.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit During Development Stage		Other Comprehensive Income		Treasury Stock				Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Additional Paid-In Capital			Accumulated Deficit During Development Stage		Other Comprehensive Income		Number of Shares		Amount		Total Shareholders’ 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 statements.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock				Additional Paid-In Capital		Accumulated Deficit During Development Stage			Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares		Amount		Additional Paid-In Capital		Accumulated Deficit During Development Stage			Other Comprehensive Income		Number of Shares	Amount		Total Shareholders’ 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	$	(20,399,211	)	$	13,875	—	$	—	$	5,206,930

The accompanying notes are an integral part of these statements.

	Series A Preferred Stock					Series B Preferred Stock					Common Stock					Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity (Deficit)
	Number of Shares		Amount			Number of Shares		Amount			Number of Shares		Amount			Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Number of Shares	Amount		Total Shareholders’ 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 5/16/02	—		—			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		$	(33,999,585	)	$	374,380	—	$	—	$	17,263,725

The accompanying notes are an integral part of these statements.

	Series A Preferred Stock			Series B Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity (Deficit)
	Number of Shares	Amount		Number of Shares	Amount		Number of Shares	Amount		Additional Paid-In Capital			Accumulated Deficit During Development Stage			Other Comprehensive Income		Number of Shares	Amount		Total Shareholders’ 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
Conversion of warrants into common stock– 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
Conversion of warrants into common stock– 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
Comprehensive income:
Net loss	—	—		—	—		—	—		—			(15,161,477		)	—		—	—		(15,161,477		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—	—		—			—			18,180		—	—		18,180
Comprehensive loss	—	—		—	—		—	—		—			—			—		—	—		(15,143,297		)
Balance, 9/30/04	—	$	—	—	$	—	34,167,247	$	34,167	$	109,807,705		$	(49,161,062	)	$	392,560	—	$	—	$	61,073,370

The accompanying notes are an integral part of these 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, 2004
	2004			2003
Cash flows from operating activities
Net loss	$	(15,161,477	)	$	(7,339,809		)	$	(36,147,377		)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation and expenses	1,783,093			—				3,405,688
Uncompensated contribution of services	—			200,000				755,556
Depreciation	849,987			631,015				1,852,946
Loss on sale of property and equipment	—			39,488				414,635
Change in operating assets and liabilities:
(Increase) in accounts receivable	(1,277,926		)	(30,773			)	(1,485,129			)
(Increase) decrease in other receivables	(285,468		)	55,000				(377,013			)
(Increase) in inventory	(620,229		)	(274,312			)	(879,924			)
(Increase) decrease in prepaid expenses	(362,701		)	9,975				(617,209			)
Increase (decrease) in other assets	(357,257		)	67,026				(490,485			)
Increase (decrease) in accounts payable	2,341,292			(179,866			)	3,801,770
Increase in accrued expenses	2,200,167			250,469				2,736,142
Increase in deferred revenue	1,491,543			300,966				1,875,831
Net cash used in operating activities	(9,398,976		)	(6,270,821			)	(25,154,569			)

Cash flows from investing activities
Purchase of property and equipment	(1,723,094		)	(1,143,548			)	(5,252,915			)
Proceeds from the sale of property and equipment	—			33,300				34,300
Net cash used in investing activities	(1,723,094		)	(1,110,248			)	(5,218,615			)

Cash flows from financing activities
Proceeds from convertible debt	—			—				1,450,000
Proceeds from notes payable to shareholders	—			—				135,667
Proceeds from the issuance of preferred stock	—			3,919,078				12,931,800
Net proceeds from the issuance of common stock	57,169,849			18,857,961				78,832,720
Cash dividends paid on preferred stock	—			(1,087,200			)	(1,087,200			)
Cash paid for fractional shares of preferred stock	—			—				(38,108			)
Merger and acquisition expenses	—			—				(48,547			)
Repurchase of common stock	—			—				(50,280			)
Net cash provided by financing activities	57,169,849			21,689,839				92,126,052

Effect of exchange rate changes on cash balance	40,889			(6,483			)	271,358
Net increase (decrease) in cash and cash equivalents	46,088,668			14,302,287				62,024,226
Cash and cash equivalents, beginning of period	15,935,558			4,244,640				—
Cash and cash equivalents, end of period	$	62,024,226		$		18,546,927		$		62,024,226

Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$		—		$	150,283
Deemed dividend associated with beneficial conversion of preferred stock	—			1,244,880				11,423,824
Preferred stock dividend	—			1,087,200				1,589,861
Uncompensated contribution of services	—			200,000				755,556
Common stock issued for intellectual property	—			540,000				540,000
Equipment through capital lease commitments	167,154			—				167,154

The accompanying notes are an integral part of these statements.

Isolagen, Inc.

(A Development Stage Company)

Notes to Unaudited Consolidated Financial Statements

Note 1 - Basis of Presentation, Business and Organization

Isolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware corporation (“Isolagen” or the “Company”) is the parent company of Isolagen Technologies, Inc., a Delaware corporation (“Isolagen Technologies”). Isolagen Technologies is the parent company of Isolagen Europe Limited, a company organized under the laws of the United Kingdom (“Isolagen Europe”). Isolagen Technologies is the parent company of Isolagen Australia Pty Limited, a company organized under the laws of Australia (“Isolagen Australia”). Isolagen Technologies is the parent company of Isolagen International, 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.”

Isolagen is a Houston, Texas-based company specializing in the development and commercialization of autologous cellular therapies for soft and hard tissue regeneration. Autologous cellular therapy is the process whereby a patient’s own cells are extracted, allowed to multiply and then injected into the patient for applications such as correction and reduction of the normal effects of aging like wrinkles and nasolabial folds. The procedure is minimally invasive and non-surgical.

In May 1996, the Food and Drug Administration, or FDA, in response to the increasing use of cellular therapy to treat serious illness, released draft regulation for public comment to regulate cellular therapy. In May 1998, this regulation was passed, and in 1999, the FDA notified the Company that the Isolagen Process would require FDA approval as a regulated biologic product. In October 1999, the Company filed an investigational new drug application, or IND, which was accepted by the FDA. In November 1999, the Company’s IND was placed on clinical hold while it established a cGMP facility and standard operating procedures, including quality control release criteria. The clinical hold was released in May 2002. From June 2002, the Company assembled its management and scientific team and improved its Isolagen Process. These improvements included the introduction of an improved transport medium to extend cell viability, the standardization of the injection technique and the standardization of the Company’s manufacturing and laboratory techniques. The Company commenced clinical trials in January 2003 upon completion of its cGMP facility.

On April 7, 2004, the Company submitted a request for a Special Protocol Assessment, or SPA, to the FDA with all the supporting information for its two pivotal Phase III clinical trials for specific dermal applications. In the SPA process, the FDA reviews the design and size of a proposed Phase III program and provides comments regarding the adequacy of the clinical trial design to support a claim of efficacy in an approvable Biologics License Application, or BLA. The FDA’s comments are binding on its review decision, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety and efficacy of a product candidate is identified after the Phase III program commences. In May 2004, the FDA approved the Company’s request for an SPA relating to the design of two pivotal Phase III clinical trials to be conducted by Isolagen in support of registration of the Isolagen Process for the treatment of nasolabial folds and glabellar lines. The Company believes that the FDA’s action will significantly reduce the risks associated with conducting its pivotal Phase III clinical trials to provide evidence of efficacy and safety sufficient for license application. In July 2004, the Company announced the commencement of two pivotal Phase III trials, which are being conducted in two different geographic and demographic populations in the United States as two identical trials for the treatment of facial wrinkles. These trials are randomized, double blind and placebo-controlled and are being conducted at various sites in the United States. The trials, which are being conducted simultaneously, each have in excess of 100 patients split evenly between the treatment group and the placebo group. Efficacy will be measured by a two-point improvements on a six-point scale, as evaluated by an independent assessor at four, six, nine and twelve months. The Company expects to file a BLA for this product candidate during the second half of 2005. We completed Phase I clinical trial for our second candidate for the treatment of periodontal disease in late 2003. In the second quarter of 2004, we initiated a Phase II clinical trial for the cosmetic, or “black triangle,” application of this product candidate.

The Company’s goal is to become a leading provider of solutions for soft and hard tissue regeneration. The Company currently sells its dermal product in the United Kingdom and Australia. The Company plans to expand sales of its dermal product to other parts of Europe, Asia and the Americas.

Through September 30, 2004, the Company has been primarily engaged in developing its initial product technology, recruiting personnel, commencing its UK operations and raising capital. In the course of its development activities, the Company has sustained losses and expects such losses to continue through at least 2004. The Company will finance its operations primarily through its existing cash and future financing.

The Company’s ability to operate profitably under its current business plan is largely contingent upon its success in obtaining further sources of funding, prompt regulatory approval to sell its products and upon its continued expansion. The Company will require additional capital in the future to expand its operations. No assurance can be given that the Company will be able to obtain any such additional capital, either through equity or debt financing, 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 could 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’s ability to manage its current operations and future 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 expanding 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.

As of September 30, 2004, the Company had a cash balance of $62.0 million and net working capital of $57.3 million. As of November 5, 2004, the Company had a cash balance of approximately $122.2 million. The Company believes its existing cash and cash equivalents will be adequate to meet its anticipated capital and liquidity requirements until June 30, 2007, assuming no additional future sources of funding and assuming no expansion of the Company. The Company does not have any credit facilities with which to fund ongoing working capital needs, and will be dependent on its cash and cash equivalents to fund operations for the foreseeable future. The Company’s long-term viability is dependent upon the successful operation of its business and its ability to raise funds within the near future for expansion.

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 3,942,000 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 Process. 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.

Since AFH and Gemini had no operations and limited assets at the time of the Merger, the merger has been accounted for as a recapitalization of Isolagen Technologies and an issuance of common stock by Isolagen Technologies for the net assets of AFH and Gemini. In the recapitalization, Isolagen Technologies is treated as having affected (i) a 27.8694 for 1 stock split, whereby the 195,707 shares of its common stock outstanding immediately prior

to the merger are converted into the 5,453,977 shares of common stock received and held by the Isolagen Technologies stockholders immediately after the merger, and (ii) a change in the par value of its common stock, from $0.01 per share to $0.001 per share. The stock split and change in par value have been reflected in the accompanying consolidated financial statements by retroactively restating all share and per share amounts. The stock issuances are accounted for as the issuance of (i) 3,942,400 shares for the net assets of Gemini, recorded at their book value, and (ii) the issuance of 3,899,547 shares (the number of shares AFH had outstanding immediately prior to the Merger) for the net assets of AFH, recorded at their book value.

Immediately prior to and as a condition of the Merger, Isolagen Technologies issued an aggregate of 2,328,972 shares (post split) of its common stock to convert to equity an aggregate of $2,075,246 of liabilities, comprised of (i) accrued salaries of $328,125, (ii) convertible debt and related accrued interest of $1,611,346, (iii) convertible shareholder notes and related accrued interest of $135,667 and (iv) bridge financing costs of $108. Simultaneous with the Merger, the Company sold 1,346,669 shares of restricted common stock to certain accredited investors in a private placement transaction. The consideration paid by such investors for the shares of common stock aggregated $2,020,000 in transactions exempt from the registration requirements of the Securities Act. The net cash proceeds of this private placement were used to fund Isolagen’s research and development projects and the initial FDA trials of the Isolagen Process, to explore the viability of entering foreign markets, to provide working capital and for general corporate purposes.

The financial statements presented include Isolagen, Inc. and its wholly-owned subsidiaries. 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 assets, liabilities, operations and cash flows of AFH and Gemini are included in the consolidated financial statements from August 10, 2001 onward.

Note 2 - Summary of Significant Accounting Policies

Interim financial information

The financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods on a basis consistent with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or a full year. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulation, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 filed with the Securities and Exchange Commission on April 28, 2004.

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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.

Concentration of credit risk

The Company maintains its cash with a major U.S. domestic bank. The amounts held in this bank exceed the insured limit of $100,000 from time to time. The terms of these deposits are on demand to minimize risk. The Company has not incurred losses related to these deposits.

The Company is subject to risks common to companies in the development stage including, but not limited to, development of new products, development of markets and distribution channels, dependence on key personnel, and the ability to obtain additional capital as needed to fund its product plans. The Company has a limited operating history and has yet to generate any significant revenues from customers. To date, the Company has been funded by private debt and equity financings. The Company’s ultimate success is dependent upon its ability to raise additional capital and to successfully develop and market its products.

The products developed by the Company require approvals from the United States FDA or other international regulatory agencies prior to commercial sales. There can be no assurance that all of the Company’s products will receive the necessary approvals. If the Company was denied such approvals or such approvals were delayed, it would have a material adverse impact on the Company.

Inventory

Inventory primarily consists of raw materials used in the Isolagen Process. Inventory is stated at the lower of cost or market and cost is determined by the weighted average method.

Property and equipment

Property and equipment, consisting primarily of lab equipment, computer equipment, leasehold improvements, and office furniture and fixtures is carried at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided by the straight-line method over the estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease. The cost of repairs and maintenance is charged as an expense as incurred.

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 preferred stock. The Company does not present diluted earnings per share for years in which it incurred net losses as the effect is antidilutive.

At September 30, 2004, options and warrants to purchase 7,921,836 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 due to their antidilutive effect.

Stock based compensation and expenses

The Company accounts for its stock-based compensation under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock Based Compensation.” Under SFAS No. 123, the Company is permitted to either record expenses for stock options and other employee compensation plans based on their fair value at the date of grant or to continue to apply the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APB No. 25”), and recognize compensation expense, if any, based on the intrinsic value of the equity instrument at the measurement date. Any such compensation cost is charged to expense on a straight-line basis over the periods the options vest. To the extent the options have cashless exercise provisions, the Company utilizes variable accounting. The Company has elected to continue following the provisions of APB No. 25. Stock options issued to other than employees or directors are recorded on the basis of their fair value as required by SFAS No. 123.

The Company from time to time issues common stock, stock options or common stock warrants to acquire services or goods from non-employees. Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by SFAS No. 123, which is measured as of the date required by EITF Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs. See Note 4.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This statement provides guidance for those companies wishing to voluntarily change to the fair value based method of accounting for stock-based compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123, requiring prominent disclosure in annual and interim financial statements regarding a company’s method for accounting for stock-based employee compensation and the effect of the method on reported results. While Isolagen continues to utilize the disclosure-only provisions of SFAS No. 123, the Company has modified its disclosures to comply with SFAS No. 148.

Had compensation costs for the Company’s stock option grants to employees and directors been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company’s net loss and net loss per share would have increased to the pro forma amounts indicated below:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2004				2003				2004				2003

Net loss attributable to common shareholders – as reported	$	(6,435,414		)	$	(3,385,444		)	$		(15,161,477	)	$	(9,671,889		)
Add: Stock-based employee compensation expense (gain) included in reported net loss, net of related tax effects of $0	—				—				339,505				—
Less: total stock-based employee compensation expense determined under fair value based method for all awards granted to employees, net of related tax effect of $0	(1,106,020			)	(11,183,906			)	(3,180,405			)	(12,810,568			)
Net loss - pro forma	$	(7,541,434		)	$	(14,569,350		)	$	(18,002,377		)	$		(22,482,457	)

Net loss per share – as reported
Basic and diluted	$		(0.19	)	$		(0.17	)	$	(0.51		)	$		(0.57	)
Net loss per share – pro forma
Basic and diluted	$		(0.22	)	$		(0.74	)	$	(0.61		)	$		(1.34	)

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.

Revenue recognition

The Company recognizes revenue from product sales when goods are shipped and the risk of loss transfers to the customer. Revenue from licenses and other upfront fees are recognized on a ratable basis over the term of the respective agreement. Milestone payments are recognized upon successful completion of a performance milestone event. Any amounts received in advance of performance are recorded as deferred revenue. 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”). 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. The Company believes that all of these conditions are met at the time of shipment. Currently, three injections are recommended, although the decision to utilize one, two or three injections is between the attending physician and his/her patient. The amount invoiced is fixed and determinable and only varies among customers depending upon the number of injections requested. There is no performance provision under any arrangement with any doctor and there is no right to refund, or returns for unused injections.

Currently the Isolagen Process is delivered through an attending physician to each patient using the Company’s recommended regimen of up to three injections. The Company believes each injection has stand alone value to the patient. The Company invoices the attending physician upon that physician submitting his or her patient’s tissue sample to the Company, as a result of which the contractual arrangement is between the Company and the medical professional. The amount invoiced varies directly with the number of injections requested. Generally, all orders are paid in advance by the physician and are not refundable. Revenue is deferred until shipment, provided no significant obligations remain, and is recognized in installments corresponding to the number of injections shipped to the attending physician. 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 amount of the revenue deferred represents 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. Should the physician discontinue the regimen prematurely all remaining deferred revenue is recognized.

Intangible assets

The Company’s intangible assets represent patent applications which are recorded at cost. The Company has filed applications for patents in connection with technologies being developed. The patent applications and any patents issued as a result of these applications are important to the protection of the Company’s technologies that may result from its research and development efforts. Costs associated with patent applications and maintaining patents are capitalized and will be amortized over the life of the patents. The Company reviews the value recorded for intangibles to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in operating results to the extent the carrying value exceeds fair value determined based on the net present value of estimated future cash flows.

Promotional incentives

The Company periodically offers promotional incentives to physicians on a case-by-case basis. Promotional incentives are provided to physicians in the form of “at no charge” Isolagen Treatments and Isolagen Treatments offered at a discount from the suggested price list. The Company does not receive any identifiable benefit from the physicians in exchange for any promotional incentives granted.

In accordance with EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” the Company does not record any revenue related to “at no charge” Isolagen Treatments and the estimated cost to provide such treatments is expensed as the time the promotion is granted. The Company records any discounts granted as a reduction in revenue (i.e., net revenue after discount) from that specific transaction.

Foreign currency translation

The financial position and results of operations of the Company’s foreign subsidiaries are generally 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 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.

Comprehensive income

Comprehensive income encompasses all changes in equity other than those with shareholders and consists of net earnings and foreign currency translation adjustments. 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.

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. 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.

Shipping and handling costs

The Company typically does not charge customers for shipping and handling costs. These costs are included in selling, general and administrative expenses.

Advertising cost

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

Note 3 - Commitments and Contingencies

On October 9, 1996, the Company was advised by the Division of Enforcement of the Securities and Exchange Commission (the “Commission”) that it is considering recommending that the Commission bring an enforcement action, which could include a civil penalty, against the Company in U.S. District Court for failing to file timely periodic reports in violation of Section 13(a) of the Securities and Exchange Act of 1934 and the rules thereunder.

In October 1996, the Company also received a request for the voluntary production of information to the Division of Enforcement of the Commission related to the resignation of Coopers & Lybrand LLP and the termination of Arthur Andersen LLP and the appointment of Jones, Jensen & Company as the Company’s independent public accountants and the reasons therefore. In addition, the Company was requested to provide certain information respecting its previous sales of securities. The Company cooperated in providing information in response to these inquiries in early 1997. The Company has not been advised of the outcome of the foregoing, and since 1997 has had no further contact by the Division of Enforcement of the Commission.

Note 4 - Equity, Stock Plan and Warrants

Uncompensated contributed services

From the date of the Merger through June 30, 2003, the Company did not pay compensation to certain officers and directors. Accordingly, the Company has capitalized the estimated fair value of these services. The uncompensated contributed services totaled $200,000 from January 1, 2003 through June 30, 2003. The Company estimated the value of the contributed services based upon its estimate of their fair market value. This contribution of services was recorded as an increase to compensation expense and increase in additional paid-in capital.

Common Stock

During the three months ended March 31, 2004, the Company issued 19,000 shares of common stock for cash totaling $102,720 in connection with the exercise of stock options and warrants and issued 78,526 shares of common stock in exchange for cashless exercise of warrants.

During the three months ended June 30, 2004, the Company issued a) 7,200,000 shares of common stock for cash totaling $56.8 million in connection with the secondary offering completed in June 2004; and b) 51,828 shares of common stock in exchange for cashless exercise of warrants. During the three month ended June 30, 2004, there were no shares of common stock issued for cash in connection with the exercise of stock options or warrants.

During the three months ended September 30, 2004, the Company issued a) 138,270 shares of common stock for cash totaling $249,695 in connection with exercise of stock options and warrants; and b) issued 7,431 shares of common stock in exchange for cashless exercise of warrants.

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 “Stock Plan”). The 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 Stock Plan is administered by the Company’s Compensation Committee, who has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.

In January 2004, the Company issued under the Stock Plan a total of 300,000 options to purchase its common stock with an exercise price of $6.00 per share to three independent board members. The options vest over a three year period and expire in January 2014. Compensation expense for these options of $0.4 million was recorded in the three months ended March 31, 2004 as these options had a cashless exercise provision. Compensation gain for these options of $0.1 million was recorded in the three months ended June 30, 2004. The cashless exercise provision for these options were eliminated on May 10, 2004, thus an expense will no longer be recorded subsequent to that date.

In the second quarter of 2004, the Company issued a total of 265,000 options to purchase its common stock with an exercise price ranging from $8.90 to $11.38 per share to various employees. The options vest over a three year period from the date of grant. In the second quarter of 2004, the Company issued 30,000 options to purchase its common stock with an exercise price of $9.00 to one independent board member. The options vest after twelve months from the date of grant.

In the third quarter of 2004, the Company did not issue any options under the Stock Plan.

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 Company’s Compensation Committee, who has

exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.

In January 2004, the Company issued 160,000 options to purchase its common stock with an exercise price of $6.00 per share to a consultant. The options vest over a three year period, subject to certain acceleration clauses. In February 2004, the Company issued 100,000 options to purchase its common stock with an exercise price of $10.49 per share to a consultant. The options vest over a three year period from the date of grant.

In the second quarter of 2004, an employee retired 300,000 options to purchase common stock.

In the third quarter of 2004, the Company did not issue any options under the 2003 Stock Plan.

Other Stock Options

In September 2004, the Company’s Board of Directors issued 920,000 options to purchase its common stock with an exercise price ranging from $8.10 to $10.11 per share to various new employees. The options vest over a three year period from the date of grant. 825,000 of these options were granted at exercised prices that were from $0.06 to $0.54 less than the market price of the common stock on the date of grant. Total stock compensation expense of $308,750 is being charged to expense on a straight line basis over the three year vesting periods.

Warrants and Options Issued for Services

As of September 30, 2004, the Company has outstanding 678,600 warrants and options issued to non-employees under consulting and distribution agreements. The following sets forth certain information concerning these warrants and options:

	Vested	Unvested

Warrants and options outstanding	370,267	308,333
Vesting period	n/a	3 to 36 months
Range of exercise prices	$1.50 to $10.49	$6.00 to $10.49
Weighted average exercise price	$4.59	$7.09
Expiration dates	2005 to 2013	2007 to 2013

Expense related to these contracts was a) $1.0 million for the three months ended March 31, 2004; b) $0.3 million for the three months ended June 30, 2004 and c) $0.2 million for the three months ended September 30, 2004.

Note 5 - Geographical Information

The Company operates its business on the basis of a single industry reportable segment. The Company markets its products on a global basis. The Company’s principal markets are the United States, United Kingdom and Australia. While no commercial operations have commenced in the United States, the United States is presented separately as it is the Company’s headquarters.

Geographical information concerning the Company’s reportable segments is as follows:

	Revenue Three months ended September 30,				Revenue Nine months ended September 30,
	2004		2003		2004		2003

United States	$	—	$	—	$	—	$	—
United Kingdom	1,232,176		78,575		1,888,471		158,371
Australia	110,628		—		287,936		—

	$	1,342,804	$	78,575	$	2,176,407	$	158,371

	Property and Equipment, net As of September 30,
	2004		2003

United States	$	1,301,406	$	1,033,380
United Kingdom	1,216,572		813,961
Australia	488,081		773,902

	$	3,006,059	$	2,621,243

	Depreciation Three months ended September 30,				Depreciation Nine months ended September 30,
	2004		2003		2004		2003

United States	$	146,482	$	144,198	$	390,427	$	342,627
United Kingdom	68,728		50,326		186,286		160,077
Australia	89,318		79,414		273,274		128,311

	$	304,528	$	273,938	$	849,987	$	631,015

	Capital Expenditures Three months ended September 30,				Capital Expenditures Nine months ended September 30,
	2004		2003		2004		2003

United States	$	770,980	$	72,915	$	1,157,828	$	347,466
United Kingdom	511,253		6,190		558,206		255,063
Australia	—		19,273		7,060		541,019

	$	1,282,233	$	98,378	$	1,723,094	$	1,143,548

Note 6 – Subsequent Event

On November 3, 2004 the Company completed the private placement of $75,000,000 aggregate principal amount of 3.5% Convertible Subordinated Notes Due 2024 (the “3.5% Subordinated Debentures”). The Company received net proceeds of approximately $71.7 million after the deduction of discounts, commissions and offering expenses. The Company also granted the purchasers of the 3.5% Subordinated Debentures the option to purchase up to $15,000,000 of additional 3.5% Subordinated Debentures through December 2, 2004. On November 5, 2004 the Company completed the private placement of the additional $15,000,000 aggregate principal amount of 3.5% Subordinated Debentures. The Company received net proceeds of approximately $14.5 million after the deduction of discounts, commissions and offering expenses. The total net proceeds to the Company were approximately $86.2 million after the deduction of discounts, commissions and offering expenses.

The Company used approximately $26 million of the net proceeds to repurchase 4,000,000 shares of its common stock, of which 2,000,000 shares were repurchased from Frank DeLape, the Chairman of the Board of Directors, Michael Macaluso, a director and the former President and Chief Executive Officer, Olga Marko, the former Senior Vice President and Director of Research, Michael Avignon, the former Manager of International Operations, and Timothy J. Till, a shareholder. The purchase price from the insiders, affiliates and founders of the Company listed above was $6.33 per share which represented a 5% discount from the closing price of the Company’s common stock on the American Stock Exchange on October 28, 2004, the date the offering of the 3.5% Subordinated Debentures was priced. The purchase of the shares from the insiders was approved by a special committee of independent directors in partial reliance on a fairness opinion issued by an investment bank. The remaining 2,000,000 shares were repurchased in private transactions at a price of $6.66 per share. The remaining net proceeds of approximately $60.2 million will be used for general corporate purposes, including product development, sales and marketing, capital expenditures and working capital. Pending the application of the remaining net proceeds they will be invested in short-term, investment grade, interest-bearing securities.

The 3.5% Subordinated Debentures are unsecured obligations and are subordinated in right of payment to all of the Company’s existing and future senior indebtedness. The 3.5% Subordinated Debentures are also effectively subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.

The Company will pay 3.5% interest per annum on the principal amount of the 3.5% Subordinated Debentures, payable semi-annually on May 1 and November 1 of each year beginning May, 1, 2005. The 3.5% Subordinated Debentures will mature on November 1, 2024. Prior to maturity the holders may convert their 3.5% Subordinated Debentures notes into shares of the Company’s common stock. The initial conversion rate is 109.2001 shares per $1,000 principal amount of 3.5% Subordinated Debentures, which is equivalent to an initial conversion price of approximately $9.16 per share.

On or after November 1, 2009, the Company may at our option redeem the 3.5% Subordinated Debentures, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the 3.5% Subordinated Debentures to be redeemed plus accrued and unpaid interest.

On each of November 1, 2009, November 1, 2014 and November 1, 2019, the holders may require us to purchase all or a portion of their 3.5% Subordinated Debentures at a purchase price in cash equal to 100% of the principal amount of 3.5% Subordinated Debentures to be purchased plus accrued and unpaid interest. The holders of the 3.5% Subordinated Debentures may also require the Company to repurchase their 3.5% Subordinated Debentures in the event its common stock (or other common stock into which the 3.5% Convertible Subordinated Debentures are then convertible) ceases to be listed for trading on a U.S. national securities exchange or approved for trading on an established automated over-the-counter market in the United States.

In the event a change in control occurs on or before November 9, 2009, the holders of the 3.5% Subordinated Debentures may require the Company to purchase all or a portion of their notes at a purchase price equal to 100% of the principal amount of the 3.5% Subordinated Debentures to be purchased plus accrued and unpaid interest and the payment of a “make-whole” payment which is based on the date on which the change in control occurs and the price per share paid for the Company’s common stock in such change in control transaction. The Company will be allowed to pay for the repurchase of the 3.5% Subordinated Debentures and accrued and unpaid interest in cash or, at its option, shares of its common stock, and the Company will be allowed to make the make-whole payment in cash or, at its option, such other form of consideration as is paid to its common stockholders in the change of control transaction. In addition, in the event a change in control occurs on or before November 9, 2009, the holders of the 3.5% Subordinated Debentures that convert their 3.5% Subordinated Debentures into shares of the Company’s common stock in connection with such change of control transaction will also be entitled to receive the make-whole payment.

The 3.5% Subordinated Debentures the Company issued in an offering are not registered under the Securities Act of 1933, as amended (“the Securities Act’). However, the Company is obligated to file with the SEC, on or prior to 90 days following the date the 3.5% Subordinated Debentures were originally issued, a shelf registration statement covering resales of the 3.5% Subordinated Debentures and the shares of the Company’s common stock issuable upon the conversion of the 3.5% Subordinated Debentures, and to use its reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act on or prior to 180 days following the date the 3.5% Subordinated Debentures were originally issued. If the Company should fail to meet the registration obligations described above, the interest rate payable of the 3.5% Subordinated Debentures will increase by 0.5% per annum for the period the Company is not in compliance with the registration obligations.

Upon completion of 3.5% Subordinated Debentures offering, the Company will immediately begin incurring interest expense related to the 3.5% Subordinated Debentures and debt placement costs. These charges will have a negative impact on the Company’s results of operations and loss per share in the future. Additionally, the repurchase of the common stock as treasury stock will result in the Company having approximately 4,000,000 fewer shares of common stock outstanding, which will also negatively impact loss per share in the future.

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,” and “intend” 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. The discovery and development of applications for autologous cellular therapy are subject to substantial risks and uncertainties. There can be no assurance that Isolagen’s trials relating to autologous cellular therapy applications for the treatment of dermal defects or gingival recession can be conducted within the timeframe that Isolagen expects, that such trials will yield positive results, or that additional applications for the commercialization of autologous cellular therapy can be identified and advanced into human clinical trials. These and other factors, some of which are described below, could cause future results to differ materially from the expectations expressed in this report. 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 and other health-related markets;

• whether our clinical human trials relating to autologous cellular therapy applications for the treatment of dermal defects or gingival recession 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;

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

• our ability to finance our business;

• our ability to improve our current pricing model;

• our ability to decrease our cost of goods sold through the development of our Automated Cell Expansion (“ACE”) System that permits an automated harvesting process in a closed loop sterile environment, which we believe will eliminate several of the steps and materials involved in our current system and will lead to significant cost reductions in both skilled labor and materials and will enable scalable mass production;

• our ability to complete and integrate the ACE System into our UK operations during 2005;

• our ability to service the demand for our dermal product in the United Kingdom, which is highly dependent on our ability to complete and integrate the ACE System;

• our ability to significantly reduce our need for fetal bovine calf serum for culturing cells, which process is in the exploratory phase and which we hope will result in an 80% or greater reduction in the use of such serum;

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

• management’s best estimate on the patient data including patients started and patients completed;

• 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 receive requisite regulatory approvals in the United States, Europe, Asia and the Americas, and our ability to retain the licenses that we have obtained and 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;

• no new entrance of competitive products in our markets;

• no adverse publicity related to our products or the Company itself;

• no adverse claims relating to our intellectual property;

• the adoption of new, or changes in, accounting principles; and/or legal proceedings;

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

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

• our ability to efficiently integrate future acquisitions, if any;

• other new lines of business that we may enter in the future; and

• other risks referenced from time to time elsewhere in this report and in our filings with the SEC.

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 specialize in the development and commercialization of autologous cellular technology that has specific applications in cosmetic dermatology and are exploring applications for periodontal disease, reconstructive dentistry and other health-related markets. We are developing our lead product candidate for the correction and reduction of the normal effects of aging, such as wrinkles and nasolabial folds. In March 2004, we announced positive results of our first Phase III clinical trial for our lead product candidate. In July 2004, the Company announced the commencement of two pivotal Phase III trials, which are being conducted in two different geographic ad demographic populations in the United States as two identical trials for the treatment of facial wrinkles. These trials are randomized, double blind and placebo-controlled and are being conducted at various sites in the United States. The trials, which are being conducted simultaneously, each have in excess of 100 patients split evenly between the treatment group and the placebo group. Efficacy will be measured by a two-point improvements on a six-point scale, as evaluated by an independent assessor at four, six, nine and twelve months. The Company expects to file a BLA for this product candidate during the second half of 2005. We completed Phase I clinical trial for our second candidate for the treatment of periodontal disease in late 2003. In the second quarter of 2004, we initiated a Phase II clinical trial for the cosmetic, or “black triangle,” application of this product candidate. We also have an active investigational new drug application for vocal cord injury. We are currently in discussions with the FDA regarding our Phase I clinical trial protocol. The FDA has approved the protocol which is currently under review by the IRB (“Institutional Review Board”). We expect to initiate this trial during the fourth quarter of 2004. We are also exploring other opportunities for additional product candidates, including for the treatment of acne scars.

Our ability to operate profitably under our current business plan is largely contingent upon our success in obtaining further sources of debt and equity capital, prompt regulatory approval to sell our products, our ability to automate our manufacturing process and upon our continued expansion. We will require additional capital in the future to expand our operations. No assurance can be given that we will be able to obtain any such additional capital, either through equity or debt financing, on satisfactory terms or at all. 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 negatively impacted.

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

We have been engaged in a search for an existing facility in the Northeast corridor that has the capacity to satisfy our United States manufacturing needs if and when our BLA is granted. We expect to establish a cGMP, or current Good Manufacturing Practices, facility in the Northeast to serve as the primary manufacturing facility and management headquarters in the United States as part of our refined strategy for the global commercialization of the Isolagen Process. We have evaluated several existing facilities that have been or could be configured and qualified for pharmaceutical research and manufacturing activities and that could be expected to meet our basic infrastructure needs for manufacturing our product candidates. We anticipate that such a future facility, coupled with anticipated processing and delivery improvements for the Isolagen Process, will enable us to service our global markets from a select number of strategically located production facilities around the world. Consequently, we have determined to close our facility in Australia. These anticipated improvements are expected to eliminate the need for numerous locally-based manufacturing facilities with the further expectation of lowered costs. Negotiations to secure a lease for such a facility are ongoing. A laboratory in Houston, Texas is expected to be retained.

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. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to the impairment of long-lived assets (including intangible assets), allowances for doubtful accounts, revenue recognition, certain accrued liabilities and stock based expenses. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amount and timing of the recognition of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition: We recognize revenue from product sales when goods are shipped and the risk of loss transfers to the customer. Revenue from licenses and other up-front fees are recognized on a ratable basis over the term of the respective agreement. Milestone payments are recognized upon successful completion of a performance milestone event. Any amounts received in advance of performance are recorded as deferred revenue. We recognize revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). 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. We believe that all of these conditions are met at the time of shipment. Currently, three injections are recommended, although the decision to utilize one, two or three injections is between the attending physician and his/her patient. The amount invoiced is fixed and determinable and only varies among customers depending upon the number of injections requested. There is no performance provision under any arrangement with any doctor and there is no right to refund, or returns for unused injections.

Currently the Isolagen Process is delivered through an attending physician to each patient using our recommended regimen of up to three injections. We believe each injection has stand alone value to the patient. We invoice the attending physician upon that physician submitting his or her patient’s tissue sample to us; as a result of which the contractual arrangement is between us and the medical professional. The amount invoiced varies directly with the number of injections requested. Generally, all orders are paid in advance by the physician and are not refundable. Revenue is deferred until shipment, provided no significant obligations remain, and is recognized in installments corresponding to the number of injections shipped to the attending physician. 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 amount of the revenue deferral represents 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. Should the physician discontinue the regimen prematurely all remaining deferred revenue is recognized.

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.

Intangible assets: Our intangible assets represent patent applications which are recorded at cost. We have filed applications for patents in connection with technologies being developed. The patent applications and any patents issued as a result of these applications are important to the protection of our technologies that may result from our research and development efforts. Costs associated with patent applications and maintaining patents are capitalized and will be amortized over the life of the patents. We review the value recorded for intangibles to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in operating results to the extent the carrying value exceeds fair value determined based on the net present value of estimated future cash flows.

Stock based compensation and expenses: We account for our stock-based compensation under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123—”Accounting for Stock Based Compensation.” Under SFAS No. 123, we are permitted to either record expenses for stock options and other employee compensation plans based on their fair value at the date of grant or to continue to apply the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APB No. 25”), and recognize compensation expense, if any, based on the intrinsic value of the equity instrument at the measurement date. To the extent the options have cashless exercise provisions, we utilize variable accounting. We have elected to continue following the provisions of APB No. 25.

From time to time we issue common stock, stock options or common stock warrants to acquire services or goods from non-employees. Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by SFAS No. 123, which is measured as of the date required by EITF Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs. As a result, the expense related to contracts that do not contain a substantial disincentive to non-performance will fluctuate from period to period based on changes in the market price of our common stock. Period to period expense

may also fluctuate if we decide to exercise our right to terminate certain contracts before some or all of the options or warrants vest.

RESULTS OF OPERATIONS

Comparison of the nine months ending September 30, 2004 and 2003

REVENUES. Revenues increased $2,018,036, to $2,176,407 for the nine months ended September 30, 2004 compared to $158,371 for the nine months ended September 30, 2003. The increase in revenues is primarily attributable to the expansion of our operations in the United Kingdom and the commencement of operations in Australia. Sales for the nine months ended September 30, 2004 are net of “at no charge” or discounted Isolagen Treatments provided to physicians as incentives. Such incentives amounted to $0.5 million during the nine months ended September 30, 2004 and we anticipate that the level of such incentives will decline in future periods.

The Isolagen Process involves a patient’s physician obtaining an approximately three millimeter punch biopsy from behind the patient’s ear using a local anesthetic. The sample is then packed in a special transport vial that we provide to the physician and is shipped overnight to our laboratory. We invoice the physician upon receipt of the skin sample. Upon arrival at our laboratory, the specimen is initiated into culture. Through a series of plastic flasks and growth media, the fibroblasts within the specimen are cultured into tens of millions of cells over a period of approximately six weeks. The fibroblasts are then harvested and put into a special transport vial. After completion of a series of quality control tests, the cells are released and shipped to the physician’s office overnight. Additional amounts are available for re-injection every two to three weeks. We recognize one-third of the revenue associated with each treatment upon the shipment of the first injection to the patient’s physician, an additional one-third of revenue associated with each treatment is recognized upon shipment of the second injection to the patient’s physician, and the remaining one-third is recognized upon the shipment of the last injection to the patient’s physician.

The revenues which we did recognize during the nine months ended September 30, 2004 from our United Kingdom and Australian operations were in part reduced by the effects of promotional incentives provided to doctors utilizing the Isolagen Process. We expect to continue providing such promotional incentives to doctors during the introduction phase of the Isolagen Process in the United Kingdom.

COST OF SALES. Costs of sales increased to $1,510,143 for the nine months ended September 30, 2004 compared to $79,161 for the nine months ended September 30, 2003. The increase in cost of sales is the result of the increase in our sales as discussed above.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 141%, or $7,319,239, to $12,520,650 for the nine months ended September 30, 2004 compared to $5,201,411 for the nine months ended September 30, 2003. The major components of the approximately $7.3 million increase in selling, general and administrative expense are as follows:

a) Consulting expense increased by approximately $1.5 million to $2.4 million for the nine months ended September 30, 2004 compared to $0.9 million for the nine months ended September 30, 2003. The increase included $1.4 million of stock based expenses related to warrants issued under consulting and distribution agreements, and $0.3 million of stock compensation related to stock options issued to directors. There were no such stock based expenses in the nine months ended September 30, 2003. The level of the expense recorded for the warrants issued under consulting and distribution contracts can vary from quarter to quarter based on changes in the market price of our common stock.

b) Salaries increased by approximately $3.2 million to $4.0 million for the nine months ended September 30, 2004 compared to $0.8 million for the nine months ended September 30, 2003 due to an increase in our number of employees. The expense for the nine months ended September 30, 2004 included $1.0 million related to employee severances. Of this $1.0 million, $0.9 million results from the severance of two employees who are entitled, under their contracts, to receive salary payments through July 2006 and $0.1 million results from our decision to close our facility in Australia and serve the Australian market through our existing facilities in Europe. The nine months ended September 30, 2003 expense included an imputed expense of $200,000 for the fair market value of services provided by certain officers for which they will not be compensated.

c) Travel expense stay constant at $0.6 million for the nine months ended September 30, 2004 compared to $0.6 million for the nine months ended September 30, 2003.

d) Promotional expense increased by approximately $0.6 million to $1.0 million for the nine months ended September 30, 2004 compared to $0.4 million for the nine months ended September 30, 2003 due to increased marketing and promotional efforts related to the expansion of our operations in the United Kingdom.

e) Depreciation and amortization increased by approximately $0.1 million to $0.8 million for the nine months ended September 30, 2004 compared to $0.7 million for the nine months ended September 30, 2003, which increase was based on assets placed into service during 2003 with the commencement of our operations in the United Kingdom and the completion of our U.S. laboratory.

f) Office costs increased by approximately $2.1 million to $3.3 million for the nine months ended September 30, 2004 compared to $1.2 million for the nine months ended September 30, 2003, which increase is primarily related to the commencement of our operations in the United Kingdom and the completion of our U.S. laboratory.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $1.2 million during the nine months ended September 30, 2004 to $3.5 million as compared to $2.3 million for the same period of 2003, primarily due to an increase in consulting expenses to $2.0 million during the nine months ended September 30, 2004 as compared to $0.5 million during the nine months ended September 30, 2003. Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for the Isolagen Process for our dermal product candidate in the United States. These costs include those personnel and laboratory costs related to the current FDA trials and certain consulting costs. In July 2004, we commenced our Phase III Pivotal Trials for our dermal product candidate, which are ongoing. The total cost of research and development from inception to September 30, 2004 is $10.3 million. As of September 30, 2004, we believe at a minimum it will cost $1.3 million to complete the approval process for our dermal product candidate. That estimate assumes that no further testing requirements for the initial dermal applications are imposed by the FDA, that we file our BLA during the second half of 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 for dermal applications 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 for the initial dermal applications will be if the BLA is not filed during the second half of 2005. We have other research projects currently underway. However, research and development costs related to these projects were not material during the 2004 or 2003 periods.

INTEREST INCOME. Interest income increased 1,144%, or $222,005, to $241,409 for the nine months ended September 30, 2004 compared to $19,404 for the nine months ended September 30, 2003. The increase in interest income resulted principally from an increase in the amount of cash held in interest bearing accounts.

OTHER INCOME. Other income of $55,663 for the nine months ended September 30, 2003 represents gains realized on the sale of certain interest bearing securities denominated in Australian dollars and British pounds held to mitigate a portion of the foreign currency exposure related to our international activity. As of September 30, 2004, we held no such securities.

NET LOSS. Net loss for the nine months ended September 30, 2004 was $15,161,477, as compared to a net loss of $7,339,809 for the nine months ended September 30, 2003. This increase in net loss represents the effects of the increases in selling, general and administrative expenses and research and development expenses partially offset by the increase in our sales and gross profit.

Comparison of the three months ending September 30, 2004 and 2003

REVENUES. Revenues increased $1,264,229, to $1,342,804 for the three months ended September 30, 2004 compared to $78,575 for the three months ended September 30, 2003. The increase in revenues is primarily

attributable to the expansion of our operations in the United Kingdom and the commencement of operations in Australia. Sales for the three months ended September 30, 2004 are net of “at no charge” or discounted Isolagen Treatments provided to physicians as incentives. Such incentives amounted to $0.1 million during the three months ended September 30, 2004 and we anticipate that the level of such incentives will decline in future periods.

The revenues which we did recognize during the three months ended September 30, 2004 from our United Kingdom operations were in part reduced by the effects of promotional incentives provided to doctors utilizing the Isolagen Process. We expect to continue providing such promotional incentives to doctors during the introduction phase of the Isolagen Process in the United Kingdom.

COST OF SALES. Costs of sales increased to $868,237 for the three months ended September 30, 2004 compared to $30,300 for the three months ended September 30, 2003. The increase in cost of sales is the result of the increase in our sales as discussed above.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 230%, or $3,866,719, to $5,545,074 for the three months ended September 30, 2004 compared to $1,678,355 for the three months ended September 30, 2003. The major components of the approximately $3.9 million increase in selling, general and administrative expense are as follows:

a) Consulting expense increased by approximately $0.4 million to $0.6 million for the three months ended September 30, 2004 compared to $0.2 million for the nine months ended September 30, 2003. The increase included $0.2 million of stock based expenses related to warrants issued under consulting agreements. There were no such stock based expenses in the nine months ended September 30, 2003. The level of the expense recorded for the warrants issued under consulting and distribution contracts can vary from quarter to quarter based on changes in the market price of our common stock.

b) Salaries increased by approximately $2.1 million to $2.3 million for the three months ended September 30, 2004 compared to $0.2 million for the three months ended September 30, 2003 due to an increase in our number of employees. The expense for the three months ended September 30, 2004 included $1.0 million related to employee severances. Of this $1.0 million, $0.9 million results from the severance of two employees who are entitled, under their contracts, to receive salary payments through July 2006 and $0.1 million results from our decision to close our facility in Australia and serve the Australian market through our existing facilities in Europe

c) Travel expense stay constant at $0.2 million for the three months ended September 30, 2004 compared to $0.2 million for the nine months ended September 30, 2003.

d) Promotional expense increased by approximately $0.3 million to $0.5 million for the three months ended September 30, 2004 compared to $0.2 million for the three months ended September 30, 2003 due to increased marketing and promotional efforts related to the expansion of our operations in the United Kingdom.

e) Depreciation and amortization stayed constant at $0.3 million for the three months ended September 30, 2004 compared to $0.3 million for the three months ended September 30, 2003.

f) Office costs increased by approximately $0.9 million to $1.4 million for the three months ended September 30, 2004 compared to $0.5 million for the three months ended September 30, 2003, which increase is primarily related to the commencement of our operations in the United Kingdom and the completion of our U.S. laboratory.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $0.5 million during the three months ended September 30, 2004 to $1.6 million as compared to $1.1 million for the same period of 2003, primarily due to an increase in consulting expenses to $0.9 million during the three months ended September 30, 2004 as compared to $0.3 million during the three months ended September 30, 2003. Research and development costs are composed primarily of costs related to our efforts to gain FDA approval for the Isolagen Process for our dermal product candidate in the United States. These costs include those personnel and laboratory costs related to the current FDA trials and certain consulting costs. In July 2004, we commenced our Phase III Pivotal Trials for our dermal product candidate, which are ongoing. We have other research projects

currently underway. However, research and development costs related to these projects were not material during the 2004 or 2003 periods.

INTEREST INCOME. Interest income increased 2,197%, or $193,004, to $201,788 for the three months ended September 30, 2004 compared to $8,784 for the three months ended September 30, 2003. The increase in interest income resulted principally from an increase in the amount of cash held in interest bearing accounts.

NET LOSS. Net loss for the three months ended September 30, 2004 was $6,435,414 as compared to a net loss of $2,709,433 for the three months ended September 30, 2003. This increase in net loss represents the effects of the increases in selling, general and administrative expenses and research and development expenses partially offset by the increase in our sales and gross profit.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities during the nine months ended September 30, 2004, amounted to $9,398,976, as compared to the $6,270,821 of cash used in operating activities during the nine months ended September 30, 2003. The increase in the cash used in operations reflects the increases in our expenses, as discussed above. For both the nine month periods ended September 30, 2004 and September 30, 2003 we financed our operating cash flow needs from our cash on hand at the beginning of the periods. Those cash balances were the result of equity offerings we completed in fiscal 2004, 2003 and 2002.

Investing Activities

Cash used by investing activities during the nine months ended September 30, 2004, amounted to $1,723,094 as compared to cash used by investing activities of $1,110,248 during the nine months ended September 30, 2003. In both periods the investing activities were the purchases of property and equipment for our laboratories. The purchases were financed from our cash on hand at the beginning of the periods and from cash received from equity issuances.

Financing Activities

Cash provided by financing activities was $57,169,849 for the nine months ended September 30, 2004, which consisted substantially of the proceeds from the sale of 7,200,000 shares of common stock in a public offering in June 2004 for cash totaling $56,817,434, after deducting the costs and expenses associated with the sale. Cash provided by financing activities during the nine months ended September 30, 2003, amounted to $21,689,839 consisting of a) $3,919,078 raised from the issuance of preferred stock; b) $18,857,961 raised from the issuance of common stock; and c) $1,087,200 cash dividends paid on preferred stock.

In May 2003, we sold in a private offering 155,750 shares of Series B Convertible Preferred Stock at an offering price of $28 per share. Each share of Series B preferred stock was convertible into 8 shares of our common stock at any time after issuance and accrued dividends at 6% per annum payable in cash or additional shares of Series B Preferred Stock. After deducting the costs and expenses associated with the sale, we received cash totaling $3,919,078. In conjunction with the private offering, we issued to the placement agent warrants to purchase 124,600 shares of common stock with an exercise price of $3.50 per share. The warrants are exercisable immediately after grant and expire five years thereafter. The fair value of the warrants granted to the placement agent, based on the Black-Scholes valuation model is estimated to be $2.77 per warrant. The value of the warrants granted was offset from the proceeds received from the sale of the Series B Preferred Stock and recorded as additional paid in capital.

As stated above, the price of the Series B Preferred Stock sold was $28 per share. The market value of our common stock sold on the dates that the preferred stock was sold had a range of $4.40 - - $4.54 per common share. In accordance with EITF 00-27 this created a beneficial conversion to the holders of the preferred stock and a deemed dividend to the preferred stockholders totaling $1,244,880 was recorded with a corresponding amount recorded as additional paid-in capital. The deemed dividend associated with the beneficial conversion was

calculated as the difference between the fair value of the underlying common stock less the proceeds that were received for the Series B Preferred Stock limited to the value of the proceeds received.

In August 2003, the Company sold in a private offering 3,359,331 shares of Common Stock, par value $0.001 per share, at an offering price of $6 per share. After deducting the costs and expenses associated with the sale, the Company received cash totaling $18,455,561.

Working Capital

As discussed in Note 6 of Notes to Unaudited Consolidated Financial Statements, on November 3, 2004 we completed the private placement of $75,000,000 aggregate principal amount of 3.5% Convertible Subordinated Notes Due 2024 (the “3.5% Subordinated Debentures”). We received net proceeds of approximately $71.7 million after the deduction of discounts, commissions and offering expenses. We also granted the purchasers of the 3.5% Subordinated Debentures the option to purchase up to $15,000,000 of additional 3.5% Subordinated Debentures through December 2, 2004. On November 5, 2004 the Company completed the private placement of the additional $15,000,000 aggregate principal amount of 3.5% Subordinated Debentures. The Company received net proceeds of approximately $14.5 million after the deduction of discounts, commissions and offering expenses. The total net proceeds to the Company were approximately $86.2 million after the deduction of discounts, commissions and offering expenses.

We used approximately $26 million of the net proceeds to repurchase 4,000,000 shares of our common stock, of which 2,000,000 shares were repurchased from Frank DeLape, the Chairman of the Board of Directors, Michael Macaluso, a director and the former President and Chief Executive Officer, Olga Marko, the former Senior Vice President and Director of Research, Michael Avignon, the former Manager of International Operations, and Timothy J. Till, a shareholder. The purchase price from the insiders, affiliates and founders listed above was $6.33 per share which represented a 5% discount from the closing price of our common stock on the American Stock Exchange on October 28, 2004, the date the offering of the 3.5% Subordinated Debentures was priced. The purchase of the shares from the insiders was approved by a special committee of independent directors in partial reliance on a fairness opinion issued by an investment bank. The remaining 2,000,000 shares were repurchased in private transactions at a price of $6.66 per share. The remaining net proceeds of approximately $60.2 million will be used for general corporate purposes, including product development, sales and marketing, capital expenditures and working capital. Pending the application of the remaining net proceeds they will be invested in short-term, investment grade, interest-bearing securities.

The Company believes its existing cash and cash equivalents will be adequate to meet its anticipated capital and liquidity requirements until June 30, 2007, assuming no additional future sources of funding and assuming no expansion of the Company. The Company does not have any credit facilities with which to fund ongoing working capital needs, and will be dependent on its cash and cash equivalents to fund operations for the foreseeable future. The Company’s long-term viability is dependent upon the successful operation of its business and its ability to raise funds within the near future for expansion.

Inflation did not have a significant impact on our results during the nine months ended September 30, 2004.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk relates to foreign currency transactions and the potential effects of changes in exchange rates. Such market risks have not changed materially from those described in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K/A for the year ended December 31, 2003 filed with the SEC on April 28, 2004.

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) have conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Certifying Officers have reviewed our disclosure controls and procedures and have concluded that those disclosure controls and procedures were effective as of the end of our most recent fiscal quarter.

During our most recent fiscal quarter, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) In April 2004 our Bylaws were amended. Certain of the amendments modified the rights of the holders of our common stock. These amendments were as follows: (i) our Bylaws deny stockholders the right to call a special meeting of stockholders; (ii) our Bylaws provide that special meetings of the stockholders may be called only by a majority of the members of our Board of Directors, our Chairman of the Board of Directors, our Chief Executive Officer or our President; (iii) our Bylaws require that all stockholder actions be taken by a vote of the stockholders at an annual or special meeting, and do not permit our stockholders to act by written consent without a meeting; and (iv) our Bylaws provide for an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the Board of Directors.

(b) n/a

(c) Set forth below is information concerning all issuances of our securities during the fiscal quarter ended September 30, 2004, that were not registered under the Securities Act.

During the third quarter ended September 30, 2004, we issued 35,701 shares of common stock to accredited investors upon the exercise of warrants, which were granted in consideration of services related to a private offering of our securities. The foregoing transactions were completed pursuant to Rule 506 of Regulation D of the Securities Act. No underwriter was utilized in the transactions, and no commissions or other remuneration was paid in connection with the issuances described above

(d) n/a

(e) We made no repurchases of our common stock during the quarter.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(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.

(b) Reports on Form 8-K

During the third quarter for which this report is being filed we furnished the SEC with eleven (11) current reports on Form 8-K.

• On July 1, 2004, we announced that the Company’s adjourned 2004 annual shareholders’ meeting has been scheduled to reconvene on Thursday, July 8, 2004 at 10:00 a.m., Houston time at the Houstonian Hotel, Club & Spa at 111 North Post Oak Lane, Houston, Texas 77024.

• On July 21, 2004, we announced the commencement of the Company’s Phase III Pivotal Trials.

• On July 28, 2004, we announced the six-month marker data of the first Isolagen Process Phase III study that indicates a positive response in 82% of the Isolagen treated patients who were evaluated.

• On July 29, 2004, we announced that Michael Macaluso, Chief Executive Officer, will be presenting at the Adams Harkness 24th Annual Summer Seminar on Thursday, August 5, 2004 at 3:00 PM, EDT at the Marriott Long Wharf, Boston, Massachusetts.

• On August 5, 2004, we announced the Company will host a conference call on August 12, 2004 beginning at 5:00 P.M. EDT to discuss the Company’s second quarter 2004 results and provide a business update.

• On August 26, 2004, we announced the Company has been granted EU patent EP0845963 entitled “The Use of Autologous Dermal Fibroblasts for the Repair of Skin and Soft Tissue Defects” covering the Company’s proprietary Isolagen Process in 17 European countries.

• On September 7, 2004, we announced that Robert J. Bitterman joined the Company as Chief Executive Officer and President.

• On September 10, 2004, we announced that the Company’s new President and Chief Executive Officer Robert J. Bitterman will address investors in a conference call on Tuesday, September 14, 2004 at two o’clock in the afternoon (EDT).

• On September 16, 2004, we announced that Dr. Kimberley Forbes-McKean joined the Company as Senior Vice President and Chief Technical Science Officer.

• On September 27, 2004, we announced that the Company’s President and Chief Executive Officer, Robert J. Bitterman is scheduled to present at the UBS Global Life Sciences Conference on Thursday, September 30, 2004 at 12:30 PM ET to be held at The Grand Hyatt New York in New York City.

• On September 30, 2004, we announced that Dennis L. Bevan joined the Company as Vice President of Commercial Operations.

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.

	ISOLAGEN, INC.


Date: November 8, 2004	By: /s/ Jeffrey W. Tomz
	Jeffrey W. Tomz, CFO and Secretary
	(Principal Financial Officer)

WASHINGTON, D.C. 20549

OR

Isolagen, Inc.

Delaware

001-31564

87-0458888

(State or other jurisdiction of incorporation)

(Commission File Number)

(I.R.S. Employer Identification No.)

Note 6 – Subsequent Event

SIGNATURES

(State or other jurisdiction
of incorporation)

(I.R.S. Employer
Identification No.)