ISOLAGEN INC - 10-Q Quarterly Report

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

FORM 10 - Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

OR

[ ] 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 0-12666 87-0458888
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)

2500 Wilcrest, 5th 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. [X] Yes [ ] No

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

As of November 13, 2003, issuer had 26,672,192 shares of issued and outstanding
common stock, par value $0.001.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets

The accompanying notes are an integral part of these statements. 1

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)

The accompanying notes are an integral part of these statements. 2

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)

The accompanying notes are an integral part of these statements. 3

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 4

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 5

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 6

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 7

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 8

Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these statements. 9

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 ("Isolagen
Europe"), a company organized under the laws of the United Kingdom and
wholly-owned subsidiary of Isolagen Technologies. Isolagen Technologies is the
parent company of Isolagen Australia Pty Limited ("Isolagen Australia"), a
company organized under the laws of the Australia and wholly-owned subsidiary of
Isolagen Technologies. The common stock, par value $0.001 per share, of the
Company ("Common Stock") is traded on the American Stock Exchange ("AMEX") under
the symbol "ILE."

Isolagen is an emerging pharmaceutical bioscience company specializing
in the development and commercialization of autologous cellular therapy for hard
and soft tissue regeneration and other therapies. Isolagen currently holds five
patents. Autologous cellular therapy is a process whereby a patient's own cells
are extracted, reproduced and then reintroduced to the patient for specific
cosmetic and medical applications. Unlike other applications for the treatment
of dermal defects, Isolagen utilizes only the patient's unique, living cells to
produce the patient's own collagen. There is no foreign substance utilized in
this treatment protocol. Isolagen's goal is to become an industry leader in the
research, development and commercialization of autologous cellular therapy which
stimulate a patient's own collagen production.

In 1995, Isolagen Technologies began treating a small percentage of
patients to correct defects (e.g., wrinkles, depressions and scarring) in the
patient's face. Between 1995 and 1999, approximately 200 doctors utilized the
Isolagen Process on approximately 963 patients with positive results. In 1997,
the FDA began regulating the science of biologics. Biologics, in contrast to
drugs that are chemically synthesized, are derived from living sources (such as
humans, animals, and microorganisms) like the Isolagen Process. In 1995, when
Isolagen Technologies began operations, the FDA had no regulations governing
this area of biologics. After reviewing the new regulations and seeking the
advice of consultants, Isolagen concluded that the use of the Isolagen Process
in cosmetic applications did not require the approval of the FDA. In 1999,
Isolagen Technologies filed a request for authorization from the FDA to
administer an investigational drug or biological product to humans. Such
authorization must be secured prior to commercialization of any new drug or
biological product. The FDA placed the authorization on clinical hold until
Isolagen Technologies' manufacturing processes and procedures were changed to
meet these new biologics standards, and FDA approval is obtained. In April 2002,
the FDA approved Isolagen's Investigational New Drug Application ("IND") for the
treatment of wrinkles and scars and clinical trial are underway. The Company's
Phase III/Exploratory trial for dermal defects has commenced, is being conducted
in ten sites, and involves physicians who are either plastic surgeons or
dermatologists with practices that emphasize aesthetic procedures. The patients'
enrollment has been completed and totals one hundred fifty-two patients. To
date, 100% of the patients have had their first consultation. The final patient
injection are scheduled for November 2003. This Phase III/Exploratory trial is a
double-blind study with 75% of the patients receiving the therapeutic dosage and
the remaining 25% receiving a placebo. In addition, in January of 2003, Isolagen
commenced a double-blind Phase II trial under the IND, which is a two-site dose
ranging study of forty patients. Isolagen is completing its analysis of the data
from the Phase II trial. Finally, Isolagen also has a Phase I clinical trial of
twenty-one patients for dental applications addressing gingival recession.
Isolagen expects to complete this study in the first quarter of 2004.

The Company received a letter from the FDA dated October 28, 2003, from
the Office of Cellular, Tissue, and Gene Therapies. The letter is in response to
the Company's request for clarification of study design comments that the FDA
alluded to previously. The Company believes that they will be able to respond to
all comments in the letter and will be doing so in a face to face meeting with
the FDA at the end of 2003. The majority of issues relate to issues that we have
already addressed and are the subject of submissions which we made in
preparation for our upcoming meeting with the FDA. At that time, the Company
will attempt to resolve any remaining study design issues. Successful resolution
of these issues with the FDA may permit the Company to use the study data from
the Phase III/Exploratory study for license application or to supplement this
data with well controlled additional

10

studies. However, there can be no assurance that the Company will be able to
satisfy the study design issues presented by the FDA.

The Company's goal is to become an industry leader in the research,
development and commercialization of autologous cellular therapy which stimulate
a patient's own collagen production. The Company, through Isolagen Europe, has
commenced commercial operations in the United Kingdom and is pursuing commercial
operations through subsidiaries, joint ventures or license arrangements in
Australia, South Korea, Hong Kong, Brazil, Mexico and elsewhere. The Company is
investigating regulatory and other requirements in these countries and
evaluating markets and potential joint venture partners and licensees. In July
2003, the Company received License No. 174347 from the Therapeutic Goods
Administration ("TGA"), in Australia, to begin the manufacture of autologous
fibroblasts including the initiation of primary cultures of fibroblasts, the
propagation of fibroblasts, the harvesting of cultured fibroblasts, the storage
of cultured fibroblasts and release for supply of cultured fibroblasts. The
Company is not in a position to predict, when or if licenses will be granted in
any jurisdiction.

Through September 30, 2003, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel, commencing its
United Kingdom operations and raising capital. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through 2004. The Company will finance its operations primarily through its
existing cash, future financing and revenues.

The Company's ability to operate profitably under its current business
plan is largely contingent upon its success in obtaining further sources of debt
and equity capital, 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 operations and
growth requires the continued improvement of operational, financial and
management controls, reporting systems and procedures. In addition, the Company
may find it necessary to hire additional management, financial and sales and
marketing personnel to manage the Company's 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, 2003, the Company had a cash balance of $18.5
million. As of November 10, 2003, the Company had a cash balance of
approximately $17.7 million. The long-term viability of the Company is dependent
upon successful operation of its business and the ability to raise additional
debt and equity within the near future.

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 U.S.

11

Food and Drug Administration ("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 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 continuing 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, 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 of 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 current report on Form 10-KSB/A
filed with the Securities and Exchange Commission on November 18, 2003.

Restatement of financial statements

Subsequent to the issuance of the Company's financial statements as
of June 30, 2003 and for the six month and three month periods ended June 30,
2003 and 2002, the Company identified several errors that were required to be
corrected in the previously reported financial statements. Accordingly, on
October 24, 2003 the Company restated its financial statements for fiscal 2002,
fiscal 2001 and for each of the quarterly periods ended June 30, 2003

12

and March 31, 2003. The amounts referenced below as of and for the nine month
period ended September 30, 2003 include the affects of the restatements as per
the previously amended Forms 10-Q/A for June and March 2003. The amounts
referenced below as of and for the nine month and three month periods ended
September 30, 2002 have been revised to reflect the balances and amounts on a
restated basis. The principal reasons and effects of the adjustments are
summarized below:

Beneficial Conversion Feature: During 2003 and 2002, the Company
completed private placements of Series A and Series B Convertible Preferred
Stock. Imbedded within the instruments was a beneficial conversion feature that
was not recorded. Accordingly, the Company revised its financial statements as
of September 30, 2003 and for the nine month and three month periods ended
September 30, 2003 and 2002 to record deemed dividends to the holders of the
preferred stock totaling $1,244,880 and $9,676,671 for the nine month periods
ended September 30, 2003 and 2002, respectively, and $0 and $82,619 for the
three month periods ended September 30, 2003 and 2002, respectively. The
Company's financial statements reflect an increase in the retained deficit and a
corresponding increase in paid-in capital for this amount. The deemed dividend
associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that
have been received for the Series A Preferred Stock and the Series B Preferred
Stock limited to the value of the proceeds received. Also, the Company has
included preferred dividends accrued for the nine months ended September 30,
2003 and 2002 of $1,087,200 and $297,958, respectively, and for the three months
ended September 30, 2003 and 2002 of $676,011 and $203,452, respectively, in the
computation of net loss attributable to common shareholders. (see Note 4)

Contributed Services: During 2002 and 2001, certain officers and
directors of the Company were not compensated for a portion of their services
provided to Company. The financial statements are to reflect the total cost of
conducting its business which includes the value of contributed services.
Accordingly, the Company has recorded contribution services from officers
totaling $200,000 for the nine month period ended September 30, 2003 and
$300,000 for the nine month period ended September 30, 2002 and $0 for the three
month period ended September 30, 2003 and $100,000 for the three month period
ended September 30, 2002. We estimated the value of the contributed services
based upon our estimate of their fair market value. This contribution of
services was recorded as an increase in compensation expense and an increase in
additional paid in capital. (see Note 4)

Weighted Average Shares Utilized in the Calculation Percentage Loss
Per Share: As described in Note 1, the Merger was accounted for as a
recapitalization of Isolagen Technologies and the issuance of shares of common
stock for the net assets of AFH and Gemini. The number of weighted average
shares outstanding computed for the purposed of computing basic and diluted loss
per share were revised to correctly reflect this accounting treatment.

Together these restatements changed the net loss per share
attributable to common shareholders from $0.21 to $0.89 for the nine months
ended September 30, 2002 and from $0.09 to $0.12 for the three months ended
September 30, 2002.

Statement of cash flows

For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity 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.

13

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 may 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 subject to half year convention. Leasehold
improvements are amortized using the straight-line method over the remaining
life of the lease. The cost of repairs and maintenance is charged against income
as incurred.

Intangible assets

In the first quarter of 2003, the Company entered into an
Intellectual Property Purchase Agreement to acquire two pending patent
applications. As consideration, the Company issued the seller 100,000 shares of
its Common Stock and royalty equal to (a) 5% of all revenues recognized by the
Company or its Affiliates from commercial application of the Intellectual
Property made, provided, distributed, sold or manufactured directly by the
Company or its Affiliates, or (b) 25% of all revenues recognized by the Company
or its Affiliates from licensing, sublicensing, transferring or selling the
Intellectual Property to a third party, without offset or deduction for general
and administrative or operating costs, subject to a total maximum royalty of $2
million. The pending patent applications are recorded as intangible assets at
their acquisition cost and will be amortized over their estimated useful lives
on a straight-line basis.

Earnings per share data

Basic earnings (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 and convertible preferred stock (calculated based on the treasury stock
method). The Company does not present diluted earnings per share for years in
which it incurred net losses as the effect is antidilutive.

Stock-based compensation

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 its current accounting policy under 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. The Company elected to continue following
the provisions of APB No. 25.

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. The statement 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, it has
modified its disclosures to comply with the new statement.

14

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. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 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 in the Company's recommended regimen of up to three
injections. Each injection has stand alone value to the patient. The Company
invoices the attending physician upon that physician submitting his/her
patient's tissue sample to the Company; thus the contractual arrangement is
between the Company and the medical professional. The amount invoiced varies
directly with the number of injections requested. 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 defined in accordance with EITF 00-21, 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.

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 to the suggested price list. The Company does not receive any
identifiable benefit from the physicians in exchange for any promotional
incentives granted.

The Company does not record any revenue related to 'at no charge'
Isolagen Treatments and the cost to provide such treatments is expensed as
incurred. The Company records any discounts granted as a reduction in revenue
(i.e.net revenue after discount) from that specific transaction. The Company
believes this accounting treatment complies with Emerging Issues Task Force
("EITF")-01-09: "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)."

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

15

at the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Adjustments arising from the use of differing exchange rates from period to
period are included in other comprehensive income in stockholders' equity. Gains
and losses resulting from foreign currency transactions are included in earnings
and have not been material in any one year.

Comprehensive income

Comprehensive income encompasses all changes in equity other than
those with stockholders 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 expenses include direct costs,
research-related overhead, and costs associated with improved process science,
manufacturing and cost reduction are charged to operations as incurred.

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.

Recent accounting pronouncements

In December 2002, the Emerging Issues Task Force, ("EITF"), issued
EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides guidance on determining whether a revenue
arrangement contains multiple deliverable items and if so, requires that revenue
be allocated amongst the different items based on fair value. EITF 00-21 also
requires that revenue or any item in a revenue arrangement with multiple
deliverables not delivered completely must be deferred until delivery of the
item is completed. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect that implementation of EITF 00-21 will have a material
impact on its results of operations or financial position.

In December 2002, the 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. The statement also
amends the disclosure requirements of Statement 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, it has modified its disclosures to
comply with the new statement.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities", which requires the consolidation of variable interest
entities. FIN 46 is applicable to variable interest entities created after
January 31, 2003. Variable interest entities created prior to February 1, 2003
must be consolidated effective July 1, 2003. Isolagen adopted FIN 46 in the
quarter ended June 30, 2003, and it did not have a material impact on our
financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities", which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. Isolagen will adopt SFAS 149 effective July 1, 2003, and
does not expect that the provisions of SFAS 149 will have a material impact on
the Company's financial position or results of operations.

16

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS 150 was adopted in the quarter ended June 30, 2003 and it did not
have an impact of the Company's financial positions or results of operations.

NOTE 3 - CONTINGENCIES

On October 9, 1996, the Company was advised by the Enforcement
Division 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 Enforcement Division 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 has had no further contact by
the Enforcement Division of the Commission.

NOTE 4 - EQUITY

From the date of the Merger through June 30, 2003, the Company has
not paid 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 for the nine month ended
September 30, 2003 and $300,000 for the nine months ended September 30, 2002. We
estimated the value of the contributed services based upon our 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.

During the nine months ended September 30, 2003, the Company issued
264,100 shares of common stock for cash totaling $402,400 in connection with the
exercise of stock options and issued 327,432 shares of common stock in exchange
for cashless exercise of warrants.

In May 2003, the Company sold in a private offering 155,750 shares
of Series B Convertible Preferred Stock, par value $0.001 per share, at an
offering price of $28 per share. Each share of Series B preferred stock is
convertible into 8 shares of common stock at any time after issuance and accrues
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, the Company received cash totaling $3,919,078. In conjunction with the
private offering, the Company 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 has been offset from the proceeds received from
the sale of the Series B Preferred Stock and recorded as additional paid in
capital.

The price of the preferred stock sold was $28 per share. The market
value of the Company's common stock sold on 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 by the Company with a corresponding amount recorded as additional
paid-in capital. The deemed dividend associated with the beneficial conversion
is calculated as the difference between the fair value of the underlying common
stock less the proceeds that have been received for the Series B Preferred Stock
limited to the value of the proceeds received.

17

In April 2003, the Company issued 150,000 warrants to purchase its
common stock with an exercise price of $3.50 per share in conjunction with a
distribution agreement. The warrants vest over a three year period, subject to
certain acceleration clauses. The Company recognized consulting expenses
totaling $36,809 during the three months ended September 30, 2002 based on the
fair value of the warrants granted on the grant date.

In May 2003, the Company issued 150,000 options to purchase its
common stock with an exercise price of $3.50 per share under the 2001 Stock
Option Plan ("2001 Stock Option Plan"). The options vest over a three year
period from the date of grant. The Company recognized compensation expense
totaling $13,125 during the three months ended September 30, 2003 based on the
options intrinsic value on the grant date.

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.

In September 2003, the Company issued 600,000 options to purchase
its common stock with an exercise price of $9.81 per share under the 2003 Stock
Option Plan. The options vest ratably over a 18 month period from 18 months from
the date of grant. Had compensation costs for all options issued under the Stock
Option Plan been determined based on the fair value at the grant date consistent
with the provisions of SFAS No. 123, net income and net income per share would
have decreased to the pro forma amounts indicated below:

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

On October 24, 2003, Isolagen announced that it would restate its
financial statements for fiscal 2002, fiscal 2001 and for each of the quarterly
periods ended June 30, 2003 and March 31, 2003. The principal reasons and
effects of the adjustments are summarized in Item 1. Financial Statements, Note
2, "Restatement of financial statements."

Throughout the following analysis, all referenced amounts reflect
the balances and amounts on a restated basis.

FORWARD-LOOKING INFORMATION

This report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934, as amended, and information relating to
Isolagen that is based on management's exercise of business judgment as well as
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

18

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:

o 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;

o 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;

o 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;

o our ability to finance our business;

o our ability to maintain our current pricing model;

o our ability to decrease our cost of goods sold;

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

o management's best estimate on the patient data including
patients started and patients completed;

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

o our ability to receive requisite regulatory approvals in the
United States, European Community, Australia, South Korea,
Hong Kong, Mexico, 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, European
Community, Australia, South Korea, Hong Kong, Mexico or any
other country we plan to do conduct commercial operations;

o continued availability of supplies at the current prices;

o no new entrance of competitive products in our markets;

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

o no adverse claims relating to our Intellectual Property;

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

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

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

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

o other new lines of business that the Company may enter in the
future; and

o 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

19

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

Isolagen is a Houston, Texas based emerging pharmaceutical
bioscience company which has focused its efforts in the development and
commercialization of autologous cellular technology that has specific
applications in cosmetic dermatology and is exploring applications for
periodontal disease, reconstructive dentistry and other health-related markets.
Autologous cellular therapy is a process whereby a patient's own cells are
extracted, reproduced and then reintroduced to the patient for specific cosmetic
and medical applications. Unlike other applications for the treatment of dermal
defects, Isolagen utilizes only the patient's unique, living cells to produce
the patient's own collagen. There is no foreign substance utilized in this
treatment protocol. Isolagen's goal is to become the industry leader in the
research, development and commercialization of autologous cellular therapy which
stimulate a patient's own collagen production.

The Company's ability to operate profitably under its current
business plan is largely contingent upon its success in obtaining further
sources of debt and equity capital, 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
operations and growth requires the continued improvement of operational,
financial and management controls, reporting systems and procedures. In
addition, the Company may find it necessary to hire additional management,
financial and sales and marketing personnel to manage the Company's 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, 2003, the Company had a cash balance of $18.5
million. As of November 17, 2003, the Company had a cash balance of
approximately $17.6 million. The long-term viability of the Company is dependent
upon successful operation of its business and the ability to raise additional
debt and equity within the near future.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States. 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, the Company evaluates its estimates and
assumptions, including but not limited to those related to the impairment of
long-lived assets, reserves for doubtful accounts, revenue recognition and
certain accrued liabilities. The Company bases its 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 that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

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. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists, (2)

20

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 in the Company's recommended regimen of up to three
injections. Each injection has stand alone value to the patient. The Company
invoices the attending physician upon that physician submitting his/her
patient's tissue sample to the Company; thus the contractual arrangement is
between the Company and the medical professional. The amount invoiced varies
directly with the number of injections requested. 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 defined in accordance with EITF 00-21, 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 expenses
include direct costs, research-related overhead, and costs associated with
improved process science, manufacturing and cost reduction are charged to
operations as incurred.

Stock-based compensation: The Company accounts for its stock-based
compensation under the provisions of 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 its current accounting
policy under 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. The Company elected to continue following the provisions of APB No. 25.

In December 2002, the 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. The statement 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, it has modified its disclosures to
comply with the new statement.

RESULTS OF OPERATIONS

Comparison of the nine months ending September 30, 2003 and 2002

REVENUES. Revenues increased $115,853, to $158,371 for the nine
months ended September 30, 2003 compared to $42,518 for the nine months ended
September 30, 2002. The increase in revenues is primarily attributable to the
commencement of operations in the United Kingdom. Included in the nine months
ended September 30, 2002 was $40,000 in license fees recognized which did not
recur in the nine months ended September 30, 2003.

The Isolagen Process involves a patient's doctor obtaining an
approximately 3 mm punch skin sample from the patient. The skin sample is packed
in a container provided by the Company and shipped overnight to the Company's
laboratory. The specimen is then cultured utilizing the Company's patented
Isolagen Process. This process separates the cell, called a fibroblast, from the
rest of the tissue then multiplies these fibroblasts. Approximately six (6)
weeks later, approximately 1 ml of the patient's cells is also sent to the
doctor for treatment. Additional amounts of approximately 1 ml are available for
re-injection every two (2) to three (3) weeks. The

21

Company recognizes one-third of the revenue associated with each treatment upon
the shipment of the first injection to the patient's doctor, an additional
one-third of revenue associated with each treatment is recognized upon shipment
of the second injection to the patient's doctor, and the remaining one-third is
recognized upon the shipment of the last injection to the patient's doctor.

In addition, those revenues which the Company did recognize during
the first nine months of 2003 from its United Kingdom operations were in part
reduced by promotional incentives provided by the Company to doctors utilizing
the Isolagen Process. The Company expects to continue providing such promotional
incentives to doctor's during the introduction phase of the Isolagen Process in
the United Kingdom.

COST OF SALES. Costs of sales increased to $79,161 for the nine
months ended September 30, 2003 compared to $0 for the nine months ended
September 30, 2002. The increase in cost of sales is primarily related to the
commencement of operations in the United Kingdom.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 111%, or $2,730,708, to $5,201,411 for the
nine months ended September 30, 2003 compared to $2,470,703 for the nine months
ended September 30, 2002. The major components of the approximately $2.7 million
increase in selling, general and administrative expense are as follows: a)
consulting expense increased by approximately $0.2 million to $0.9 million for
the nine months ended September 30, 2003 compared to $0.7 million for the nine
months ended September 30, 2002; b) salaries increased by approximately $0.3
million to $0.8 million for the nine months ended September 30, 2003 compared to
$0.5 million for the nine months ended September 30, 2002 (these amounts include
an imputed expense of $200,000 in the nine months ended September 30, 2003 and
an imputed expense of $300,000 in the nine months ended September 30, 2002
relating to the fair market value of services provided by certain officers for
which they will not be compensated); c) travel expense increased by
approximately $0.3 million to $0.6 million for the nine months ended September
30, 2003 compared to $0.3 million for the nine months ended September 30, 2002;
d) legal expense increased by approximately $0.1 million to $0.3 million for the
nine months ended September 30, 2003 compared to $0.2 million for the nine
months ended September 30, 2002; e) promotional expense increased by
approximately $0.3 million to $0.4 million for the nine months ended September
30, 2003 compared to $0.1 million for the nine months ended September 30, 2002;
and f) depreciation and amortization increased by approximately $0.7 million to
$0.7 million for the nine months ended September 30, 2003 compared to $0.0
million for the nine months ended September 30, 2002. The increase in selling,
general and administrative expenses is attributed primarily to: a) higher
salaries expense due to an increase in the number of employees; b) increased
travel expenses related to our expansion into the United Kingdom and Australia;
c) higher legal fees related to patent and business development issues; d)
increased marketing and promotion efforts related to the commencement of
operations in the United Kingdom; and e) depreciation and amortization of assets
placed into service during 2003 with the commencement of operations in the
United Kingdom and the completion of the U.S laboratory.

RESEARCH AND DEVELOPMENT. Research and development expenses
increased by approximately $1.1 million during the nine months ended September
30, 2003 to $2.3 million as compared to $1.2 million for the same period of
2002. Research and development costs are composed primarily of costs related to
the Company's efforts to gain FDA approval for the Isolagen Process in the
United States. These costs include those personnel and laboratory costs related
to the current FDA trials and certain consulting costs. This project is still
under development. The total cost of research and development as of September
30, 2003 is $6.1 million. As of September 30, 2003, we believe at a minimum it
will cost $2 million to complete this project. That estimate assumes that no
further testing requirements are imposed by the FDA, that FDA approval is
forthcoming and that FDA approval is received during 2005. The FDA approval
process is extremely complicated and is dependent upon our study protocols and
the results of our studies. In the event that the FDA requires additional
studies or requires changes in our study protocols or in the event that the
results of the studies are not consistent with our expectations the process will
be more expensive and time consuming. Due to the vagaries of the FDA approval
process we are unable to predict what the cost of obtaining approval will be if
FDA approval is not forthcoming in 2005. The Company has other research projects
currently underway, including those related to repairing damaged nerves and
therapies to regrow hair and to heal burned skin. However, research and
development costs related to these projects were not material during the 2003 or
2002 periods. The major components of the approximately $1.1 million increase in
research and development expense are as follows: a) salaries increased by
approximately $0.7 million to $1.3 million for the nine months ended September
30, 2003 compared to $0.6 million for the nine months ended

22

September 30, 2002; and b) laboratory expense increased by approximately $0.3
million to $0.5 million for the nine months ended September 30, 2003 compared to
$0.2 million for the nine months ended September 30, 2002.

INTEREST INCOME. Interest income decreased 77%, or $63,621, to
$19,404 for the nine months ended September 30, 2003 compared to $83,025 for the
nine months ended September 30, 2002. The decrease in interest income resulted
from, among other things, a decrease in the amount of cash on hand by the
Company, and a decrease in interest rates paid on the Company's deposits.

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 the Company's
international activity. As of September 30, 2003, the Company holds no such
securities.

NET LOSS. Net loss for the nine months ended September 30, 2003 was
$7,339,809, as compared to a net loss of $3,494,169 for the nine months ended
September 30, 2002. This increase in net loss is attributed primarily to
salaries, travel, consulting, legal, and promotional expenses. Net loss
attributable to common stockholders for the nine months ended September 30, 2003
was $9,671,889, as compared to a net loss of $13,468,798 for the nine months
ended September 30, 2002. These amounts include $1.2 million and $9.7 million of
deemed dividend associated with beneficial conversion of preferred stock for the
nine months ended September 30, 2003 and September 30, 2002, respectively. These
amounts include $1.1 million and $0.3 million of preferred stock dividends for
the nine months ended September 30, 2003 and September 30, 2002, respectively.

Comparison of the three months ending September 30, 2003 and 2002

REVENUES. Revenues increased $78,575, to $78,575 for the three
months ended September 30, 2003 compared to $0 for the three months ended
September 30, 2002. The increase in revenues is primarily attributable to the
commencement of operations in the United Kingdom.

Those revenues which the Company did recognize during the three
months ended September 30, 2003 from its United Kingdom operations were in part
reduced by promotional incentives provided by the Company to doctors utilizing
the Isolagen Process. The Company expects to continue providing such promotional
incentives to doctor's during the introduction phase of the Isolagen Process in
the United Kingdom.

COST OF SALES. Costs of sales increased to $30,300 for the three
months ended September 30, 2003 compared to $0 for the three months ended
September 30, 2002. The increase in cost of sales is primarily related to the
commencement of operations in the United Kingdom.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 68%, or $681,761, to $1,678,355 for the three
months ended September 30, 2003 compared to $996,594 for the three months ended
September 30, 2002. The major components of the approximately $0.7 million
increase in selling, general and administrative expense are as follows: a)
salaries decreased by approximately $0.1 million to $0.2 million for the three
months ended September 30, 2003 compared to $0.3 million for the three months
ended September 30, 2002 (these amounts include an imputed expense of $100,000
in the three months ended September 30, 2002 relating to the fair market value
of services provided by certain officers for which they will not be
compensated); b) promotional expense increased by approximately $0.2 million to
$0.2 million for the three months ended September 30, 2003 compared to $0.0
million for the three months ended September 30, 2002; c) depreciation and
amortization increased by approximately $0.3 million to $0.3 million for the
three months ended September 30, 2003 compared to $0.0 million for the three
months ended September 30, 2002; and d) office costs increased by approximately
$0.4 million to $0.5 million for the three months ended September 30, 2003
compared to $0.1 million for the three months ended September 30, 2002. The
increase in selling, general and administrative expenses is attributed primarily
to: a) increased marketing and promotion efforts related to the commencement of
operations in the United Kingdom; and b) depreciation and amortization of assets
placed into service during 2003 with the commencement of operations in the
United Kingdom and the completion of the U.S laboratory.

RESEARCH AND DEVELOPMENT. Research and development expenses
increased by approximately $0.6 million during the three months ended September
30, 2003 to $1.1 million as compared to $0.5 million for the

23

same period of 2002. Research and development costs are composed primarily of
costs related to the Company's efforts to gain FDA approval for the Isolagen
Process in the United States. These costs include those personnel and laboratory
costs related to the current FDA trials and certain consulting costs. This
project is still under development. The total cost of research and development
as of September 30, 2003 is $6.1 million. As of September 30, 2003, we believe
at a minimum it will cost $2 million to complete this project. That estimate
assumes that no further testing requirements are imposed by the FDA, that FDA
approval is forthcoming and that FDA approval is received during 2005. The FDA
approval process is extremely complicated and is dependent upon our study
protocols and the results of our studies. In the event that the FDA requires
additional studies or requires changes in our study protocols or in the event
that the results of the studies are not consistent with our expectations the
process will be more expensive and time consuming. Due to the vagaries of the
FDA approval process we are unable to predict what the cost of obtaining
approval will be if FDA approval is not forthcoming in 2005. The Company has
other research projects currently underway, including those related to repairing
damaged nerves and therapies to regrow hair and to heal burned skin. However,
research and development costs related to these projects were not material
during the 2003 or 2002 periods. The major components of the approximately $0.6
million increase in research and development expense are as follows: a) salaries
increased by approximately $0.3 million to $0.6 million for the three months
ended September 30, 2003 compared to $0.3 million for the three months ended
September 30, 2002; b) consultant expense increased by approximately $0.2 to
$0.3 million for the three months ended September 30, 2003 compared to $0.1
million for the three months ended September 30, 2002; and c) laboratory expense
increased by approximately $0.1 million to $0.3 million for the three months
ended September 30, 2003 compared to $0.2 million for the three months ended
September 30, 2002.

INTEREST INCOME. Interest income decreased 72%, or $22,757, to
$8,784 for the three months ended September 30, 2003 compared to $31,541 for the
three months ended September 30, 2002. The decrease in interest income may be
attributed to, among other things, a decrease in the amount of cash on hand by
the Company, and a decrease in interest rates paid on the Company's deposits.

NET LOSS. Net loss for the three months ended September 30, 2003 was
$2,709,433, as compared to a net loss of $1,466,708 for the three months ended
September 30, 2002. This increase in net loss is attributed primarily to
salaries, travel, consulting, legal, and promotional expenses. Net loss
attributable to common stockholders for the three months ended September 30,
2003 was $3,385,444, as compared to a net loss of $1,752,779 for the three
months ended September 30, 2002. These amounts include $0.0 million and $0.1
million of deemed dividend associated with beneficial conversion of preferred
stock for the three months ended September 30, 2003 and September 30, 2002,
respectively. These amounts include $0.7 million and $0.2 million of preferred
stock dividends for the three months ended September 30, 2003 and September 30,
2002, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities during the nine months ended
September 30, 2003, amounted to $6,270,821, as compared to the $2,268,771 of
cash used in operating activities during the nine months ended September 30,
2002. The increase is attributed primarily to salaries, travel, consulting,
legal, and promotional expenses.

Investing Activities

Cash used by investing activities during the nine months ended
September 30, 2003, amounted to $1,110,248 as compared to cash used by investing
activities of $748,522 during the nine months ended September 30, 2002. This
increase in cash used is due to the purchase of property and equipment for the
Houston, Texas, London, England, and Sydney, Australia laboratories.

Financing Activities

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, as
compared to cash provided

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by financing activities of $9,012,723 during the nine months ended September 30,
2002 which consisted entirely of proceeds from the issuance of preferred stock.

In May 2003, the Company sold in a private offering 155,750 shares
of Series B Convertible Preferred Stock, par value $0.001 per share, at an
offering price of $28 per share. Each share of Series B preferred stock was
convertible into 8 shares of common stock at any time after issuance and accrues
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, the Company received cash totaling $3,919,078. In conjunction with the
private offering, the Company 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 has been offset from the proceeds received from
the sale of the Series B Preferred Stock and recorded as additional paid in
capital.

The price of the Series B Preferred Stock sold was $28 per share.
The market value of the Company's 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 by the Company with a corresponding amount
recorded as additional paid-in capital. The deemed dividend associated with the
beneficial conversion is calculated as the difference between the fair value of
the underlying common stock less the proceeds that have been 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 of September 30, 2003, the Company had a cash balance of $18.5
million. As of November 10, 2003, the Company had a cash balance of
approximately $17.7 million. The Company does not have any credit facilities
with which to fund ongoing working capital needs. The long-term viability of the
Company is dependent upon successful operation of its business and the ability
to raise additional debt and equity within the near future.

Inflation did not have a significant impact on the Company's results
during the six months ended September 30, 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk as it relates to foreign currency transactions is
described in Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

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"), the Chief Executive
Officer and Chief Financial Officer of the Company (the "Certifying Officers")
have conducted evaluations of the Company's 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 Commission'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 the Company's disclosure controls and
procedures and have concluded that those disclosure controls and procedures were
effective as of the end of the Company's most recent fiscal quarter.

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

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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.

ITEM 6. EXHIBITS AND REPORTS

(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.

26

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 18, 2003 By: /s/ Jeffrey W. Tomz
--------------------------------------
Jeffrey W. Tomz, CFO and Secretary
(Principal Executive and
Financial Officer)

27

EXHIBIT INDEX