ISOLAGEN INC - 10-Q Quarterly Report

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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 March 31, 2005

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.)

102 Pickering Way
Exton, Pennsylvania 19341

(Address of principal executive offices, including zip code)

(484) 875-3099

(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.) ý Yes o No

As of May 5, 2005, issuer had 30,247,684 shares of outstanding common stock, par value $0.001.

TABLE OF CONTENTS

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets March 31, 2005 (unaudited) and December 31, 2004

	Consolidated Statements of Operations Three months ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited) and cumulative period from inception to March 31, 2005 (unaudited)

	Consolidated Statements of Shareholders’ Equity From inception to March 31, 2005 (unaudited)

	Consolidated Statements of Cash Flows Three months ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited) and cumulative period from inception to March 31, 2005 (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 6.	Exhibits

PART I - - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Isolagen, Inc.

(A Development Stage Company)

Consolidated Balance Sheets

	March 31,			December 31,
	2005			2004
	(unaudited)
Assets

Current assets
Cash and cash equivalents	$	22,955,357		$	64,329,356
Short-term investments	87,306,313			51,809,660
Accounts receivable, net of allowance for doubtful accounts of $109,586 and $50,533, respectively	1,790,972			1,516,591
Inventory	519,777			1,010,768
Other receivables	469,046			350,861
Prepaid expenses	954,888			769,984
Assets held for sale	98,159			—

Total current assets	114,094,512			119,787,220

Property and equipment, net	3,654,905			3,634,992
Intangible assets	540,000			540,000
Other assets, net of amortization of $187,310 and $124,873, respectively	4,085,256			4,158,926

Total assets	$	122,374,673		$	128,121,138

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable	$	2,280,161		$	2,360,363
Accrued expenses	4,181,406			3,441,805
Deferred revenue	3,042,981			2,923,328

Total current liabilities	9,504,548			8,725,496

Long term debt	90,000,000			90,000,000
Other long term liabilities	259,494			410,217

Total liabilities	99,764,042			99,135,713

Commitments and contingencies

Shareholders’ equity
Preferred stock, $.001 par value; 5,000,000 shares authorized	—			—
Common stock, $.001 par value; 50,000,000 shares authorized	34,220			34,195
Additional paid-in capital	110,043,714			109,935,174
Treasury stock, at cost, 4,000,000 shares	(25,974,000		)	(25,974,000		)
Accumulated other comprehensive income	411,957			464,110
Accumulated deficit during development stage	(61,905,260		)	(55,474,054		)

Total shareholders’ equity	22,610,631			28,985,425

Total liabilities and shareholders’ equity	$	122,374,673		$	128,121,138

The accompanying notes are an integral part of these statements.

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Operations

(unaudited)

	Three Months Ended March 31,						Cumulative Period from December 28, 1995 (date of inception) to March 31,
	2005			2004			2005

Revenues
Product sales	$	2,666,534		$	289,357		$	8,732,575
License fees	—			—			260,000

Total revenues	2,666,534			289,357			8,992,575

Cost of product sales	2,419,672			742,440			10,991,514
Selling, general and administrative expenses	4,819,367			3,248,784			33,196,792
Research and development	1,594,581			1,182,982			13,507,766

Operating loss	(6,167,086		)	(4,884,849		)	(48,703,497		)

Other income (expense)
Interest income	715,814			18,105			1,560,120
Other income	—			—			180,040
Interest expense	(979,934		)	—			(1,928,238		)

Net loss	$	(6,431,206	)	$	(4,866,744	)	$	(48,891,575	)

Deemed dividend associated with beneficial conversion of preferred stock	—			—			(11,423,824		)
Preferred stock dividends	—			—			(1,589,861		)
Net loss attributable to common shareholders	$	(6,431,206	)	$	(4,866,744	)	$	(61,905,260	)

Per share information
Net loss – basic and diluted	$	(0.21	)	$	(0.18	)	$	(4.89	)
Deemed dividend associated with beneficial conversion of preferred stock	—			—			(1.14		)
Preferred stock dividends	—			—			(0.16		)
Net loss attributable to common shareholders – basic and diluted	$	(0.21	)	$	(0.18	)	$	(6.19	)

Weighted average number of basic and diluted common shares outstanding	30,216,843			26,714,465			9,989,681

The accompanying notes are an integral part of these statements.

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Shareholders’ Equity

	Series A			Series B															Accumulated
	Preferred Stock			Preferred Stock			Common Stock							Treasury Stock			Accumulated		During				Total
	Number			Number			Number			Additional				Number			Other		Development				Shareholders’
	of			of			of			Paid-In				of			Comprehensive		Stage				Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital				Shares	Amount		Shares		Income				(Deficit)
Issuance of common stock for cash on 12/28/95	—	$	—	—	$	—	2,285,291	$	2,285	$		(1,465	)	—	$	—	$	—	$		—		$	820
Issuance of common stock for cash on 11/7/96	—	—		—	—		11,149	11		49,989				—	—		—		—				50,000
Issuance of common stock for cash on 11/29/96	—	—		—	—		2,230	2		9,998				—	—		—		—				10,000
Issuance of common stock for cash on 12/19/96	—	—		—	—		6,690	7		29,993				—	—		—		—				30,000
Issuance of common stock for cash on 12/26/96	—	—		—	—		11,148	11		49,989				—	—		—		—				50,000
Net loss	—	—		—	—		—	—		—				—	—		—		(270,468			)	(270,468		)
Balance, 12/31/96	—	$	—	—	$	—	2,316,508	$	2,316	$	138,504			—	$	—	$	—	$		(270,468	)	$	(129,648	)
Issuance of common stock for cash on 12/27/97	—	—		—	—		21,182	21		94,979				—	—		—		—				95,000
Issuance of common stock for Services on 9/1/97	—	—		—	—		11,148	11		36,249				—	—		—		—				36,260
Issuance of common stock for Services on 12/28/97	—	—		—	—		287,193	287		9,968				—	—		—		—				10,255
Net loss	—	—		—	—		—	—		—				—	—		—		(52,550			)	(52,550		)
Balance, 12/31/97	—	$	—	—	$	—	2,636,031	$	2,635	$	279,700			—	$	—	$	—	$	(323,018		)	$	(40,683	)

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

	Series A			Series B															Accumulated
	Preferred Stock			Preferred Stock			Common Stock										Accumulated		Deficit			Total
	Number			Number			Number			Additional			Treasury Stock				Other		During			Shareholders’
	of			of			of			Paid-In			Number of				Comprehensive		Development			Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital			Shares	Amount			Income		Stage			(Deficit)
Issuance of common stock for cash on 8/23/98	—	$	—	—	$	—	4,459	$	4	$	20,063		—	$	—		$	—	$	—		$	20,067
Repurchase of common stock on 9/29/98	—	—		—	—		—	—		—			2,400	(50,280		)	—		—			(50,280		)
Net loss	—	—		—	—		—	—		—			—	—			—		(195,675		)	(195,675		)
Balance, 12/31/98	—	$	—	—	$	—	2,640,490	$	2,639	$	299,763		2,400	$	(50,280	)	$	—	$	(518,693	)	$	(266,571	)
Issuance of common stock for cash on 9/10/99	—	—		—	—		52,506	53		149,947			—	—			—		—			150,000
Net loss	—	—		—	—		—	—		—			—	—			—		(1,306,778		)	(1,306,778		)
Balance, 12/31/99	—	$	—	—	$	—	2,692,996	$	2,692	$	449,710		2,400	$	(50,280	)	$	—	$	(1,825,471	)	$	(1,423,349	)
Issuance of common stock for cash on 1/18/00	—	—		—	—		53,583	54		1,869			—	—			—		—			1,923
Issuance of common stock for Services on 3/1/00	—	—		—	—		68,698	69		(44		)	—	—			—		—			25
Issuance of common stock for Services on 4/4/00	—	—		—	—		27,768	28		(18		)	—	—			—		—			10
Net loss	—	—		—	—		—	—		—			—	—			—		(807,076		)	(807,076		)
Balance, 12/31/00	—	$	—	—	$	—	2,843,045	$	2,843	$	451,517		2,400	$	(50,280	)	$	—	$	(2,632,547	)	$	(2,228,467	)

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

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

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

	Series A			Series B														Accumulated
	Preferred Stock			Preferred Stock			Common Stock						Treasury Stock			Accumulated		Deficit			Total
	Number			Number			Number				Additional		Number			Other		During			Shareholders’
	of			of			of				Paid-In		of			Comprehensive		Development			Equity
	Shares	Amount		Shares	Amount		Shares		Amount		Capital		Shares	Amount		Income		Stage			(Deficit)
Uncompensated contribution of services—3rd quarter	—	$	—	—	$	—	$	—	$	—	$	55,556	—	$	—	$	—	$	—		$	55,556
Issuance of common stock for services on 11/1/01	—	—		—	—		145,933		146		218,754		—	—		—		—			218,900
Uncompensated contribution of services—4th quarter	—	—		—	—		—		—		100,000		—	—		—		—			100,000
Net loss	—	—		—	—		—		—		—		—	—		—		(1,652,004		)	(1,652,004		)
Balance, 12/31/01	—	$	—	—	$	—	15,189,563		$	15,190	$	5,321,761	—	$	—	$	—	$	(4,284,551	)	$	1,052,400
Uncompensated contribution of services—1st quarter	—	—		—	—		—		—		100,000		—	—		—		—			100,000
Issuance of preferred stock for cash on 4/26/02	905,000	905		—	—		—		—		2,817,331		—	—		—		—			2,818,236
Issuance of preferred stock for cash on 5/16/02	890,250	890		—	—		—		—		2,772,239		—	—		—		—			2,773,129
Issuance of preferred stock for cash on 5/31/02	795,000	795		—	—		—		—		2,473,380		—	—		—		—			2,474,175
Issuance of preferred stock for cash on 6/28/02	229,642	230		—	—		—		—		712,991		—	—		—		—			713,221
Uncompensated contribution of services—2nd quarter	—	—		—	—		—		—		100,000		—	—		—		—			100,000
Issuance of preferred stock for cash on 7/15/02	75,108	75		—	—		—		—		233,886		—	—		—		—			233,961
Issuance of common stock for cash on 8/1/02	—	—		—	—		38,400		38		57,562		—	—		—		—			57,600
Issuance of warrants for services on 9/06/02	—	—		—	—		—		—		103,388		—	—		—		—			103,388
Uncompensated contribution of services—3rd quarter	—	—		—	—		—		—		100,000		—	—		—		—			100,000
Uncompensated contribution of services—4th quarter	—	—		—	—		—		—		100,000		—	—		—		—			100,000
Issuance of preferred stock for dividends	143,507	144		—	—		—		—		502,517		—	—		—		(502,661		)	—
Deemed dividend associated with beneficial conversion of preferred stock	—	—		—	—		—		—		10,178,944		—	—		—		(10,178,944		)	—
Comprehensive income:
Net loss	—	—		—	—		—		—		—		—	—		—		(5,433,055		)	(5,433,055		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—		—		—		—	—		13,875		—			13,875
Comprehensive loss	—	—		—	—		—		—		—		—	—		—		—			(5,419,180		)
Balance, 12/31/02	3,038,507	$	3,039	—	$	—	15,227,963		$	15,228	$	25,573,999	—	$	—	$	13,875	$	(20,399,211	)	$	5,206,930

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

						Series B																		Accumulated
	Series A					Preferred Stock													Treasury Stock			Accumulated		Deficit			Total
	Preferred Stock					Number					Common Stock					Additional			Number			Other		During			Shareholders’
	Number of					of					Number of					Paid-In			of			Comprehensive		Development			Equity
	Shares		Amount			Shares		Amount			Shares		Amount			Capital			Shares	Amount		Income		Stage			(Deficit)
Issuance of common stock for cash on 1/7/03	—		—			—		—			61,600		62			92,338			—	—		—		—			92,400
Issuance of common stock for patent pending acquisition on 3/31/03	—		—			—		—			100,000		100			539,900			—	—		—		—			540,000
Cancellation of common stock on 3/31/03	—		—			—		—			(79,382	)	(79		)	(119,380		)	—	—		—		—			(119,459		)
Uncompensated contribution of services—1st quarter	—		—			—		—			—		—			100,000			—	—		—		—			100,000
Issuance of preferred stock for cash on 5/9/03	—		—			110,250		110			—		—			2,773,218			—	—		—		—			2,773,328
Issuance of preferred stock for cash on 5/16/03	—		—			45,500		46			—		—			1,145,704			—	—		—		—			1,145,750
Conversion of preferred stock into common stock—2nd qtr	(70,954	)	(72		)	—		—			147,062		147			40,626			—	—		—		—			40,701
Conversion of warrants into common stock—2nd qtr	—		—			—		—			114,598		114			(114		)	—	—		—		—			—
Uncompensated contribution of services—2nd quarter	—		—			—		—			—		—			100,000			—	—		—		—			100,000
Issuance of preferred stock dividends	—		—			—		—			—		—			—			—	—		—		(1,087,200		)	(1,087,200		)
Deemed dividend associated with beneficial conversion of preferred stock	—		—			—		—			—		—			1,244,880			—	—		—		(1,244,880		)	—
Issuance of common stock for cash—3^rd qtr	—		—			—		—			202,500		202			309,798			—	—		—		—			310,000
Issuance of common stock for cash on 8/27/03	—		—			—		—			3,359,331		3,359			18,452,202			—	—		—		—			18,455,561
Conversion of preferred stock into common stock—3^rd qtr	(2,967,553	)	(2,967		)	(155,750	)	(156		)	7,188,793		7,189			(82,875		)	—	—		—		—			(78,809		)
Conversion of warrants into Common stock—3^rd qtr	—		—			—		—			212,834		213			(213		)	—	—		—		—			—
Compensation expense on warrants issued to non-employees	—		—			—		—			—		—			412,812			—	—		—		—			412,812
Issuance of common stock for cash—4^th qtr	—		—			—		—			136,500		137			279,363			—	—		—		—			279,500
Conversion of warrants into Common stock—4^th qtr	—		—			—		—			393		—			—			—	—		—		—			—
Comprehensive income:
Net loss	—		—			—		—			—		—			—			—	—		—		(11,268,294		)	(11,268,294		)
Other comprehensive income, foreign currency translation adjustment	—		—			—		—			—		—			—			—	—		360,505		—			360,505
Comprehensive loss	—		—			—		—			—		—			—			—	—		—		—			(10,907,789		)
Balance, 12/31/03	—		$	—		—		$	—		26,672,192		$	26,672		$	50,862,258		—	$	—	$	374,380	$	(33,999,585	)	$	17,263,725

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

	Series A																		Accumulated
	Preferred Stock			Series B			Common Stock										Accumulated		Deficit			Total
	Number			Preferred Stock			Number			Additional			Treasury Stock				Other		During			Shareholders’
	of			Number of			of			Paid-In			Number of				Comprehensive		Development			Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital			Shares	Amount			Income		Stage			(Deficit)
Conversion of warrants into common stock—1^st qtr	—	—		—	—		78,526	79		(79		)	—	—			—		—			—
Issuance of common stock for cash in connection with exercise of stock options—1^st qtr	—	—		—	—		15,000	15		94,985			—	—			—		—			95,000
Issuance of common stock for cash in connection with exercise of warrants—1^st qtr	—	—		—	—		4,000	4		7,716			—	—			—		—			7,720
Compensation expense on options and warrants issued to non-employees and directors—1^st qtr	—	—		—	—		—	—		1,410,498			—	—			—		—			1,410,498
Issuance of common stock in connection with exercise of warrants—2^nd qtr	—	—		—	—		51,828	52		(52		)	—	—			—		—			—
Issuance of common stock for cash—2^nd qtr	—	—		—	—		7,200,000	7,200		56,810,234			—	—			—		—			56,817,434
Compensation expense on options and warrants issued to non-employees and directors—2^nd qtr	—	—		—	—		—	—		143,462			—	—			—		—			143,462
Issuance of common stock in connection with exercise of warrants—3^rd qtr	—	—		—	—		7,431	7		(7		)	—	—			—		—			—
Issuance of common stock for cash in connection with exercise of stock options—3^rd qtr	—	—		—	—		110,000	110		189,890			—	—			—		—			190,000
Issuance of common stock for cash in connection with exercise of warrants—3^rd qtr	—	—		—	—		28,270	28		59,667			—	—			—		—			59,695
Compensation expense on options and warrants issued to non-employees and directors—3^rd qtr	—	—		—	—		—	—		229,133			—	—			—		—			229,133
Issuance of common stock in connection with exercise of warrants—4^th qtr	—	—		—	—		27,652	28		(28		)	—	—			—		—			—
Compensation expense on options and warrants issued to non-employees, employees, and directors—4^th qtr	—	—		—	—		—	—		127,497			—	—			—		—			127,497
Purchase of treasury stock—4^th qtr	—	—		—	—		—	—		—			4,000,000	(25,974,000		)	—		—			(25,974,000		)
Comprehensive income:
Net loss	—	—		—	—		—	—		—			—	—			—		(21,474,469		)	(21,474,469		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—	—		—			—	—			79,725		—			79,725
Other comprehensive income, net unrealized gain on available-for-sale securities	—	—		—	—		—	—		—			—	—			10,005		—			10,005
Comprehensive loss	—	—		—	—		—	—		—			—	—			—		—			(21,384,739		)
Balance, 12/31/04	—	$	—	—	$	—	34,194,899	$	34,195	$	109,935,174		4,000,000	$	(25,974,000	)	$	464,110	$	(55,474,054	)	$	28,985,425

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

	Series A																		Accumulated
	Preferred Stock			Series B			Common Stock									Accumulated			Deficit			Total
	Number			Preferred Stock			Number			Additional		Treasury Stock				Other			During			Shareholders’
	of			Number of			of			Paid-In		Number of				Comprehensive			Development			Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Shares	Amount			Income			Stage			(Deficit)
Issuance of common stock for cash in connection with exercise of stock options—1^st qtr	—	—		—	—		25,000	25		74,975		—	—			—			—			75,000
Compensation expense on options and warrants issued to non-employees, employees and directors—1^st qtr	—	—		—	—		—	—		33,565		—	—			—			—			33,565
Comprehensive income:
Net loss	—	—		—	—		—	—		—		—	—			—			(6,431,206		)	(6,431,206		)
Other comprehensive income, foreign currency translation adjustment	—	—		—	—		—	—		—		—	—			(42,148		)	—			(42,148		)
Other comprehensive income, net unrealized gain on available-for-sale securities	—	—		—	—		—	—		—		—	—			(10,005		)	—			(10,005		)
Comprehensive loss	—	—		—	—		—	—		—		—	—			—			—			(6,483,359		)
Balance, 3/31/05	—	$	—	—	$	—	34,219,899	$	34,220	$	110,043,714	4,000,000	$	(25,974,000	)	$	411,957		$	(61,905,260	)	$	22,610,631

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

Isolagen, Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended March 31,						Cumulative Period from December 28, 1995 (date of inception) to March 31,
	2005			2004			2005
Cash flows from operating activities
Net loss	$	(6,431,206	)	$	(4,866,744	)	$	(48,891,575	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity awards issued for services	33,565			1,410,498			3,566,750
Uncompensated contribution of services	—			—			755,556
Depreciation and amortization	441,065			272,550			2,747,322
Provision for doubtful accounts	57,591			—			108,124
Amortization of debt issue costs	187,310			—			312,183
Amortization of debt discounts	(183,001		)	—			(183,001		)
Loss on disposal or impairment of property and equipment	—			—			575,861
Change in operating assets and liabilities:
(Increase) in accounts receivable	(355,923		)	(341,721		)	(1,849,051		)
(Increase) decrease in other receivables	(24,362		)	(6,664		)	(353,790		)
(Increase) decrease in inventory	484,290			(5,076		)	(502,816		)
(Increase) in prepaid expenses	(191,054		)	(176,782		)	(935,877		)
(Increase) in other assets	(182,974		)	(2,009		)	(471,775		)
Increase (decrease) in accounts payable	(77,497		)	25,897			2,223,413
Increase in accrued expenses	591,343			522,046			3,859,100
Increase in deferred revenue	170,907			303,902			2,963,375
Net cash used in operating activities	(5,479,946		)	(2,864,103		)	(36,076,201		)

Cash flows from investing activities
Purchase of property and equipment	(524,165		)	(95,056		)	(6,865,701		)
Proceeds from the sale of property and equipment	—			—			34,300
Purchase of investments	(44,123,657		)	—			(116,923,657		)
Proceeds from sales and maturities of investments	8,800,000			—			29,800,000
Net cash used in investing activities	(35,847,822		)	(95,056		)	(93,955,058		)

Cash flows from financing activities
Proceeds from convertible debt	—			—			91,450,000
Offering costs associated with the issuance of convertible debt	—			—			(3,746,193		)
Proceeds from notes payable to shareholders, net	—			—			135,667
Proceeds from the issuance of preferred stock, net	—			—			12,931,800
Proceeds from the issuance of common stock, net	75,000			102,720			78,907,720
Cash dividends paid on preferred stock	—			—			(1,087,200		)
Cash paid for fractional shares of preferred stock	—			—			(38,108		)
Merger and acquisition expenses	—			—			(48,547		)
Repurchase of common stock	—			—			(26,024,280		)
Net cash provided by financing activities	75,000			102,720			152,480,859

Effect of exchange rate changes on cash balance	(121,231		)	8,817			505,757
Net increase (decrease) in cash and cash equivalents	(41,373,999		)	(2,847,622		)	22,955,357
Cash and cash equivalents, beginning of period	64,329,356			15,935,558			—
Cash and cash equivalents, end of period	$	22,955,357		$	13,087,936		$	22,955,357

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

Commencing in 1995, a predecessor of our Isolagen Process was used to correct facial defects, such as wrinkles, depressions and scars. From 1995 to 1999, approximately 200 physicians utilized this process on approximately 1,000 patients, for a total of approximately 4,000 injections. The physicians who used this process during this period did not document any significant adverse reactions.

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 reviewed the design and size of a proposed Phase III program and provided 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. The Company completed Phase I clinical trial for its second candidate for the treatment of periodontal

disease in late 2003. In the second quarter of 2004, the Company 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 primarily in the United Kingdom. The Company plans to expand sales of its dermal product to other parts of Europe, Asia and the Americas.

Through March 31, 2005, 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 2005. 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 regulatory approval to sell its products and upon its successful development of markets for its products and profitable manufacturing processes. The Company may be required to obtain additional capital in the future to expand its operations. No assurance can be given that the Company will be able to obtain such regulatory approvals, successfully develop the markets for its products or profitable manufacturing methods, or any such additional capital as it might need, 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 March 31, 2005, the Company had cash and cash equivalents and short-term investments of $110.3 million. The Company believes that its existing capital resources are adequate to finance its operations until June 30, 2007, however its long-term viability is dependent upon successful operation of its business, its ability to automate its manufacturing process, the approval of its products and the ability to raise additional debt and equity to meet its business objectives.

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, 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 for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 15, 2005 and the Form 10-K/A for the year ended December 31, 2004 filed with the Securities and Exchange Commission on April 28, 2005.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts and inventory obsolescence, useful lives of property and equipment and intangible assets, impairment of property and equipment and intangible assets, deferred taxes, and the provision for and disclosure of litigation and loss contingencies. Actual results may differ materially from those estimates.

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiaries are determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period-end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income in shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings and have not been material in any one period.

Balances of related after-tax components comprising accumulated other comprehensive income included in stockholders’ equity, at March 31, 2005 and December 31, 2004 are as follows:

	March 31, 2005		December 31, 2004
Unrealized gains on available-for-sale securities	$	—	$	10,005
Foreign currency translation adjustment	411,957		454,105
Accumulated other comprehensive income	$	411,957	$	464,110

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 primarily with major U.S. domestic banks. The amounts held in these banks 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. Cash equivalents are maintained in two financial institutions. The Company invests these funds primarily in Fannie Mae and government securities.

The Company’s short-term investments, as set forth below, subject it to certain credit risk that is concentrated in securities issued by U.S. government sponsored mortgage entities, and various states including: Wisconsin, California, Iowa, Missouri, New Hampshire and Pennsylvania. Due to the credit ratings of these issuers, the Company does not believe that the credit risk is significant.

Short-Term Investments

At March 31, 2005 the Company held certain investments in marketable debt securities as a means of temporarily investing the proceeds from its issuance of shares of common stock and 3.5% Convertible Subordinated Notes until the funds are needed for operating purposes. These investments are being accounted for as “available-for-sale” securities under Statement of Financial Accounting Standards (“SFAS”) No. 115,” Accounting for Certain Investments in Debt and Equity Securities.” As a result, the investments are reflected at their fair value, based on quoted market prices, with unrealized gains and losses recorded in accumulated other comprehensive income until the investments are sold, at which time the realized gains and losses are included in the results of operations.

The following sets forth information concerning marketable debt securities as of March 31, 2005:

Type of issue	Maturity	Face amount		Amoritzed Cost		Gross unrealized gains			Gross unrealized losses			Fair value
Freddie Mac and Fannie Mae	2005	$	53,548,000	$	53,306,313	$	—		$	—		$	53,306,313
State and local government	2012-2044	$	23,350,000	$	23,350,000	—			—			$	23,350,000
Corporate	2021-2043	$	10,650,000	$	10,650,000	—			—			$	10,650,000
				$	87,306,313	$		—	$		—	$		87,306,313

The Company’s investments in state and local government and corporate issues are principally investments in Auction Rate Securities (“ARS”), for which the interest rates are reset periodically through a Dutch auction process.

The following sets forth the aggregate maturities of the Company’s investments in marketable debt securities without regard to the dates at which the interest rates for ARS investments reset:

Maturity	Cost		Fair Value
2005	$	53,306,313	$	53,306,313
2006-2010	—		—
2011-2015	1,950,000		1,950,000
2016 and after	32,050,000		32,050,000
	$	87,306,313	$	87,306,313

Proceeds from the sale of available-for-sale marketable debt securities were $8.8 million for the three months ended March 31, 2005, and no realized gains and losses based on specific identification, were included in the results of operations upon those sales.

Allowance for Doubtful Accounts

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

Inventory

Inventory 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, software, leasehold improvements, and office furniture and fixtures is carried at cost less accumulated depreciation and amortization. Depreciation and amortization 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 lease term or the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an expense as incurred.

Intangible assets

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.

Debt Issue Costs

The costs incurred in issuing the Company’s 3.5% Convertible Subordinated Notes, including placement agent fees, legal and accounting costs and other direct costs are included in Other Assets and are being amortized to expense using the effective interest method over five years, through November 2009. Debt issuance costs, net of amortization, were approximately $3,434,000 at March 31, 2005 and approximately $3,746,000 at December 31, 2004.

Treasury Stock

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

Revenue recognition

The Company recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In general, SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibility is reasonably assured.

Currently the Isolagen Process is delivered through an attending physician to each patient using the Company’s recommended regimen of up to three injections. Due to the short shelf life, each injection is cultured on an as needed basis and shipped prior to the individual injection being administered by the physician. The Company believes each injection 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 prior to the first injection and are not refundable and there is no performance provision under any arrangement with any doctor, and there is no right to refund, or returns for unused injections.

As a result, the Company believes that the requirements of SAB 104 are met as each injection is shipped, as the risk of loss transfers to the customer at that time, the fee is fixed and determinable and collection is reasonably assured. Advance payments are deferred until shipment. 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.

Revenue from licenses and other upfront fees are recognized on a ratable basis over the term of the respective agreement.

The Company also offers a service whereby it stores a patient’s cells for later use in the preparation of injections, and a service whereby it processes a patient’s cells to expand the cells to the mass necessary to prepare an injection, but then store the expanded cells for later use in the preparation of injections. In accordance with EITF 00-21, the fees charged for both of these services are recognized as revenue ratably over the length of the storage agreement. No separate revenue is recognized for the initial cell expansion service, as the Company does not offer this service separately and the process of cell expansion has no value without either the subsequent preparation of an injection or the storage of the expanded cells for later use in the preparation of injections.

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.

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.

Costs of Exit Activities

In September, 2004, the Company approved a plan for the closure of its Australian facilities and the servicing of Australia from the Company’s London, England facility. The Company adopted this plan because it believed that anticipated processing enhancements and improved delivery logistics will eliminate the need for an Australian laboratory. The Company expects that the closure of the Australian facility will be completed by June, 2005.

The costs associated with the closure of the Australian facilities, which are comprised principally of statutory or contractual employee severance costs and the cost of terminating certain contracts, are being accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, employee severance costs are accrued over the period beginning with the date on which the Company communicated the exit plan and the severance benefits to the affected employees, and ending on the date through which the affected employees must continue working to be entitled to the severance benefit, and costs incurred to terminate other contracts are accrued when the Company terminates the contract in accordance with the contract terms or has otherwise negotiated a termination with the counterparty. The exit costs charged to expense are included in selling, general and administrative expenses in the consolidated statements of operations.

The following sets forth information about the major components of the exit costs:

	Costs incurred for the
	three months ended		Cumulative costs
	March 31, 2005		incurred to date
Employee severance	$	3,695	$	208,589
Contract termination	25,216		386,841

Total	$	28,911	$	595,430

The following sets forth information about the changes in the accrued exit costs for the three months ended March 31, 2005:

	Accrued							Accrued
	liability at		Costs		Costs			liability at
	December 31,		charged		paid or			March 31,
	2004		to expense		settled			2005
Employee severance	$	—	$	3,695	$	(3,695	)	$	—
Contract termination	361,625		25,216		—			386,841

Total	$	361,625	$	28,911	$	(3,695	)	$	386,841

As of March 31, 2005 the Company has discontinued depreciating the equipment it intends to dispose of and has reclassified the equipment, at estimated fair value, as assets held for sale in the consolidated balance sheet. A third party has estimated the fair market value of lab and office equipment at $98,159 and the Company has identified interested parties to purchase the entire amount of these assets.

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 and totaled approximately $95,000 for the three months ended March 31, 2005 and approximately $46,000 for the three months ended March 31, 2004

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 and totaled approximately $25,000 for the three months ended March 31, 2005 and approximately $57,000 for the three months ended March 31, 2004.

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 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.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. 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 plan been determined based on the fair value at the grant date for the three months ended March 31, 2005 and 2004 consistent with the provisions of SFAS No. 123 and SFAS 148, the Company’s net loss and net loss per share would have increased to the pro forma amounts indicated below:

	Three Months Ended March 31,
	2005			2004

Net loss - as reported	$	(6,431,206	)	$	(4,866,744	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects of $0	25,729			449,190
Less: total stock-based employee compensation expense determined under fair value based method for all awards granted to employees, net of related tax effects of $0	(1,535,745		)	(1,100,083		)
Net loss - pro forma	$	(7,941,222	)	$	(5,517,637	)

Net loss per share – as reported Basic and diluted	$	(0.21	)	$	(0.18	)
Net loss per share – pro forma Basic and diluted	$	(0.26	)	$	(0.21	)

As required under SFAS 123 and SFAS 148, the pro forma effects of stock-based compensation on net loss per share have been estimated at the date of grant using the Black Scholes option-pricing model based on the following weighted average assumptions:

	Three Months ended March 31, 2005		Three Months ended March 31, 2004
Expected life (years)	5 years		5 years
Interest rate	4	%	4	%
Dividend yield	—		—
Volatility	78	%	71	%

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.

Loss per share data

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

At March 31, 2005, options and warrants to purchase 8,513,356 shares of common stock at exercise prices ranging from $1.50 to $11.38 per share were outstanding, but were not included in the computation of diluted earnings per share as their effect would be antidilutive, and 9,828,009 shares issuable upon the conversion of the Company’s convertible notes, at a conversion price of approximately $9.16, were not included as their effect would be antidilutive.

Comprehensive loss

Comprehensive loss encompasses all changes in equity other than those with shareholders and consists of net loss and foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketable debt

securities. The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries.

	Three Months Ended March 31, 2005				Three Months Ended March 31, 2004
Net loss	$	(6,431,206		)	$	(4,866,744		)
Other comprehensive income, foreign currency translation adjustment	(42,148			)	41,483
Other comprehensive income, net unrealized gain on available-for-sale securities	(10,005			)	—
Comprehensive loss	$		6,483,359		$		(4,825,261	)

Fair Value of Financial Instruments

The Company’s financial instruments consist of accounts receivable, marketable debt securities, accounts payable and convertible subordinated debentures. The fair values of the Company’s accounts receivable, accounts payable, and convertible subordinated debentures approximate, in the Company’s opinion, their respective carrying amounts. The Company’s marketable debt securities are carried at fair value.

Reclassifications

In the fourth quarter of Fiscal 2004 the Company changed the manner by which it classifies the costs incurred in its London and Australia facilities as either costs of sales or selling, general and administrative expenses. The Company believes that the new classifications better reflect the primary purpose and functions of each of these facilities. The new manner of classifying these costs is reflected in the accompanying consolidated statements of operations for all periods presented. The reclassifications did not have any effect on net loss or net loss per share.

In the fourth quarter of Fiscal 2004 the Company changed the manner by which it classifies losses on disposal of assets and includes these amounts in selling, general and administrative expenses. The new manner of classifying these costs is reflected in the accompanying consolidated statements of operations for all periods presented. The reclassifications did not have any effect on net loss or net loss per share.

Recent accounting pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share Based Payment,” which eliminates the use of APB Opinion No. 25 and will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised 2004) is effective for the first interim or annual reporting period that begins after June 15, 2005 (the quarter beginning July 1, 2005 for the Company) and must be applied to all options granted or modified after its effective date and also to recognize the cost associated with the portion of any option awards made before its effective date for with the associated service has not been rendered as of its effective date. The Company is still studying the requirements of SFAS No. 123 (Revised 2004) and has not yet determined what impact it will have on the Company’s results of operations and financial position. On April 14, 2005 the U.S. Securities and Exchange Commission announced a deferral of the effective date of FAS 123(R) for calendar year companies until the beginning of 2006.

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, Stock Plan and Warrants

Equity instruments issued to non-employees

From time to time, in order to preserve cash and to fund operating activities of the Company, common stock or other equity instruments may be issued for cash or in exchange for goods or services. Equity instruments issued for goods or services are recorded at the fair value of the goods or services received or the fair value of the equity instruments issued, whichever is more reliably measurable.

Common Stock

During the three months ended March 31, 2005, the Company issued 25,000 shares of common stock for cash totaling $75,000 in connection with the exercise of stock options and issued no 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 Board of Directors, who has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.

In the first quarter of 2005, the Company issued under the Stock Plan a total of 56,000 options to purchase its common stock with an exercise price of $7.24 per share to three employees. The options vest over a three year period from the date of grant.

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

In the first quarter of 2005, the Company issued a total of 80,000 options to purchase its common stock with an exercise price ranging of $7.67 per share to four board members. The options vest over a one year period. Further, the Company issued a total of 100,000 options to purchase its common stock with an exercise price of $7.24 per share to six employees. The options vest over a three year period from the date of grant.

Other Stock Options

In the first quarter of 2005, the Company did not issue any options outside the Stock Plan or the 2003 Stock Plan.

Warrants and Options Issued for Services

As of March 31, 2005, the Company has outstanding 653,600 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	396,933		256,667
Vesting period	n/a		3 to 36 months
Range of exercise prices	$1.50 to $10.49		$3.50 to $10.49
Weighted average exercise price	$	4.93	$	5.90
Expiration dates	2007 to 2013		2007 to 2013

Expense related to these contracts was approximately $8,000 for the three months ended March 31, 2005 and approximately $961,000 for the three months ended March 31, 2004.

The expense was calculated using the Black Scholes option-pricing model based on the following weighted average assumptions for the three months ended March 31, 2005 and 2004:

	Three Months ended March 31, 2005		Three Months ended March 31, 2004
Expected life (years)	5 years		5 years
Interest rate	4	%	4	%
Dividend yield	—		—
Volatility	83	%	83	%

Note 5 - Geographical Information

The Company operates its business on the basis of a single 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 March 31
	2005		2004

United States	$	—	$	—
United Kingdom	2,666,534		201,679
Australia	—		87,678
	$	2,666,534	$	289,357

	Property and Equipment, net March 31,
	2005		2004

United States	$	1,952,220	$	565,893
United Kingdom	1,659,687		814,967
Australia	42,998		700,182
	$	3,654,905	$	2,081,042

	Depreciation Three months ended March 31,
	2005		2004

United States	$	160,626	$	119,347
United Kingdom	193,887		58,254
Australia	86,552		94,949
	$	441,065	$	272,550

	Capital Expenditures Three months ended March 31,
	2005		2004

United States	$	221,330	$	79,509
United Kingdom	302,835		12,313
Australia	—		3,234
	$	524,165	$	95,056

Note 6 - Subsequent Events

In April 2005, the Company acquired a two-building corporate campus in Bevaix, Canton of Neuchâtel, Switzerland for $10 million cash. The 100,000 square foot, five-acre facility was acquired from Ascom, a Swiss-based microelectronics and IT company. It is anticipated that the renovated facility, which will serve Continental Europe, the Middle East, Africa and the Pacific Rim, will be operational by the end of 2006. The renovation costs cannot be estimated at this time.

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. Our ability to operate profitably under our current business plan is largely contingent upon our success in obtaining regulatory approval to sell our products and upon our successful development of markets for our products and profitable manufacturing processes. We may be required to obtain additional capital in the future to support these efforts or expand our operations. No assurance can be given that we will be able to obtain such regulatory approvals, successfully develop the markets for our products or profitable manufacturing methods, or obtain such additional capital as we might need, 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.

Although the focus of our efforts has been and will continue to be the development, testing and approval of the aesthetic and dental applications of our process, and research into other applications of our process, as a result of which our company is still considered to be a “development stage” enterprise, we have, since 2002, made Isolagen Process injections available to physicians in the United Kingdom and Australia as a means of developing our marketing, sales and manufacturing processes. Revenues from the sale of these treatments were approximately $2.7 million for the three months ending March 31, 2005. These revenues partially offset the costs we are incurring in our developing marketing, sales and manufacturing.

As of December March 31, 2005, we had cash, cash equivalents and short-term investments of $110.3 million. As of May 5, 2005, we had cash, cash equivalents and short-term investments of approximately $96.4 million. We believe our existing capital resources are adequate to finance our operations until June 30, 2007, however our long-term viability is dependent upon successful operation of our business, our ability to automate our manufacturing process, the approval of our products and the ability to raise additional debt and equity to meet our business objectives.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 2 of Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of the our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. The following discusses our significant accounting policies and estimates.

Revenue Recognition: 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”). In general, SAB 104

requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibility is reasonably assured.

Currently the Isolagen Process is administered by an attending physician to each patient using our recommended regimen of up to three injections. Due to the short shelf life, each injection is cultured on an as needed bases and shipped prior to the individual injection being administered by the physician. 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, orders are paid in advance by the physician prior to the first injection and are not refundable and there is no performance provision under any arrangement with any doctor, and there is no right to refund, or returns for unused injections.

As a result, we believe that the requirements of SAB 104 are met as each injection is shipped, as the risk of loss transfers to the customer at that time, the fee is fixed and determinable and collection is reasonably assured. Advance payments are deferred until shipment. 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.

Revenue from licenses and other upfront fees are recognized on a ratable basis over the term of the respective agreement.

We also offer a service whereby we store a patient’s cells for later use in the preparation of injections, and a service whereby we process a patient’s cells to expand the cells to the mass necessary to prepare an injection, but then store the expanded cells for later use in the preparation of injections. In accordance with EITF 00-21, the fees charged for both of these services are recognized as revenue rateably over the length of the storage agreement. No separate revenue is recognized for the initial cell expansion service, as we do not offer this service separately and the process of cell expansion has no value without either the subsequent preparation of an injection or the storage of the expanded cells for later use in the preparation of injections. This service did not result in significant revenue in the three months ending March 31, 2005.

Cost of Sales and Selling, General and Administrative Expenses and Research and Development Expenses: In the fourth quarter of Fiscal 2004 we changed the manner by which we classify the costs incurred in our London and Australia facilities as either costs of sales or selling, general and administrative expenses or research and development expenses. We believe that the new classifications better reflect the primary purpose and functions of each of these facilities, as described below. The new manner of classifying these costs is reflected in the accompanying consolidated statements of operations for all periods presented. The reclassifications did not have any effect on net loss or net loss per share.

The primary purpose of our Houston, Texas facility is to conduct research on the development, testing and approval of the aesthetic and dental applications of our process, including the required clinical trials, and research into other applications of our process, while our London and Australia (being closed in the second quarter of Fiscal 2005) facilities were engaged in the commercialization of our process (for which they earned revenues from the sale of Isolagen Process Injections) in these markets as a means of improving manufacturing technologies that are more automated and therefore can be used to produce commercial quantities of injections on a profitable basis. Therefore, we have classified as cost of sales the costs (except for costs related to marketing, sales and general corporate administration) incurred in operating our London and Australia facilities, while the costs incurred in operating our Houston, Texas facility (except for costs related to general corporate administration) have been classified as research and development expenses. Previously some of the costs of operating our London and Australia facilities now included in cost of sales had been included in selling, general and administrative expenses and research and development expenses.

Costs of sales includes salaries and benefits, costs paid to third-party contractors to develop and manufacture drug materials and delivery devices, and a portion of facilities cost. Those costs, except for the costs of raw materials that have not been used, are expensed as incurred.

Historically, autologous cell companies have been hampered by manufacturing technologies that use traditional methodology for culturing cells through the utilization of plastic flasks. This methodology is labor intensive, slow, involves many sterile interventions and is costly. The use of this process to produce Isolagen Process injections in commercial quantities would not, over time, be profitable. We have been using the commercialization of our process in these markets as a means of researching and developing manufacturing technologies that are more automated and therefore can be used to produce commercial quantities of injections on a profitable basis. Cumulative to date, our cost of sales has exceeded our revenues. This reflects the fact that the level of our sales from our commercialization efforts in the United Kingdom and previously Australia, while increasing, have not yet reached the levels necessary for profitable operations, and the development and implementation of our automated processes has not yet achieved all of the cost efficiencies we hope to achieve.

If, in the future, the purposes for which we operate our Houston, Texas, or London facilities, or any new facilities we open, changes, the allocation of the costs incurred in operating that facility between cost of sales and research and development expenses could change to reflect such operational changes.

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. The projection of future cash flows requires us to make estimates about the when product approvals may be obtained, and the amount of future revenues. The actual future results could differ significantly from these estimates, and resulting changes in the estimates of future cash flows could be significant and could affect the recoverability of intangible assets.

Stock-Based Compensation: 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. We have 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.

Beginning the first quarter of fiscal year 2006, we will be required to adopt SFAS No. 123 (Revised 2004), “Share Based Payment,” which eliminates the use of APB Opinion No. 25 and we will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward—the requisite service period. No compensation cost will be recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those

instruments. SFAS No. 123 (Revised 2004) must be applied to all options granted or modified after its effective date and also to recognize the cost associated with the portion of any option awards made before its effective date for with the associated service has not been rendered as of its effective date. We are still studying the requirements of SFAS No. 123 (Revised 2004) and have not yet determined what impact it will have on our results of operations and financial position.

RESULTS OF OPERATIONS

Comparison of the three months ending March 31, 2005 and 2004

REVENUES. Revenues increased $2,377,177, to $2,666,534 for the three months ended March 31, 2005 compared to $289,357 for the three months ended March 31, 2004. The increase in revenues is primarily attributable to the continuation of operations in the United Kingdom.

The Isolagen Process involves a patient’s physician obtaining an approximately three millimeter punch skin sample from the patient. The skin sample is packed in a container provided by us and shipped overnight to our laboratory. We invoice the physician upon receipt of the skin sample. The specimen is then cultured utilizing our Isolagen Process. Approximately six weeks later, the patient’s cells are sent to the doctor for treatment. 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 three months ended March 31, 2005 and 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 $2,419,672 for the three months ended March 31, 2005 compared to $742,440 for the three months ended March 31, 2004. The increase in cost of sales is primarily related to the increase in activities of our London facility. The increase resulted from increases in essentially all categories of costs as these facilities increased their commercialization of our process. Cumulative to date, cost of sales exceeded revenues as the development and implementation of our automated processes has not yet achieved all of the cost efficiencies we anticipate.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 48%, or $1,570,583, to $4,819,367 for the three months ended March 31, 2005 compared to $3,248,784 for the three months ended March 31, 2004. The major changes in selling, general and administrative expense are as follows:

a) Consulting expense decreased by approximately $1.1 million to $0.4 million for the three months ended March 31, 2005 compared to $1.5 million for three months ended March 31, 2004. For the three months ended March 31, 2004, the amount included $1.0 million of stock based expenses related to options and warrants issued under consulting and distribution agreements, and $0.4 million of stock compensation related to stock options issued to directors and officers. There was a $34,000 stock based expense for the three months ended March 31, 2005. 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 $0.7 million to $1.0 million for the three months ended March 31, 2005 compared to $0.3 million for three months ended March 31, 2004 due to an increase in our number of employees.

c) Travel expense increased by approximately $0.3 million to $0.4 million for the three months ended March 31, 2005compared to $0.1 million for three months ended March 31, 2004.

d) Legal expense remained constant at $0.2 million for the three months ended March 31, 2005 compared to $0.2 million for three months ended March 31, 2004.

e) Promotional expense increased by approximately $0.3 million to $0.5 million for the three months ended March 31, 2005 compared to $0.2 million for three months ended March 31, 2004 due to increased marketing and promotional efforts related to the expansion of our operations in the United Kingdom.

f) Depreciation and amortization increased by approximately $0.1 million to $0.3 million for the three months ended March 31, 2005 compared to $0.2 million for three months ended March 31, 2004.

g) Office and other costs increased by approximately $1.3 million to $2.0 million for the three months ended March 31, 2005 compared to $0.7 million for three months ended March 31, 2004, which increase is primarily related to continuing increase in the level of operations in the United Kingdom and the completion of our U.S. laboratory.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $0.4 million during the three months ended March 31, 2005 to $1.6 million as compared to $1.2 million for the same period of 2004. Research and development costs are composed primarily of costs related to the Company’s efforts to gain FDA approval for the Isolagen Process for specific dermal applications in the United States. These costs include those personnel and laboratory costs related to the current FDA trials and certain consulting costs. The dermal project is still under development. The total cost of research and development as of March 31, 2005 is $13.5 million. As of March 31, 2005, we believe at a minimum it will cost $1.0 million of additional expenditures will be required to complete this project. 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 three months ended March 31, 2005 and 2004. The major changes in research and development expense are as follows: a) consulting expense increased by approximately $0.1 million to $0.8 million for the three months ended March 31, 2005 compared to $0.7 million for the three months ended March 31, 2004; b) laboratory expense decreased by approximately $0.1 million to $0.1 million for the three months ended March 31, 2005 compared to $0.2 million for the three months ended March 31, 2004; and c) salaries and payroll taxes increased by approximately $0.5 million to $0.8 million for the three months ended March 31, 2005 compared to $0.3 million for the three months ended March 31, 2004.

INTEREST INCOME. Interest income increased 3,854%, or $697,709, to $715,814 for the three months ended March 31, 2005 compared to $18,105 for the three months ended March 31, 2004. The increase in interest income resulted principally from an increase in the amount of cash held in interest bearing accounts, and our investment in marketable debt securities, as the result of our receipt of the proceeds of $56.8 million from the issuance of common stock in the second quarter of Fiscal 2004 and the issuance of $90 million of 3.5% Convertible Subordinated Notes in the fourth quarter of Fiscal 2004.

INTEREST EXPENSE. Interest expense increased $979,934, to $979,934 for three months ended March 31, 2005, from $0 for the three months ended March 31, 2004. The increase in interest expense resulted principally from the issuance on November 1, 2004 of $90 million in principal amount of 3.5% Convertible Subordinated Notes.

NET LOSS. Net loss for the three months ended March 31, 2005 was $6,431,206, as compared to a net loss of $4,866,744 for the three months ended March 31, 2004. 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 and interest income.

Off-Balance Sheet Transactions

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

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities during the three months ended March 31, 2005, amounted to $5,479,946, as compared to the $2,864,103 of cash used in operating activities during the three months ended March 31, 2004. The increase in the cash used in operations reflects the increases in our expenses, and in our net loss, as discussed above, as well as the fact that the net loss for the three months ended March 31, 2004 included non-cash equity awards expense of approximately $1.4 million. For both the quarters ended March 31, 2005 and March 31, 2004 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 debt and equity offerings we completed in fiscal 2004 and fiscal 2003.

Investing Activities

Cash used by investing activities during the three months ended March 31, 2005, amounted to $35,847,822 as compared to cash used by investing activities of $95,056 during the three months ended March 31, 2004. This increase in cash used is due to the purchase of property and equipment for the Houston, Texas, and London, England laboratories of $524,165 for the three months ended March 31, 2005 and the net purchases of short-term investments of $35,323,657 for the three months ended March 31, 2005.

Financing Activities

Cash provided by financing activities was $75,000 for the three months ended March 31, 2005, and $102,720 for the three months ended March 31, 2004. In both periods the cash flows represented cash received upon the issuance of common stock. The issuance of common stock in both quarters resulted from the exercise of outstanding common stock options.

Working Capital

Inflation did not have a significant impact on the Company’s results during the three months ended March 31, 2005.

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 for the year ended December 31, 2004 filed with the SEC on March 15, 2005.

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 Interim Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) have conducted evaluations of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. 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. Based upon their evaluation of these disclosure controls and procedures, our Interim Chief Executive Officer and our Chief Financial Officer have concluded that the disclosure controls and procedures were not effective as of the date of such evaluation to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

In our Annual Report on Form 10-K/A for the year ended December 31, 2004, filed with the SEC on April 28, 2005, we disclosed that our assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, which was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (COSO Framework), had identified five material weaknesses, as follows:

• The Company’s accounting systems and control procedures, including certain control procedures that are depended on the review of the Company’s accounting by management, were inadequate to insure that certain indirect costs associated with the production process were properly classified in the Company’s financial statements.

• The Company failed to perform certain control procedures designed to ensure that the financial statement presentations and related disclosures were complete and in accordance with GAAP.

• The Chief Financial Officer is actively involved in the preparation of the financial statements, and therefore cannot provide an independent review and quality assurance function within the accounting and financial reporting group.

• The number of qualified accounting personnel with experience in public company SEC reporting and GAAP is extremely limited. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, by this shortage of qualified resources.

• The Company lacks effective controls to prevent or detect fraud, including that insuring that transactions are properly authorized, in a timely manner. This material weakness exists because of the aggregate effect of multiple significant deficiencies in internal control which affect the Company’s fraud detection and prevention controls, including: a) a failure to effectively implement, follow, and enforce the limits on the delegation of authority for expenditure from the Board of Directors to management, including the failure by management to obtain the required Board approvals for certain expenditures; b) the lack of an effective risk assessment process for the identification of fraud risks; c) a failure to ensure the consistent and timely completion of employee acknowledgments of the Company’s Code of Ethics required by Company policy; d) the lack of an internal audit function or other effective mechanism for ongoing monitoring of the effectiveness of internal controls.

As of March 31, 2005 we have remediated the following material weaknesses that occurred as of December 31, 2004:

• The weaknesses in the Company’s accounting systems and control procedures, including certain control procedures that are depended on the review of the Company’s accounting by management, that made them inadequate to insure that certain indirect costs associated with the production process were properly classified in the Company’s financial statements.

• The Company’s failure to perform certain control procedures designed to ensure that the financial statement presentations and related disclosures were complete and in accordance with GAAP.

The Company plans to continue to implement changes and improvements in its system of internal controls over financial reporting. However, as of March 31, 2005, such additional changes and improvements had not been implemented, and therefore those weaknesses must be deemed to continue to exist at that date. As a result, our Interim Chief Executive Officer and our Chief Financial Officer have concluded that the disclosure controls and procedures were not effective as of March 31, 2005.

During our most recent fiscal quarter, except as described above, 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 6. EXHIBITS

(a) Exhibits

EXHIBIT NO.		IDENTIFICATION OF EXHIBIT
10.1		Employment Agreement dated April 26, 2005 between Isolagen, Inc and Susan Stranahan Ciallella.

10.2		Offer Letter between Isolagen, Inc. and Todd J. Greenspan

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

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

SIGNATURES

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

	ISOLAGEN, INC.


Date: May 9, 2005	By:	/s/ Martin E. Schmieg
		Martin E. Schmieg, CFO and Secretary
		(Principal Financial Officer)