10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number 001-33205

Artes Medical, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	33-0870808
(State of Incorporation)	(I.R.S. Employer Identification No.)
5870 Pacific Center Boulevard	92121
San Diego, California	(Zip Code)
(Address of Principal Executive Offices)

(858) 550-9999

(Registrant’s Telephone Number, Including Area Code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	The NASDAQ Global Market

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

The aggregate market value of the common stock held by non-affiliates of the registrant ( shares) based on the closing price of the registrant’s common stock as reported on the NASDAQ Global Market on June 30, 2007, was $131,477,913. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant have been excluded in that such persons may be deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

As of March 3, 2008, there were outstanding 16,514,163 shares of the registrant’s common stock, par value $.001 per share, and no shares of the registrant’s preferred stock.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. The registrant’s 2008 Annual Meeting of Stockholders is scheduled to be held on June 11, 2008. The registrant will file its definitive proxy statement with the Securities and Exchange Commission not later than 120 days after the conclusion of its fiscal year ended December 31, 2007. In addition, certain exhibits filed with the Securities and Exchange Commission with our prior registration statements and reports are incorporated by reference in Part IV of this report.

ARTES MEDICAL, INC.

ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended December 31, 2007

TABLE OF CONTENTS

			Page
PART I
	ITEM 1.	BUSINESS		4
	ITEM 1A.	RISK FACTORS		29
	ITEM 1B.	UNRESOLVED STAFF COMMENTS		50
	ITEM 2.	PROPERTIES		50
	ITEM 3.	LEGAL PROCEEDINGS		51
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		52
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		53
	ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA		56
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		57
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68
	ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		69
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		69
	ITEM 9A.	CONTROLS AND PROCEDURES		69
	ITEM 9B.	OTHER INFORMATION		71
PART III
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		71
	ITEM 11.	EXECUTIVE COMPENSATION		71
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		71
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		71
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		71
PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		71
SIGNATURES				76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS				77
EXHIBIT 4.2
EXHIBIT 4.19
EXHIBIT 4.20
EXHIBIT 4.21
EXHIBIT 10.43
EXHIBIT 10.44
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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Forward-Looking Statements:

This Annual Report on Form 10-K, particularly in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the documents incorporated herein by reference, include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. Words such as “believe,” “may,” “could” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under Item 1A. “Risk Factors” and those discussed in other documents we file with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.

This Annual Report on Form 10-K contains market data and industry forecasts that were obtained from industry publications, third-party market research and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that the information from these publications is reliable, we have not independently verified, and make no representation as to the accuracy of, such information.

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PART I

Item 1.   Business.

Overview

We are a medical technology company focused on developing, manufacturing and commercializing a new category of injectable aesthetic products for the dermatology and plastic surgery markets. On October 27, 2006, the FDA approved ArteFill, our non-resorbable aesthetic injectable implant for the correction of facial wrinkles known as smile lines, or nasolabial folds, for commercial sale in the United States. We commenced commercial shipments of ArteFill in February 2007. Currently, there are two categories of injectable aesthetic products used for the treatment of facial wrinkles: temporary muscle paralytics, which block nerve impulses to temporarily paralyze the muscles that cause facial wrinkles, and dermal fillers, which are injected into the skin or deeper facial tissues beneath a wrinkle to help reduce the appearance of the wrinkle. Unlike existing temporary muscle paralytics and other dermal fillers, which are temporary, and are comprised of materials that are completely metabolized and absorbed by the body, ArteFill is a proprietary formulation comprised of polymethylmethacrylate, or PMMA, microspheres and bovine collagen, or collagen derived from calf hides. PMMA is one of the most widely used artificial materials in implantable medical devices, and is not absorbed or degraded by the human body. Following injection, the PMMA microspheres in ArteFill remain intact at the injection site and provide a permanent support structure to fill in the existing wrinkle and help prevent further wrinkling. As a result, we believe that ArteFill will provide patients with aesthetic benefits that may last for years.

As part of the FDA approval process for our product ArteFill, we conducted a controlled, randomized, double-masked, prospective, multi-center U.S. clinical trial of 251 patients, in which 128 patients received ArteFill, and 123 patients received a control of either Zyderm^® or Zyplast^®, the leading bovine collagen-based temporary dermal fillers at that time. Patients who received ArteFill in our clinical trial showed wrinkle correction that persisted six months after treatment. In contrast, patients who received the collagen control in our clinical trial had returned to their pre-treatment status by their six-month evaluation. As provided in the study protocol, we offered all control group patients the opportunity to be treated with ArteFill at their six-month evaluation, and 91% of these patients accepted our offer. The safety profiles for ArteFill and the collagen control were comparable. In the 111 patients who were treated with ArteFill and remained in the study at 12 months after treatment, ArteFill demonstrated continued safety and wrinkle correction. We did not evaluate the patients who received the collagen control at 12 months after treatment because these patients had either elected to be treated with ArteFill at their six-month evaluation period or had returned to their pre-treatment status. Our promotion of the efficacy benefits of ArteFill is limited to the six-month efficacy evaluation period and the twelve-months follow up photos that we established as the official endpoint in our U.S. clinical trial.

In 2007, we completed a five-year follow-up study of 145 patients who were originally treated with ArteFill in our U.S. clinical trial. In this follow-up study, patients were evaluated for efficacy and safety at a mean of 5.4 years after their last ArteFill injection. With respect to patients who had received treatment for nasolabial fold wrinkles, independent masked observers compared the wrinkle ratings for these patients at five years to baseline (prior to treatment) with an n=119. The results were statistically significant (p<0.001), with patients showing continued wrinkle correction at five years compared to baseline. Patients also showed continued improvement, demonstrating statistically significant improvement (p=0.002) in wrinkle correction at five years compared to six months after treatment with an n=113. The differences in the number of patients varies based upon the number of patients that returned at each visit and the presence of evaluable photos for masked observer grading. As part of the study, physician investigators and patients were asked to provide their assessment of ArteFill treatment. Over 90% of the physician assessments were either “completely successful” or “very successful;” and over 90% of the patient assessments were either “very satisfied” or “satisfied.” We submitted the data from the study to the FDA for review in order to enhance the product labeling for ArteFill. The 5- year data was published in the December 2007 Filler issue of the peer reviewed Journal of Dermatologic Surgery and presented by key physician opinion leaders at major medical meetings and conferences during 2007.

We market and sell ArteFill to dermatologists, plastic surgeons and cosmetic surgeons in the United States through our direct sales force. We have rapidly increased the size of our direct sales force, from 21 sales

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representatives in September 2007 to more than 40 sales representatives as of March 3, 2008. We intend to expand to 48 sales representatives by June 30, 2008. We target dermatologists, plastic surgeons and cosmetic surgeons whom we have identified as having performed a large number of procedures involving injectable aesthetic products. These physicians are geographically concentrated in major urban centers in the United States. As part of our marketing and sales program, we train physicians in the technique of injecting ArteFill with the goal of optimizing patient and physician satisfaction with our product. To date, more than 1,200 physicians have opened accounts with us to offer ArteFill to their patients, and more than 1,000 dermatologists, plastic surgeons, and cosmetic surgeons completed their ArteFill training in 2007.

Market Opportunity

Market Overview

Aesthetic procedures include non-surgical and surgical treatments to improve or enhance a patient’s physical appearance. According to the American Society for Aesthetic Plastic Surgery, or the ASAPS, there were approximately 9.6 million non-surgical aesthetic procedures performed in the United States in 2007, representing a total consumer market of more than $4.8 billion. The leading non-surgical aesthetic procedure in 2007 was the administration of Botox, followed by hyaluronic acid (a type of dermal filler), laser hair removal, microdermabrasion, and chemical peel and the treatment of varicose veins. Women represented 91% of the patients who underwent non-surgical aesthetic procedures in 2007. Most non-surgical aesthetic procedures are considered to be elective procedures, the cost of which must be paid for directly by patients, and is not reimbursable through government or private health insurance.

Based on published membership numbers of professional medical associations, we believe that there are approximately 24,000 physicians in the dermatology, plastic surgery and cosmetic surgery specialties in the United States.

Based on our market research, we believe that a majority of injectable aesthetic procedures are performed by approximately 2,000 physicians who are primarily concentrated in major urban centers in California, Florida, New York, Texas, Nevada, New Jersey, Arizona and Illinois.

Injectable Aesthetic Treatment Market

According to the ASAPS, injectable aesthetic treatments are the largest and, for dermal fillers, the fastest growing segment of the non-surgical aesthetic treatment market. Injectable aesthetic products are administered through a syringe into the facial skin or deeper facial tissues in order to reduce the appearance of facial wrinkles and scars and to add fullness to the lips and cheeks. The ASAPS reported that, in 2007, approximately 4.5 million injectable aesthetic procedures were performed in the United States, and U.S. consumers spent approximately $2.1 billion on injectable aesthetic treatments.

Industry research conducted by Medical Insight, Inc. projects that the market for injectable dermal filler treatments will expand at a compound annual growth rate through 2011 of more than 25% in the United States and 20% throughout the rest of the world. We believe the rapid growth in the injectable aesthetic treatment market has been, and will continue to be driven largely by:

•  the introduction of new products that offer improved aesthetic benefits and longer lasting results;

•  an increasing demand for minimally invasive and cost-effective aesthetic treatments that offer immediate results;

•  the aging of the baby boomer demographic segment, which currently represents over 25% of the U.S. population;

•  a growing emphasis on self-image driven by the media and an increasingly youth-oriented culture; and

•  a growing trend among physicians to offer elective aesthetic treatments to generate additional income.

As noted above, currently, there are two categories of injectable aesthetic products: temporary muscle paralytics and dermal fillers. Temporary muscle paralytics block nerve impulses to temporarily paralyze the muscles that cause facial wrinkles. Dermal fillers are injected into the skin or deeper facial tissues to “plump up” the skin under a wrinkle or scar or to add fullness to tissues such as lips and cheeks. Because the substances contained in

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these products are completely metabolized and absorbed by the body over time, repeat injections typically are required to maintain the aesthetic effect.

The most widely used injectable aesthetic products currently approved by the FDA for use in the United States for the correction of facial wrinkles include the following, based on the latest available ASAPS data:

			Approximate
			Number of
			Procedures
Product Category	Leading Brands	Ingredient	Performed in 2007
Temporary Muscle Paralytics	Botox® Cosmetic	Botulinum toxin type A		2,800,000
Temporary Dermal Fillers	Captiquetm	Hyaluronic acid (HA)		1,400,000
	Perlane®
	Hylaform®
	Hylaform® Plus
	Restylane®
	Juvedermtm
	CosmoDerm®	Human or bovine collagen		64,000
	CosmoPlast®
	Zyderm®
	Zyplast®
	Radiessetm	Calcium hydroxylapatite (CaHA)		119,000
Non-resorbable Dermal Filler	ArteFill	Purified bovine collagen and PMMA microspheres		12,000

Physicians also may use other injectable products off-label, beyond their FDA-approved labeled indications, to treat facial wrinkles and scars. For example, physicians used Sculptra^®, an injectable product consisting of a combination of saline and poly-L lactic acid, or PLLA, microspheres approved by the FDA for the restoration and/or correction of the signs of facial fat loss in people with human immunodeficiency virus, or HIV, in approximately 45,000 aesthetic procedures in 2006. Similar to the FDA-approved temporary dermal fillers listed above, the substances contained in Sculptra are completely metabolized and absorbed by the body over time.

Injectable aesthetic treatments usually involve multiple injections into the area to be corrected. Treatments typically are administered in less than 30 minutes. Patients often will receive a local anesthetic or nerve block, either topically or by injection, to reduce pain during treatment, especially for the treatment of sensitive areas. The instructions for use of all treatments that contain bovine collagen require physicians to administer a skin test for allergic reactions to bovine collagen approximately 30 days before a patient’s first treatment with the bovine collagen-based product. Historically, approximately 3 to 5% of patients test positive for bovine collagen allergies to other bovine collagen based products. We believe the rate of allergic reactions to bovine collagen is inversely related to the purity of the collagen, and we believe our collagen is of a higher level of purity than historical bovine collagen fillers. In our randomized study, there were no positive skin tests in the 128 patients first randomized to receive ArteFill treatment or the 106 control patients who elected to receive ArteFill injections in the cross-over cohort. We are currently in discussions with the FDA to determine what data they require in order to remove our skin test requirement.

Market Dynamics for Injectable Aesthetic Treatments

The market for injectable aesthetic treatments is characterized by the following:

Rapid market acceptance of innovative and/or longer lasting aesthetic products.  Injectable aesthetic products that offer new or improved benefits and/or longer lasting aesthetic effects have often achieved rapid market acceptance. Recent examples include:

•  Botox Cosmetic.  Botox treatments are the most common aesthetic procedure performed in the United States. According to the ASAPS, approximately 2.8 million Botox treatments for aesthetic use were

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performed in the United States in 2007. Since 1997, Botox treatments have experienced an annual growth rate of 46%.

•  Restylane.  Launched in January 2004, Restylane, a product comprised primarily of hyaluronic acid, a jelly-like substance that is found naturally in living organisms and acts to hydrate and cushion skin tissue, has become the leading temporary dermal filler approved by the FDA for the correction of facial wrinkles. According to the ASAPS, the number of hyaluronic acid-based procedures has increased significantly over the past several years, with 1.4 million procedures in 2007. We believe this increase was mainly attributable to the market launch of Restylane, which provides patients with a moderately longer lasting aesthetic benefit compared to prior leading temporary dermal fillers, such as the collagen-based Zyderm and Zyplast, and does not require a skin test prior to treatment like bovine collagen-based products.

•  Juvéderm.  Launched in 2006, Juvéderm is a product also comprised primarily of hyaluronic acid. Juvéderm competes with Restylane and does not require a skin test prior to treatment like bovine collagen-based products.

Off-label use of available products.  Physicians may use injectable aesthetic products beyond their specific FDA-approved indications. Off-label usage is common across medical specialties because physicians often use their professional judgment to decide whether an off-label use is the best treatment option for their patients. The FDA does not regulate the behavior of physicians in their choice of treatment options. The FDA does, however, strictly prohibit a manufacturer’s promotion, advertising and labeling of all off-label uses. FDA penalties for promoting products off-label can include adverse publicity, warning letters, fines, civil and criminal penalties, injunctions and product seizures.

The following table highlights common off-label uses for several major injectable aesthetic products as compared to their FDA-approved indications:

		Approved by the
		FDA for the
Product	Leading	Treatment of	FDA-Approved	Common Off-Label
Formulation	Brand(s)	Facial Wrinkles	Indications	Uses
Botulinum toxin type A	Botox Cosmetic	Yes	Moderate to severe frown lines	Forehead wrinkles; crow’s feet; and vertical neck bands
Hyaluronic acid	Captique, Perlane, Hylaform, Restylane, Juvederm	Yes	Moderate to severe facial wrinkles and folds, such as smile lines	Forehead wrinkles; lip augmentation; and acne scars
Bovine or human collagen	CosmoDerm, CosmoPlast, Zyderm, Zyplast	Yes	Soft tissue contour deficiencies such as wrinkles and acne scars	Lip augmentation
Calcium hydroxylapatite (CaHA)	Radiesse	Yes	Vocal cord augmentation, radiographic tissue marking, and oral maxillofacial defects, moderate to severe facial wrinkles and folds, such as nasolabial folds	Frown lines; marionette lines; lip augmentation
Poly-L lactic acid (PLLA)	Sculptra	No	Facial fat loss associated with HIV	Smile lines; marionette lines; and facial contours

Use of injectable aesthetic products as complementary treatments.  Physicians commonly offer their patients aesthetic treatments that incorporate multiple products or procedures. For example, physicians commonly use more

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than one injectable aesthetic product during a single treatment procedure to achieve a desired result, such as combining Botox with a dermal filler. Physicians also increasingly use longer lasting injectable aesthetic products during surgical procedures, such as facelifts, nose reconstructions and breast reconstruction.

Growing consumer base for injectable aesthetic treatments.  Increasing consumer awareness and social acceptance of injectable aesthetic procedures have driven more patients to consider these procedures for the first time. Additionally, during initial patient consultations or following an initial aesthetic treatment, physicians who perform aesthetic procedures commonly inform their patients about other available injectable aesthetic products and cosmetic treatment options.

Limitations of Current Treatments

All other injectable aesthetic products currently approved by the FDA for the treatment of facial wrinkles contain substances that are readily absorbed and completely metabolized by the body, rendering their aesthetic effects relatively short-lived.

The temporary duration of these products limits their usefulness to physicians and patients in the following way:

•  Patients must undergo repeat injections to sustain aesthetic benefits.  In order to sustain the desired aesthetic benefits, patients must undergo repeat injections, which involve additional pain and inconvenience as a result of the multiple facial injections and the recovery time associated with each treatment. Some patients who undergo repeat injections may develop scars and discoloration in the target tissue area.

•  Cumulative cost and inconvenience of repeat injections.  The cumulative cost and inconvenience of repeat treatments required to maintain the desired aesthetic benefits with currently available injectable aesthetic products may decrease the appeal of these products to patients over time. Based on data from the ASAPS, a patient treated with Botox Cosmetic would need to undergo between 10 to 15 treatments over a five year period to maintain the aesthetic benefit. A patient treated with Restylane would need to undergo between five to 15 treatments to maintain the aesthetic benefit over a similar five year period. Based on pricing data reported by the ASAPS, the cumulative cost to the consumer of these treatments would be at least $5,000 over five years.

•  Risk to physician practices of patient attrition.  The expense, pain and inconvenience of a repeat injection regimen can decrease patient satisfaction with injectable aesthetic treatments and lead patients to discontinue treatments. Based on our market research and discussions with physicians, we believe that a significant percentage of patients suspend or cease injectable aesthetic treatments within one year after their first treatment. Patients who discontinue the use of injectable aesthetic products may stop going to the physician’s office altogether, resulting in the physician losing the opportunity to market additional products and services to these patients.

•  Current products may have limited utility in conjunction with aesthetic surgical procedures.  Physicians sometimes use injectable aesthetic products during surgical procedures, such as facelifts, nose reconstructions or other facial reconstruction procedures. The aesthetic effects provided by these products, however, have a much shorter duration than the aesthetic effects provided by surgical procedures. As a result, surgeons have not widely adopted currently available injectable aesthetic products for use in conjunction with surgical procedures.

Injectable products, such as Sculptra, that are used off-label for the correction of facial wrinkles, present similar limitations because they also contain substances that are completely metabolized and absorbed by the body over time. In addition, the aesthetic correction provided by Sculptra typically is not visible until several weeks after the initial treatment. We also believe that the viscosity of Sculptra limits its off-label use primarily to deep facial contour deficiencies and severe wrinkles.

Due to these limitations, and given the growth and rapid adoption of new, improved products within the market for injectable aesthetic products, we believe that a significant market opportunity exists for a safe and effective injectable aesthetic product that can provide patients with immediate and enduring aesthetic effects.

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Our Solution — ArteFill

ArteFill is a novel and proprietary injectable aesthetic implant for the correction of nasolabial folds, or smile lines. In October 2006, the FDA approved ArteFill for commercial sale in the United States, and we commenced commercial shipments of ArteFill in February 2007. ArteFill is the first product in a new category of non-resorbable aesthetic injectable products for the dermatology and plastic surgery markets. Unlike existing temporary muscle paralytics and temporary dermal fillers, which are comprised of materials that are completely metabolized and absorbed by the body, ArteFill is a proprietary formulation comprised of PMMA microspheres and purified bovine collagen. Following injection, the PMMA microspheres in ArteFill remain intact at the injection site and provide a permanent support structure to fill in the existing wrinkle and help prevent further wrinkling. As a result, we believe that ArteFill will provide patients with aesthetic benefits that may last for years. ArteFill has been shown to be safe and effective in our U.S. clinical trials. We believe we have treated over 6,000 patients in 2007. Since launch, there have been a limited number of side effects reported, and those were similar to side effects seen in other dermal fillers. There were no MDR’s reportable to the FDA.

We believe that ArteFill will offer the following benefits to physicians and patients:

•  Enduring aesthetic improvements.  We have developed ArteFill to provide patients with aesthetic benefits that we believe may last for years. Based on clinical trial data, the FDA has determined that ArteFill is safe and effective and has allowed us to characterize it as a non-resorbable aesthetic injectable implant. ArteFill is the first non-resorbable injectable aesthetic product approved by the FDA for the treatment of nasolabial folds. Patients who received ArteFill in our clinical trial showed wrinkle correction that persisted six months after treatment. In contrast, patients who received the collagen control in our clinical trial had returned to their pre-treatment status by their six-month evaluation. As provided in the study protocol, we offered all control group patients the opportunity to be treated with ArteFill at their six-month evaluation, and 91% of these patients accepted our offer. In the 111 patients who were treated with ArteFill and remained in our clinical trial at 12 months after treatment, ArteFill demonstrated continued safety and wrinkle correction. We did not evaluate the patients who received the collagen control at 12 months after treatment because at their six-month evaluation period, these patients had either elected to be treated with ArteFill or had returned to their pre-treatment status. Our promotion of the efficacy benefits of ArteFill is limited to the six-month efficacy evaluation period and the twelve-month follow up photos that we established as the official endpoint in our U.S. clinical trial.

In 2007, we completed a 5-year follow-up study of 145 patients who were treated with ArteFill in our U.S. clinical trial. In addition to demonstrating the safety profile of ArteFill, the study showed statistically significant (p<0.001) improvement in patient wrinkle correction five years after the patient’s last ArteFill treatment, and a statistically significant (p = 0.002) improvement in wrinkle correction at the five-year point compared to the six-month evaluation period. The FDA is currently reviewing the data from the study which we submitted in order to enhance the product labeling for ArteFill. The 5-year data was published in the December 2007 Filler issue of the peer reviewed Journal of Dermatologic Surgery.

•  Compelling value proposition to patients.  We believe patients treated with ArteFill, versus currently available temporary injectable aesthetic products, will incur meaningfully lower cumulative costs over time to maintain the desired aesthetic effect. As a result, we believe ArteFill will present patients with a compelling value proposition because it will allow patients to avoid the cost of repeat injections required by existing temporary injectable aesthetic products.

•  High levels of patient satisfaction.  We believe that the enduring aesthetic improvements provided by ArteFill may generate high levels of patient satisfaction by decreasing the discomfort, cost and inconvenience associated with frequent re-injections, which are required for existing injectable aesthetic products. As a result, we believe that the increased levels of patient satisfaction provided by our product will contribute to longer term physician- patient relationships. As part of our 5-year follow-up study, physician investigators and patients were asked to provide their assessment of ArteFill treatment. Over 90% of the physician assessments were either “completely successful” or “very successful;” and over 90% of the patient assessments were either “very satisfied” or “satisfied.”

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•  Differentiated, high value product for physician practices.  We believe that the longer lasting aesthetic benefits of ArteFill will enable physicians to offer their patients a premium injectable aesthetic product and generate additional practice revenue per procedure.

•  Complement to surgical and non-surgical aesthetic treatments.  Because of its ability to provide patients with aesthetic benefits that may last for years, we believe that physicians may choose to adopt ArteFill as a valuable complement to the various surgical and non-surgical aesthetic treatments they provide to their patients.

Our Strategy

Our goal is to become a leading medical technology company focused on developing, manufacturing and commercializing a new category of injectable aesthetic products for the dermatology and plastic surgery markets in the United States. We plan to achieve this goal through the following strategies:

•  Establish ArteFill as a leading injectable aesthetic product.  ArteFill is the first product in a new category of non-resorbable aesthetic injectable products for the dermatology and plastic surgery markets. We believe ArteFill will provide patients with aesthetic benefits that may last for years. Therefore, we intend to continue to differentiate ArteFill from other injectable aesthetic products and position ArteFill as the premier enduring injectable aesthetic product for the treatment of nasolabial folds. We are and plan to continue to work closely with key opinion leaders to drive physician and patient awareness of the unique benefits of ArteFill.

•  Provide physicians with comprehensive education and training programs.  In connection with the commercial launch of ArteFill, we have implemented a comprehensive physician education and training program to foster consistent and high-quality injection procedures and results. Our education and training program includes web-based training, in-office and off-site training seminars, as well as physician-to-physician training. We believe our education and training programs will enable physicians to improve patient outcomes and satisfaction. As of December 31, 2007, we trained 1,007 physicians in the use of ArteFill and who are also listed on our physician locator of our product website ArteFill.com. Of these trained physicians, we believe that 665 physicians have ordered and treated patients with ArteFill.

•  Drive the adoption of our products through a direct sales and marketing effort.  We have built a direct sales team of more than 40 sales professionals as of March 3, 2008 and intend to grow the sales force up to 48 sales professionals by June 30, 2008. We target dermatologists, plastic surgeons and cosmetic surgeons whom we have identified as having historically performed a significant number of procedures involving injectable aesthetic products. Based on our market research, we believe that a majority of injectable aesthetic procedures are performed by approximately 2,000 physicians concentrated in several major urban centers in the United States. As part of our marketing efforts, we provide physicians with training, marketing programs and practice support services with respect to the use of ArteFill. We also use targeted marketing, advertising and promotional activities to educate consumers about the benefits of ArteFill.

•  Implement programs to increase awareness and demand from consumers.  We have begun several direct marketing initiatives, which include online marketing and regional print advertising and intend to add more initiatives in 2008, including internet marketing, expanded print marketing, and radio advertising. We entered into an agreement with iVillage, the #1 women’s community website, which is viewed by more than 17 million visitors per month. In addition, the Company has placed focused regional print advertising in key publications within major metropolitan markets, including the New York Times: “T” Magazine, which is an insert that reaches 1.7 million readers. To assist us in developing our direct marketing efforts, we have retained Lehman Millet, an advertising agency with experience in the aesthetic device space; Manning, Selvage & Lee, a public relations firm with experience in consumer and beauty; and eVisibility, an Internet marketing firm with experience in on-line marketing and search engine optimization.

•  Expand our product offering by acquiring complementary products, technologies or businesses.  We may expand our aesthetic product offerings by acquiring complementary products, technologies or businesses that may be sold by our direct sales force to dermatologists, plastic surgeons and cosmetic surgeons. We also

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plan to explore additional uses of our injectable microsphere platform technology in markets outside of personal aesthetics through collaborative arrangements with strategic partners.

Our Product

ArteFill is composed of PMMA microspheres (20% by volume) suspended in a water-based carrier gel (80% by volume) containing bovine collagen and lidocaine, a local anesthetic. ArteFill is a smooth, opaque, off-white gel. We sell ArteFill in two kit configurations containing five sterile pre-filled syringes of either 0.4 cc or 0.8cc of ArteFill. We also provide individual skin test kits, with each kit containing five skin test syringes filled with our manufactured bovine collagen.

PMMA Microspheres

ArteFill is a proprietary combination of round and smooth PMMA microspheres, ranging from 30 to 50 microns in diameter, suspended in a bovine collagen-based solution. PMMA is a biocompatible synthetic polymer manufactured to the standards required for use as a long-term medical grade implant. PMMA is one of the most widely used artificial materials in implantable medical devices and has been used for more than 60 years in medical implants such as intraocular lenses and dental prostheses. Scientific studies have shown that PMMA microspheres are both biocompatible and safe for use in humans as soft tissue fillers. These studies also show that human enzymes are unable to metabolize PMMA because of its chemical structure. As a result, PMMA microspheres are not degraded or absorbed by the human body following injection.

The size, shape and smoothness of the PMMA microspheres utilized in a soft tissue filler are important to the product’s biocompatibility. Scientific studies have shown that round and smooth microspheres, such as those contained in ArteFill, cause less adverse tissue response compared to other irregular shapes. We believe that PMMA microspheres with diameters of 30 to 50 microns are within the optimal size range for use in soft tissue fillers because PMMA microspheres of this size are small enough to be easily injected through a standard 26-gauge needle, but are large enough to prevent migration from the implantation site and to avoid removal of the microspheres by white blood cells.

We currently manufacture our PMMA microspheres at our manufacturing facility in Frankfurt, Germany. We have developed a proprietary manufacturing process that generates round and smooth microspheres from medical grade PMMA. This proprietary process ensures that our PMMA microspheres are of the proper size and shape to meet the FDA’s stringent quality requirements. We intend to duplicate the proprietary manufacturing process at our San Diego California facility and submit for FDA approval for commercial use during 2008.

Bovine Collagen

We manufacture the bovine collagen contained in ArteFill at our manufacturing facility in San Diego, California. Bovine collagen has been used by plastic surgeons and dermatologists to treat wrinkles and scars for over 25 years. To ensure both safety and quality, we use a proprietary manufacturing process to produce a highly purified and partly denatured bovine collagen solution from calf hides. Historically, approximately 3-5% of patients test positive for allergies to other bovine collagen-based products. We believe that our collagen is among the most highly purified injectable collagens in the medical industry, and accordingly, may cause a lower incidence rate of allergic reactions in patients, providing us with a competitive advantage over other bovine collagen-based injectable aesthetic products. In our randomized study, there were no positive skin tests in the 128 patients first randomized to receive ArteFill treatment or the 106 control patients who elected to receive ArteFill injections in the cross-over cohort.

In February 2008, we met with the FDA to discuss what data would be needed in order for the FDA to approve treatment with ArteFill without a skin test.

We take numerous precautions to help ensure that our bovine collagen is free from BSE. We purchase our supply of calf hides from a herd that is isolated, bred and monitored in accordance with both FDA and USDA guidelines. This closed herd provides a reliable source of raw material, with backup capabilities in case of natural disasters. We purchase only the hides of male calves younger than six months of age. Studies of BSE outbreaks have

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found that BSE typically manifests itself in female cattle between 40 and 60 months of age. The youngest calf ever detected with BSE was 19 months of age. These studies also have found that BSE is more than 100 times more prevalent in adult females than adult males. We are exploring the use of male calves older than six months, but do not believe that this will increase our risk of BSE. We currently have a two year supply of calf hides in frozen storage at our manufacturing facility and intend to establish and maintain a supply of calf hides that will last for more than two years. The FDA has required that we continue to monitor the stability of our ArteFill product for a sufficient period of time to support the 18-month expiration date in our product label.

Lidocaine

ArteFill contains a local anesthetic, lidocaine (0.3%). Lidocaine reduces patient discomfort during and after the injection process, making ArteFill injections more convenient for patients and physicians than other injectable aesthetic products that do not contain a local anesthetic.

Storage and handling

We sell ArteFill in kits containing five sterile pre-filled syringes, sealed within a thermoformed tray. These kits must be maintained in refrigerated storage at standard domestic refrigerator temperatures (2^o to 8^o C) for the duration of the product shelf life. We ship each kit inside a container designed to maintain the 2^o to 8^o C temperature requirement during transit.

Our Proprietary Microsphere Technology

ArteFill is based on our proprietary combination of PMMA microspheres and bovine collagen, which we believe serves to stimulate the natural growth of a patient’s collagen in the treated area. The bovine collagen in ArteFill provides for the initial correction of a wrinkle and serves to maintain an even distribution of the PMMA microspheres at the injection site, while the PMMA microspheres act as a scaffold for the patient’s own collagen deposition. After implantation, the bovine collagen is gradually metabolized and absorbed by the patient’s body. At the same time, the collagen-coated PMMA microspheres stimulate fibroblasts, which are cells naturally present in the patient’s body, to produce collagen that encapsulates each individual microsphere. The PMMA microspheres are designed not to migrate from the injection site while the patient’s own collagen replaces the bovine collagen component of ArteFill. The treated area eventually consists of the patient’s own collagen encapsulating each of the PMMA microspheres. We believe that the encapsulation of the PMMA microspheres by the patient’s own collagen will provide aesthetic improvements that may last for years.

ArteFill Treatment

ArteFill is administered primarily in an out-patient clinical setting, such as a physician’s office. Treatment with ArteFill requires between 15 and 30 minutes. Similar to the application of several widely used temporary dermal fillers, the physician administers ArteFill through a commonly used tunneling injection technique, in which the physician moves the needle linearly beneath the skin wrinkle. The physician can use the thickness of the needle as a gauge to help determine the correct depth of the injection. Because physicians are encouraged to avoid over-correction during the initial injection, patients may require one or two touch-up treatments in intervals of at least two weeks to achieve the desired aesthetic results.

As with all bovine collagen-based products, the instructions for use of ArteFill require physicians to administer a skin test to screen each patient for an allergic reaction to bovine collagen before the patient’s first treatment. The skin test involves the physician injecting our purified bovine collagen into the patient’s forearm skin and the patient monitoring the treatment area for 28 days. If there are no signs of irritation during the 28-day monitoring period, the patient can proceed with the ArteFill treatment. We believe that our collagen is among the most highly purified injectable collagens in the medical industry and that our collagen accordingly may result in a lower rate of allergic reactions in patients, providing us with a competitive advantage over other bovine collagen-based injectable aesthetic products. In February 2008, we met with the FDA to discuss what data would be needed in order for the FDA to approve treatment with ArteFill without a skin test.

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Our Physician Training and Education Program

The goal of our training program is to maximize patient and physician satisfaction with ArteFill by fostering consistent and high-quality injection procedures. As part of our commercial launch, we initiated a comprehensive training program in order to ensure that physicians are trained to inject ArteFill using a common tunneling injection technique. We offer ArteFill only to physicians who have successfully completed our training program. We have focused and intend to continue to focus on training those physicians whom we have identified as having significant experience in performing injectable aesthetic procedures using the tunneling injection technique. As of December 31, 2007, we trained 1,007 physicians in the use of ArteFill. We have designed our training program to be adaptable to each physician’s level of prior experience with this technique. Our training program includes the following modules:

•  Web-based Training.  We offer physicians a 30 minute web-based interactive tutorial on ArteFill’s scientific background, clinical trial information, injection technique and treatment guidelines.

•  In-office Training.  We offer physicians who have significant experience with the tunneling injection technique a training program in their offices. The training includes an injection technique video, an injection training manual and reference materials.

•  Training Seminars/Hands-on Training.  Other physicians participate in a half-day educational program that provides in-depth injection technique training. The program includes live demonstrations and hands-on practice injecting ArteFill. We also provide training support, an injection training manual and reference materials.

•  Physician-to-Physician Training.  We have established a peer training program, through which physicians who are highly skilled in the tunneling injection technique and have completed our training program may participate in training other physicians.

Sales and Marketing

We commenced commercial shipments of ArteFill in February 2007. We have built a direct sales force in the United States to sell ArteFill into the dermatology and plastic surgery markets. We target dermatologists, plastic surgeons and cosmetic surgeons whom we have identified as having performed a large number of procedures involving injectable aesthetic products. We market ArteFill through our sales and marketing organization, which consisted of more than 40 sales professionals as of March 3, 2008. We intend to expand our sales force to 48 sales professionals by June 30, 2008, in order to provide better account management coverage and be able to expand up to 1,800 trained physicians by December 31, 2008.

Within the dermatology and plastic surgery markets, we believe that there are approximately 24,000 physicians in the United States, including approximately 14,000 dermatologists, 7,500 plastic and reconstructive surgeons and 2,500 facial/ear-nose-and-throat plastic surgeons. However, we believe that only approximately 6,000 of these physicians offer injectable aesthetic products to their patients.

Furthermore, we believe that a majority of injectable aesthetic procedures are performed by approximately 1,000 physicians who are concentrated in major urban centers in the United States, including California, Florida, New York, Texas, Nevada, Arizona and Illinois. Our initial sales effort has and will continue to target these highly experienced physicians and we expect that the size of our direct sales organization is appropriate to support our commercial launch. We believe that targeting physicians highly experienced with the injection technique used to administer ArteFill will help drive market adoption.

We believe that the advantages of ArteFill over currently available injectable aesthetic treatments for the correction of facial wrinkles will allow us to position ArteFill as a premium injectable aesthetic product. According to our market research, we believe temporary injectable aesthetic products are not meeting all of the needs of patients and physicians for lasting treatment results, value and convenience. Based on its product attributes, we believe ArteFill fills a void that currently exists in the market for injectable aesthetic products. As a result, we market ArteFill to physicians at a premium price, supported by the positioning of ArteFill as the first non-resorbable aesthetic injectable implant for the treatment of nasolabial folds. Based on our market research, we believe patients

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are willing to pay a premium price for ArteFill when they understand that the cost of ArteFill will be lower than the cumulative costs of the treatment regimen required by currently available temporary injectable aesthetic products.

As part of our marketing strategy, we have developed programs to support physicians and their practices and to foster a mutual commitment to patient satisfaction. Specifically, these programs include:

•  technical skill support programs, such as advanced injection training symposia;

•  promotional materials that provide a physician’s patients with information about ArteFill treatments;

•  marketing programs to assist physicians in developing their patient base for ArteFill; and

•  participation in our web-based physician locator service.

•  consumer oriented programs to drive brand awareness.

We market and plan to continue to market ArteFill to physicians through scientific presentations at key medical conferences and symposia, advertising in scientific journals, industry trade publications and our website. We have and intend to continue to publish scientific articles to expand physician awareness of our product, and we have and intend to continue offer clinical forums with recognized expert panelists to discuss their experience with ArteFill. We are striving to build consumer awareness of ArteFill through physician office marketing programs, health and lifestyle magazine advertisements and our website. We have begun several direct marketing initiatives, which include online marketing and regional print advertising. We entered into an agreement with iVillage, the #1 women’s community website, which is viewed by more than 17 million visitors per month. In addition, the Company has placed focused regional print advertising in key publications within major metropolitan markets, including the New York Times: “T” Magazine, which is an insert that reaches 1.7 million readers. We plan to add more initiatives in 2008, including internet marketing, expanded print marketing, and radio advertising. To assist us in developing our direct marketing efforts, we have retained Lehman Millet, an advertising agency with experience in the aesthetic device space; Manning, Selvage & Lee, a public relations firm with experience in consumer and beauty; and eVisibility, an Internet marketing firm with experience in on-line marketing and search engine optimization.

Manufacturing

We have established our 35,000 square foot dedicated manufacturing facility and corporate headquarters in San Diego, California for the production of ArteFill. At this facility, we utilize a proprietary manufacturing process to produce purified and partly denatured bovine collagen from calf hides for the water-based carrier gel, which includes 3.5% purified bovine collagen. Our proprietary process includes viral inactivation, extraction, purification and sterile filtration of the collagen. Our viral inactivation procedure employs two separate validated process steps to inactivate potential viruses in the bovine corium, or inner layer of the calf skin. In addition, we treat our bovine collagen with sodium hydroxide to inactivate potential viruses. We create the final product at this facility by evenly suspending our PMMA microspheres within the water-based carrier gel, which includes 0.3% lidocaine, through our proprietary sterile mixing and syringe filling process. We then package the sterile pre-filled syringes into kits, where each kit contains five sterile pre-filled syringes of either 0.4 cc or 0.8cc of ArteFill.

We conduct our manufacturing operations at our San Diego facility using sterile and calibrated equipment in dedicated controlled rooms suitable for maintaining product sterility consistent with Good Manufacturing Practice, or GMP, regulations.

Our clean room facilities include equipment sterilizers and a water purification system, and are controlled by an integrated building management system that monitors and regulates air handling and temperature. Our product packaging and labeling capabilities include sealing validations, sterile barriers, transit testing, stability testing, as well as process-validated labeling and barcode generation. We believe our San Diego facility will be capable of supporting our manufacturing, distribution and product development requirements for the foreseeable future.

We currently manufacture our PMMA microspheres at our 3,550 square foot dedicated manufacturing and warehouse facility in Frankfurt, Germany. We utilize a proprietary manufacturing process that generates round and smooth microspheres from medical grade PMMA. The process extracts microspheres ranging from 30 to 50 microns

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in diameter, and ensures that no more than 1% of the total number of microspheres are smaller than 20 microns in diameter. We then sterilize and package the microspheres and ship them to our San Diego manufacturing facility for final inspection and use in ArteFill. We believe our Frankfurt facility has sufficient capacity to meet our needs for PMMA microspheres for the foreseeable future. We intend to implement redundant capabilities for the production of PMMA microspheres at our San Diego facility and plan to submit to the FDA for the approval for commercial use of this new capability in 2008. In addition, we plan to further improve and automate our production process in San Diego.

Manufacturing facilities that produce medical devices intended for distribution in the United States and internationally are subject to regulation and periodic unannounced review by the FDA and other regulatory agencies. On October 27, 2006, the FDA issued final certification of our facilities in connection with its approval of ArteFill for sale in the United States. Manufacturing facilities that produce medical devices intended for sale and distribution in the European Economic Community, or EEC, are subject to regulatory requirements of the Medical Devices Directive, or MDD, as well as various International, or ISO, and European National, or EN, standards. In Europe, Notified Bodies are responsible for the enforcement of MDD regulations. In January 2006, KEMA, a European Notified Body, issued to us a quality system certificate indicating that our facilities are in compliance with ISO 13485:2003, the internationally recognized quality system standard for medical device manufacturers.

We have limited experience in manufacturing commercial quantities of ArteFill. While we believe that our current facilities will be sufficient to manufacture an adequate supply to meet the demand for ArteFill through the next several years, in order to produce ArteFill in the quantities we anticipate will be necessary to meet future market demand, we will need to increase our manufacturing capacity significantly over the current level.

Material Agreements

Intercompany Manufacturing and Supply Agreement

We have in place an intercompany manufacturing and supply agreement with our wholly-owned subsidiary, Artes Medical Germany GmbH, or Artes Medical Germany, pursuant to which Artes Medical Germany exclusively manufactures and supplies to us the PMMA microspheres used in ArteFill. Under the terms of this agreement, pricing for the PMMA microspheres is based on Artes Medical Germany’s actual documented production costs, determined in accordance with generally accepted accounting principles in the United States, subject to adjustment, plus an additional manufacturing profit. This agreement has an indefinite term, but may be terminated by either us or Artes Medical Germany for cause, or by us in the event of a supply failure or for convenience at any time upon ninety days’ prior written notice of termination to Artes Medical Germany.

Master Services Agreement

We entered into a master services agreement with Therapeutics Inc., an independent clinical research organization, to conduct clinical studies for our company, including the 5-year post-approval safety study required by the FDA as part of its approval of ArteFill. Therapeutics Inc. will conduct project management, medical monitoring, case reports, subject recruitment, data analysis and other clinical study activities for clinical studies we initiate or that are conducted by third parties under a grant we provide to the third parties. This agreement has an initial term of 3 years.

Supply Agreement

We also have in place a supply agreement with Lampire Biological Labs, Inc., or Lampire, pursuant to which Lampire sells to us bovine corium, which we use to produce our highly purified and partly denatured bovine collagen contained in ArteFill. Under the terms of this agreement, pricing is based on unit fees for the acquisition of calves and for processing. Lampire has agreed to process the bovine corium in strict accordance with general and manufacturing process requirements to ensure safety and quality, and to ensure that our bovine collagen is free from BSE. The agreement requires that we purchase at least $612,000 of bovine corium during the one-year term. This agreement is subject to automatic renewals of successive one-year periods. Lampire is our sole supplier of bovine corium.

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Settlement and License Agreement

In October 2005, we and Dr. Martin Lemperle entered into a settlement and license agreement with BioForm Medical, Inc. and BioForm Medical Europe B.V., pursuant to which all outstanding disputes and litigation matters among the parties were settled. Under the agreement, we granted to the BioForm entities an exclusive, world-wide, royalty-bearing license under certain of our patents to make and sell implant products containing CaHA particles, and a non-exclusive, world-wide, royalty-bearing license under the same patents to make and sell certain other non-polymeric implant products, and the BioForm entities paid us a technology access fee of $2.0 million for these rights. Under the terms of the agreement, we are entitled to bring suit, at our own expense, to enforce the licensed patents against any third party infringers and to retain any and all damages, including damages for harm to the sales of BioForm, its affiliates or its sublicensees, obtained by us in our efforts to stop the infringement. BioForm has agreed to provide reasonable cooperation to us in connection with any such enforcement action. In the event we are involved in a bankruptcy proceeding or discontinue our business, then BioForm may, at it own expense and for its own benefit, enforce the licensed patents. The settlement and license agreement remains in effect so long as any of the patents licensed under the agreement continues to have at least one valid and enforceable claim that has not expired, lapsed, or been disclaimed or permanently abandoned. BioForm may terminate the agreement only if all licensed patents that remain in force are in force solely by virtue of extensions to the original patent terms, and the extensions do not cover any products of BioForm or its sublicensees under the agreement.

On September 21, 2007, we entered into a second license agreement with BioForm. Under the second agreement, BioForm pre-paid all future royalty obligations to the Company by making two payments totaling $5.5 million. These payments replaced any future royalty obligation of BioForm to the Company under the settlement and license agreement, dated October 31, 2005. We received payment of the $5.5 million from BioForm in the fourth quarter of 2007.

Financing Arrangement

In January 2008, we entered into a financing arrangement with Cowen Healthcare Royalty Partners, L.P., or CHRP, to raise $21.5 million, and up to an additional $1 million in 2009 contingent upon our satisfaction of a net product sales milestone. We intend to use the proceeds to expand both our dedicated U.S. sales force and consumer outreach programs. We used $8.6 million of the proceeds to payoff and terminate our existing credit facility with Comerica Bank. The financing closed on February 12, 2008, resulting in net proceeds of $12.6 million after the repayment of our debt to Comerica Bank and payment of certain transaction expenses.

Under the revenue interest financing and warrant purchase agreement, or Revenue Agreement, CHRP acquired the right to receive a revenue interest on our U.S. net product sales from October 2007 through December 2017. We are required to pay a revenue interest on U.S. net product sales of ArteFill^®, any improvements to ArteFill^®, any internally developed products and any products in-licensed or purchased by us, provided that such improvements, internally developed, in-licensed or purchased products are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or dermatologic procedures. The scope of the products subject to CHRP’s revenue interest narrows following the date the cumulative payments we make to CHRP first exceed a specified multiple of the consideration paid by CHRP for the revenue interest. In addition, we are required to make two lump sum payments of $7.5 million to CHRP, the first in January 2012 and the second in January 2013.

In the event of (i) a change of control, (ii) a bankruptcy or other insolvency event, (iii) subject to a cure period, material breach of the covenants, representations or warranties in the financing documents, each a “put event”, CHRP has the right to require us to repurchase from CHRP its revenue interest at a price in cash which equals the greater of (a) a specified multiple of cumulative payments made by CHRP under the Revenue Agreement less the cumulative payments previously paid by us to CHRP under the Revenue Agreement; or (b) the amount which will provide CHRP, when taken together with the payments previously paid under the Revenue Agreement, a specified rate of return. The Revenue Agreement contains certain customary representations, warranties and indemnities.

Under the Revenue Agreement, we issued CHRP a warrant to purchase 375,000 shares of common stock, at an exercise price equal to $3.13 per share. This warrant has a 5 year term, and allows for cashless exercise.

As part of the financing, we also entered into a note and warrant purchase agreement or the Note and Warrant Agreement with CHRP pursuant to which we agreed to issue and sell to CHRP, at the closing of the financing, a

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10% senior secured note in the principal amount of $6,500,000. The note has a term of five (5) years and bears interest at 10% per annum, payable monthly in arrears. We have the option to prepay all or a portion of the note at a premium. In the event of an event of default, with “event of default” defined as (i) a put event, (ii) a failure to pay the note when due, (iii) our material breach of its covenants and agreements in the Note and Warrant Agreement, (iv) our failure to perform an existing agreement with a third party that accelerates the majority of any debt in excess of $500,000 or (v) subject to a cure period, material breach of the covenants, representations or warranties in the financing documents, the outstanding principal and interest in the note, plus the prepayment premium, shall become immediately due and payable.

Under the Note and Warrant Agreement, we issued CHRP a warrant to purchase 1,300,000 shares of common stock, at an exercise price equal to $5.00 per share. This warrant has a 5 year term, and allows for cashless exercise.

Under the Revenue Agreement and the Note and Warrant Agreement, we have agreed not to, without the prior written consent of CHRP: (i) create any liens, other than specific permitted liens, (ii) sell or dispose of all of any material part of its business or property, (iii) merge or consolidate with or into any other business organization, with limited exceptions, (iv) incur any debt other than specific permitted debt, and (v) pay any distributions or dividends to holders of its capital stock. We have also agreed to take actions to maintain CHRP’s security interests and to take commercially reasonable actions to maintain its intellectual property and other assets.

Pursuant to the terms of the Revenue Agreement and the Note and Warrant Agreement, we entered into security agreements in favor of CHRP to secure our performance under the financing documents. Under the security agreement contemplated by the Revenue Agreement, we granted to CHRP a security interest in and to the rights underlying the revenue interest, including our intellectual property, regulatory approvals, clinical data, license and other rights related to ArteFill^® and to any other products included in the revenue interest, or the Underlying Rights. We also granted to CHRP a second priority interest in the Underlying Rights, and a first priority interest in all other assets of the Company, under the security agreement contemplated by the Note and Warrant Agreement. Subject to certain limits, the security agreements permit us to obtain a revolving line of credit secured by our inventory and accounts receivable.

In addition to the security agreements, we entered into a joint bank account arrangement with CHRP that provides that the revenue interest percentage will be transferred each business day to CHRP.

We and CHRP also entered into an investor rights agreement, under which we agreed to file a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of the shares underlying the warrants issued to CHRP.

Under the investor rights agreement, we also agreed to elect two individuals designated by CHRP to our Board of Directors, including: (i) an employee of CHRP, or the CHRP Director, and (ii) an individual with relevant experience in the Company’s industry and who is acceptable to a majority of the then serving directors on the Board, or the Industry Director. On February 12, 2008, Todd Davis, a Managing Director of Cowen Healthcare Royalty GP, LLC, the General Partner of CHRP, was elected to the Board as the CHRP Director. The Industry Director will be elected when CHRP and our Board identify a qualified candidate. Mr. Davis was elected as a Class I director, with a term ending at the annual meeting of stockholders held in 2010. The Industry Director will serve as a Class II director, with a term ending at the annual meeting of stockholders held in 2011. Our Board will, subject to its fiduciary obligations, use commercially reasonable efforts to continue to nominate two individuals designated by CHRP to serve as the CHRP and Industry Directors at each election of directors until the earliest to occur of: (i) December 31, 2017, (ii) the date the cumulative payments to CHRP made by the Company with respect to the Revenue Agreement first exceed a specified multiple of the consideration paid to the Company by CHRP or (iii) upon a change of control. If at any time the CHRP Director is not serving on the Board, CHRP will have a right to participate in all meetings of the Board in a nonvoting observer capacity.

Competition

The market for injectable aesthetic products is intensely competitive, subject to rapid change and significantly affected by new product introductions. We compete against other medical technology and pharmaceutical companies who market aesthetic products. In the United States, we compete primarily with companies that offer

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temporary injectable aesthetic products approved by the FDA for the correction of facial wrinkles, such as Medicis Pharmaceutical Corporation, Allergan, Inc. and BioForm Medical, Inc. In addition, we compete with companies that offer products that physicians currently use off-label for the correction of facial wrinkles, including Dermik Laboratories, a subsidiary of sanofi-aventis. A number of companies, such as Mentor Corporation and Johnson and Johnson, are currently developing new products that may be used for the treatment of facial wrinkles, although we believe none of them involve a non-resorbable injectable aesthetic implant. We also compete with companies that offer different treatments for facial wrinkles, including topical cosmeceuticals and creams, chemical peels, laser skin treatments and microdermabrasion.

To compete effectively, we need to demonstrate that ArteFill is a unique and attractive alternative to these other products and treatments. We believe the principal competitive factors in our market include:

•  safety and efficacy;

•  immediate and enduring aesthetic results;

•  cost-effectiveness to patients and physicians;

•  reduced pain and recovery time before a patient can return to normal activities;

•  effectiveness of marketing and distribution; and

•  ability to leverage existing relationships with physicians and distributors.

Government Regulation

ArteFill is classified as a medical device and is subject to extensive and rigorous regulation by the FDA, as well as by other federal and state regulatory bodies in the United States and comparable authorities in other countries. FDA regulations govern the following activities that we perform, or that are performed on our behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:

•  product design, development and manufacture;

•  product safety, clinical testing, labeling and storage;

•  pre-marketing clearance or approval;

•  record-keeping procedures;

•  product marketing, sales and distribution; and

•  post-marketing surveillance, reporting of deaths or serious injuries and medical device reporting.

FDA’s Pre-market Clearance and Approval Requirements

Unless an exemption applies, each medical device we wish to distribute commercially in the United States will require either prior 510(k) clearance or PMA from the FDA. Medical devices are classified into one of three classes — Class I, Class II, or Class III — depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Devices deemed to pose lower risks are placed in either Class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices like ArteFill, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring PMA. ArteFill is a Class III device that required approval of a PMA application.

510(k) Clearance Pathway

When a 510(k) clearance is required, we must submit a pre-market notification to the FDA demonstrating that our proposed device is substantially equivalent to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the

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submission of a PMA application. By regulation, the FDA is required to clear or deny a 510(k) pre-market notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer.

The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously cleared device or use, the FDA will place the device, or the particular use, into Class III. We currently do not have any products in development that would qualify for 510(k) clearance.

Pre-market Approval Pathway

A PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The PMA application process is much more demanding and uncertain than the 510(k) pre-market notification process. A PMA application must be supported by extensive data, including but not limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. After a PMA application is submitted and the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application for review. The FDA has 180 days to review an “accepted” PMA application, although the review of an application generally occurs over a significantly longer period of time and can take up to several years. During this review period, the FDA may request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with QSRs. New PMA applications or PMA application supplements are required for a significant modification to the manufacturing process, labeling and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel. FDA review of most PMA applications and PMA supplements is subject to payment of a user fee, ranging from $18,000 to $259,000 (in fiscal year 2006), with reduced fees applicable to small business concerns.

Clinical Trials

Clinical trials are almost always required to support a PMA approval and are sometimes required for 510(k) clearance. In the United States, these trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specific number of patients unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. Clinical trials for significant risk devices may not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. Our clinical trials must be conducted under the oversight of an IRB at the relevant clinical trial sites and in accordance with FDA regulations, including but not limited to those relating to good clinical practices. We are also required to obtain patients’ informed consent that complies with both FDA requirements and state and federal privacy regulations. We, the FDA or the IRB at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and efficacy of the device, may be equivocal or may otherwise not be sufficient to obtain approval of the product. Similarly, in Europe the clinical study must be approved by the local ethics committee and in some cases, including studies with high-risk devices, by the Ministry of Health in the applicable country.

Regulatory Status of ArteFill

In April 2002, we submitted to the FDA a PMA application for our product candidate. We initially named the product used in our clinical trials Artecoll, but later changed the name of our product candidate to ArteFill to reflect refinements that we made to the PMMA microsphere manufacturing process.

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In February 2003, an independent expert advisory panel on general and plastic surgery devices recommended that our PMA application be considered approvable. The FDA adopted the recommendations of the panel, and in January 2004 the FDA issued a letter informing us that our PMA application was approvable, subject to the fulfillment of two conditions. The first condition to approval required us to demonstrate that we can manufacture the bovine collagen component of ArteFill at a dedicated manufacturing facility according to FDA quality requirements. The second condition to approval was the submission of a post-market study protocol for examining the potential incidence of delayed granuloma formation in patients treated with ArteFill. A granuloma is an inflammatory reaction to a foreign body that results in redness and hardening of tissue at the injection site. Granuloma formation has been reported to occur in patients treated with all dermal fillers. In the case of temporary dermal fillers, this condition can dissipate when these fillers biodegrade and are reabsorbed by the body. In the case of ArteFill, which is a non-resorbable aesthetic injectable implant containing PMMA microspheres that will not be absorbed or degraded by the human body, it is believed that granuloma formation could occur at any time after injection, although we, the FDA and the medical community currently do not have long-term data regarding the incidence rate of granuloma formation in patients treated with ArteFill. As a result, the FDA has required us to conduct this post-market study to examine whether treatment with ArteFill affects the incidence rate of granuloma formation. We are required to identify the methods by which we will monitor approximately 1,000 patients for granuloma formation for a period of five years after the date of their initial treatment. The FDA has informed us that our proposed protocol is acceptable and we began our five year post market study in September 2007.

In January 2006, we submitted an amendment to our PMA application to address the conditions set forth in the FDA’s approvable letter. In March 2006, the FDA completed inspections of our manufacturing facility and our contract sterilizer in Frankfurt, Germany, with no observations noted. In addition, the FDA completed a comprehensive pre-approval inspection of our primary manufacturing facility in San Diego, California, in April 2006. During this inspection, the FDA noted four minor observations, all of which were corrected and annotated to the inspection report as corrected. On May 3, 2006, the FDA issued an EIR, indicating that its inspection of our manufacturing facilities was completely closed, requiring no further action on the part of our company related to the inspection. On October 27, 2006, the FDA approved ArteFill for the correction of facial wrinkles known as smile lines, or nasolabial folds.

In early 2007, we completed a five-year follow-up study of 145 patients who were treated with ArteFill in our U.S. clinical trial. We submitted the results of our five-year follow-up study to the FDA in March 2007 to seek approval to enhance product labeling that would allow us to claim efficacy benefits of ArteFill beyond six months. We received the FDA’s comments to our submission and their request for additional information in August 2007. We are currently supplying this information to the FDA for consideration to complete their review of the supplement and enabling us to enhance the product label. There can be no assurance, however, that we will be successful in obtaining FDA approval to claim that the aesthetic benefits of ArteFill extend beyond six months or to expand our product labeling to cover additional indications.

In February 2008, we met with the FDA to discuss what data would be needed in order for the FDA to approve treatment with ArteFill without a skin test. There can be no assurance, however, that any data that we gather will be acceptable by the FDA or sufficient for the FDA to approve treatment with ArteFill without a skin test.

Pervasive and Continuing Regulation

After a device is placed on the market, numerous regulatory requirements continue to apply. These include:

•  the FDA’s QSRs, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

•  labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses;

•  clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use;

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•  medical device reporting, or MDR, regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; and

•  post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

We have registered with the FDA as a medical device manufacturer and have received a manufacturing license from the California Department of Health Services, or CDHS.

We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDHS, or FDB, to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

•  warning letters, fines, injunctions, consent decrees and civil penalties;

•  repair, replacement, refunds, recall or seizure of our products;

•  operating restrictions, partial suspension or total shutdown of production;

•  refusing our requests for 510(k) clearance or PMA of new products, new intended uses or modifications to existing products;

•  withdrawing 510(k) clearance or PMAs that have already been granted; and

•  criminal prosecution.

ArteFill Instructions for Use

In connection with approving our PMA application for ArteFill, the FDA also reviewed and approved our Instructions for Use of ArteFill, or our product label. Our product label provides that ArteFill is indicated for the correction of nasolabial folds in the general population, but is contraindicated for use in patients that:

•  have a positive reaction to our ArteFill skin test;

•  have a history of severe allergies manifested by a history or presence of multiple severe allergies;

•  are allergic or hypersensitive to the anesthetic lidocaine contained in ArteFill;

•  have a history of allergies to any bovine collagen products;

•  are prone to thick scar formation and/or excessive scarring; or

•  are undergoing or planning to undergo desensitization injections to meat products.

ArteFill also is contraindicated for augmentation in the body of the lip. Our product label further provides that ArteFill should not be used in patients that have skin outbreaks near the injection site until any outbreak clears and cautions that patients may experience increased bruising or bleeding at the injection site if they are taking aspirin or anti-inflammatory drugs or have any medical condition that affects their blood. In addition, physicians, in order to help their patients make an informed treatment decision, should ask patients if they:

•  have had any treatments for smile lines in the last 6 months;

•  are receiving ultra-violet light therapy; or

•  are currently on immuno-suppressive medications or are suffering from any skin disease.

The product label also provides that the most common adverse events associated with ArteFill injections, similar to those observed with other dermal fillers, are lumpiness, persistent swelling or redness and increased sensitivity at the injection site.

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Promotion and Advertising Restrictions

We may promote and advertise ArteFill only for the correction of nasolabial folds. We are also limited to promoting the efficacy benefits of ArteFill for six months and twelve-month follow up photos. However, physicians may prescribe ArteFill for uses that are not described in its FDA-approved labeling and for uses that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, strictly prohibit a manufacturer’s communications regarding off-label uses. Companies cannot actively promote FDA-approved devices for off-label uses. If the FDA believes we are promoting ArteFill for off-label uses, we could be subject to negative publicity, warning letters, fines, civil and criminal penalties, injunctions and product seizures.

FDA Investigation

In March 2006, the counsel for Dr. Gottfried Lemperle, our former Chief Scientific Officer and a former member of our board of directors, in the Sandor litigation discussed in “Legal Proceedings” below informed us that she had contacted an investigator in the FDA’s Office of Criminal Investigations. She further stated that the FDA investigator informed her that the FDA has an open investigation regarding us, Dr. Gottfried Lemperle and his son, Dr. Stefan Lemperle, our former Chief Executive Officer and a former director, that the investigation had been ongoing for many months, that the investigation would not be completed within six months, and that when the investigation is completed, it could be referred to the U.S. Attorney’s office for criminal prosecution. In February 2008, we contacted the FDA’s Office of Criminal Investigations. That office confirmed that the investigation is ongoing and has been referred to the U.S. Attorney’s office, but did not provide any additional information regarding this investigation or whether the U.S. Attorney’s office may commence an action. For more information, see “Legal Proceedings” below.

International Regulation

As a manufacturer of Class III medical devices, our manufacturing processes and facilities are subject to regulation and review by international regulatory agencies for products sold internationally. A medical device may only be marketed in the European Union, or the EU, if it complies with the Medical Devices Directive (93/42/EEC), or the MDD, and bears the CE mark as evidence of that compliance. To achieve this, the medical devices in question must meet the essential requirements defined under the MDD relating to safety and performance, and we as manufacturer of the devices must undergo verification of our regulatory compliance by a third party standards certification provider, known as a notified body. In January 2006, we received a quality system certificate from a notified body, demonstrating our compliance with ISO 13485:2003, the internationally recognized quality system standard for medical device manufactures. The ISO 13485:2003 certificate represents the first step toward demonstrating compliance with the appropriate medical and statutory requirements for receipt of the CE mark which is needed if we decide to market in the EU and for marketing approval in Canada. At this time, we do not have active plans to market in these regions.

Environmental Regulation

Our present and future business has been and will continue to be subject to various other laws and regulations, including state and local laws relating to such matters as safe working conditions and disposal of potentially hazardous substances.

State and Federal Physician and Healthcare Regulation

Physicians are also subject to various state laws and regulations that govern the practice of medicine, prohibit physicians from accepting payment or remuneration for patient referrals or goods or services, restrict referrals for certain services where a physician has a financial relationship with an entity to whom referrals are made, and mandate certain disclosure requirements for physicians who refer patients to organizations with whom physicians have a significant beneficial interest. These laws include those known as anti-kickback laws and physician self-referral laws. Violations of these laws can lead to fines, civil monetary penalties, incarceration and other

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administrative sanctions by state or federal agencies. We intend to educate our employees and independent contractors regarding these rules and regulations, and to comply with all applicable laws, rules and regulations that may govern the relationships between us and the physicians or healthcare organizations who purchase or administer ArteFill to their patients.

Clinical History

ArteFill is the culmination of more than 20 years of research and development. In 1999, we acquired the U.S. intellectual property rights to ArteFill. In 2004, we acquired all other remaining worldwide intellectual property rights related to ArteFill. These rights included (i) the know-how and trade secrets associated with the bovine collagen manufacturing process used to produce ArteFill and (ii) the know-how, trade secrets and certain assets, including a manufacturing facility in Frankfurt, Germany, relating to the manufacture of the PMMA microspheres contained in ArteFill. Following our acquisition of this technology, we have made further refinements to the PMMA manufacturing process that we believe improve the characteristics and purity of the PMMA microspheres. In addition, to meet the FDA’s requirements for final marketing approval of our PMA application and to prepare for commercialization in the United States, we have established our own dedicated QSR compliant manufacturing facility in San Diego, California to produce the bovine collagen used in ArteFill and to complete the manufacturing, packaging and labeling processes for ArteFill.

U.S. Clinical Trial

To support our PMA application, we completed a double-blind, prospective, controlled, randomized, multi-center clinical trial in the United States in 2001. In this trial, patients were randomized (1:1) either to receive ArteFill, or to receive either Zyderm or Zyplast, the leading bovine collagen-based temporary dermal fillers, as a control. A total of 251 subjects (128 ArteFill, 123 control) were treated at eight dermatology or plastic surgery centers in the United States. Follow-up periods for both safety and efficacy were at one, three and six months. Patients treated with ArteFill were also evaluated at 12 months.

The primary effectiveness endpoint was a comparison of the cosmetic correction provided by ArteFill versus the control treatments at the end of a six-month period after injection. The cosmetic correction was evaluated by means of a validated Facial Fold Assessment Scale, or FFA Scale, using standardized photographs as reference. The numerical values for the FFA Scale are presented in the table below.

Facial Fold Assessment Scale Ratings

Score		Description	Depth
			(Mm)
	0	No folds		—
	1	Folds just perceptible		0.1
	2	Shallow folds with some defined edges		0.2
	3	Moderately deep folds with some well-defined edges		0.5
	4	Deep folds with most edges well-defined and some redundant folds		1.0
	5	Very deep folds with most edges well-defined and some redundant folds		2.0

Comparisons to the standardized reference photos were made by masked observers at pre-treatment and at follow-up visits at one month, three months and six months after treatment. FFA Scale improvement was determined by subtracting each patient’s FFA score on the applicable evaluation date from the patient’s FFA score prior to treatment. Safety was evaluated by comparing the incidence and severity of adverse clinical events during and for 12 months after treatment.

A total of 229 women and 22 men between the ages of 28 and 82 (mean 52.2 years) were enrolled in the study. There were no significant differences in the distribution of age, gender and the facial area treated for the two treatment groups. At six months after treatment, the mean FFA score improvement in subjects who received ArteFill for the treatment of nasolabial folds was 0.8, as compared to a mean FFA score improvement of 0.0 among subjects who received the collagen control treatments. This difference in the level of FFA score improvement in the two

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groups was statistically significant (p<0.001). The difference between the treatments as measured by the improvement in FFA score from baseline was evident beginning three months after treatment.

In addition, the nasolabial fold area showed significantly greater improvement for subjects treated with ArteFill at 12 months than for subjects treated with collagen control at six months, consistent with the comparison of the two treatment groups at six months.

There were no statistically significant differences between the ArteFill and control groups for treatment of glabellar folds, or frown lines, upper lip lines or mouth corners at six months after treatment. The following graph represents results from our clinical trial comparing ArteFill and Zyderm or Zyplast, based on FFA scale improvement over six months.

At six months after treatment, which was the primary efficacy evaluation endpoint, the wrinkle correction in the patients treated with ArteFill persisted, while the patients treated with the collagen returned to their pre-treatment status. At the six-month evaluation, the control group subjects were offered the opportunity to be treated with ArteFill. Of the 123 subjects in the original control group, 116 completed the six-month evaluation and were offered ArteFill as a crossover treatment. Of these, 106 (91%) chose to be treated with ArteFill. In the 111 patients who were treated with ArteFill and remained in the study at 12 months after treatment, ArteFill demonstrated continued safety and wrinkle correction. We did not evaluate the patients who received the collagen control at 12 months after treatment because these patients had either elected to be treated with ArteFill at their six-month evaluation period or had returned to their pre-treatment status. There were no unexpected or serious adverse events reported in patients treated with ArteFill in the clinical trial. Adverse events reported for ArteFill were similar to but lower in number than the adverse events reported for the control group. Throughout the clinical trial, there were no significant differences in the adverse event rates reported for the two treatments. Based on the results of our clinical trial, on October 27, 2006 the FDA approved ArteFill for the correction of nasolabial folds.

Open Label Trial

Prior to commencing our U.S. clinical trial, we conducted an open label, multi-center, single-arm clinical trial study under a conditional FDA IDE approval. The purpose of this study was to assess the safety of ArteFill for the correction of soft tissue defects in the face. A total of 157 subjects were enrolled and were monitored at three, six and 12 months post-treatment. 126 of the 157 (80.2%) subjects completed the one-year study. There were no implant-related severe illness, trauma or death among the subjects treated with ArteFill. A total of 18 adverse events in 17 subjects were reported, most of which were mild to moderate events. Only one severe adverse event related to treatment with ArteFill was reported. The adverse event, a granuloma, was treated with Cipro and, later, surgical excision of the implant. The only other severe adverse event reported in the study resulted from use of the product in a manner contrary to the study protocol.

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Five-Year Follow-up Study

In our U.S. clinical trial we evaluated patients for 12 months after treatment. This evaluation showed that aesthetic benefits of ArteFill persisted and safety remained throughout the one-year study period. Based on this data, the FDA has determined that ArteFill is safe and effective and has allowed us to characterize it as a non-resorbable aesthetic injectable implant. We believe that the aesthetic effects of ArteFill may last for many years.

In 2007, we completed a five-year follow-up study of 145 patients who were originally treated with ArteFill in our U.S. clinical trial. In this follow-up study, patients were evaluated for efficacy and safety at a mean of 5.4 years after their last ArteFill injection. With respect to patients who had received treatment for nasolabial fold wrinkles, independent masked observers compared the wrinkle ratings for these patients at five years to baseline (prior to treatment) with an n=119. The results were statistically significant (p<0.001), with patients showing continued wrinkle correction at five years compared to baseline. Patients also showed continued improvement, demonstrating statistically significant improvement (p=0.002) in wrinkle correction at five years compared to six months after treatment with an n=113. The differences in the number of patients varies based upon the number of patients that returned at each visit and the presence of evaluable photos for masked observer grading.

The most common adverse events observed during the study were lumpiness, persistent swelling or redness at the injection site. The adverse events were similar to those seen with other dermal fillers and those observed in other studies with ArteFill.

As part of the study, physician investigators and patients were asked to provide their assessment of ArteFill treatment. Over 90% of the physician assessments were either “completely successful” or “very successful;” and over 90% of the patient assessments were either “very satisfied” or “satisfied.” The FDA is currently reviewing the data from the study which was submitted in order to enhance the product labeling for ArteFill.

Dr. Mark G. Rubin, Assistant Clinical Professor of Dermatology, University of California, San Diego, Division of Dermatology, presented data from the five year follow up study at the 65th annual meeting of the American Academy of Dermatology in Washington, D.C. on February 2, 2007. Dr. Steven Cohen, the lead investigator in our U.S. clinical trial, previously presented preliminary findings of the five-year follow-up study, which included the results of evaluations for 69 patients, at a conference of the American Society of Plastic Surgeons held in San Francisco, California in October 2006. These interim data for the 69 patients have also been published in the September 1, 2006 supplement to Plastic and Reconstructive Surgery, a peer-reviewed journal. The 5-year data was published in the December 2007 Filler issue of the peer reviewed Journal of Dermatologic Surgery.

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Research and Development

We incurred research and development expenses of $10.2 million, $8.1 million and $6.0 million in fiscal 2005, 2006 and 2007, respectively, primarily related to the development of our manufacturing processes for ArteFill. We currently plan to conduct research and clinical development activities to explore potential improvements and enhancements to ArteFill for aesthetic applications. In 2007, we also entered into a master services agreement with Therapeutics Inc., an independent clinical research organization, to conduct the 5-year post-approval safety study required by the FDA as part of its approval of ArteFill. Therapeutics Inc. will conduct project management, medical monitoring, case reports, subject recruitment, data analysis and other clinical study activities for clinical studies we initiate. We are also providing research grants to third parties to conduct clinical trials in a variety of areas, including treatment of acne scars and other depressed atrophic scars, improvement of nasal contour deformities and comparisons to other commercially available dermal fillers.

While these activities are centered around the current composition of ArteFill, the Company has made a substantial investment in new research, engineering management and support staff which is expected to result in a further streamlining of the current manufacturing process and identify other areas within the technologies the Company possesses to expand clinical usage for use in other applications. The Company has a significant advantage as it manufactures, or will soon manufacture, the major components (processed bovine collagen and PMMA microspheres) at its San Diego location at a capacity that exceeds current and near-term future production demand; this internal capability provides for a decreased dependence on outside vendors and allows for a shortened development cycle for new materials systems, preclinical studies, and new product pipeline development. In June 2007, and in anticipation of the expansion of research and development capabilities, we announced the formation of a new wholly-owned subsidiary named Spheris Medical, Inc. to develop and commercialize new and innovative therapeutic medical applications of our proprietary microsphere tissue bulking technology through collaborative agreements with third parties. These fields may include gastroesophageal reflux disease, female stress urinary incontinence, spinal disc degeneration, sleep apnea and snoring.

Intellectual Property

We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our proprietary rights. We currently hold five issued U.S. patents, and have seven pending U.S. patent applications. We also have five issued foreign patents, and multiple foreign patent applications pending in Australia, Canada, Japan, Mexico and Europe. Our primary U.S. patent, No. 5,344,452, which we refer to as the ’452 patent, covers our product, ArteFill, and does not expire until September 2011. We have applied for an extension of the term of the ’452 patent with the U.S. Patent and Trademark Office, or the U.S. PTO, under Title II of the Drug Price Competition and Patent Term Restoration Act. If the U.S. PTO grants our application, the term of the ’452 patent may potentially be extended until September 2016. Our other four U.S. patents have projected expiration dates from April 2, 2021 through February 6, 2023. These other patents are primarily related to injection devices, but do not currently cover or provide patent protection for ArteFill. These other patents may provide patent protection for future products, primarily in the gastroenterology and urology areas. The foreign patents that are counterparts to the ’452 patent expire in December 2009. We believe that our ’452 patent family protects our rights to ArteFill in the United States, Austria, Belgium, France, Germany, Hong Kong, Italy, Liechtenstein, Luxembourg, the Netherlands, Singapore, Spain, Sweden, Switzerland and the United Kingdom. We also have an Australian patent covering an injection device.

We have obtained registrations for the trademarks ArteFill, Artes, Artes Medical and Enduring Beauty in the United States and certain foreign jurisdictions and have obtained registration for the trademark The First to Last in the United States. In addition, we have filed an application to register the trademark The Art of Soft Tissue Augmentation in the United States and certain foreign jurisdictions.

We also rely on trade secrets, technical know-how, contractual arrangements and continuing innovation to protect our proprietary technology and maintain our competitive position. We seek to protect our proprietary information and other intellectual property by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure and invention assignment agreements on commencement of their employment or engagement.

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In October 2005, in connection with the settlement of all outstanding disputes and litigation matters among us, BioForm Medical, Inc. and BioForm Medical Europe, B.V., we granted to the BioForm entities an exclusive, world-wide, royalty-bearing license under certain of our patents to make and sell implant products containing CaHA particles, and a non-exclusive, world-wide, royalty-bearing license under the same patents to make and sell certain other non-polymeric implant products. In September 2007, we entered into a second license agreement with the BioForm entities. See “— Material Agreements” above.

Employees

As of March 3, 2008, we had 155 full-time employees, including four full-time employees located in Frankfurt, Germany. In the United States, we have 31 manufacturing employees, 23 quality assurance and regulatory employees, 57 sales and marketing employees, including 44 sales professionals, 12 employees in research and development and 28 general and administrative employees. None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our existing employees to be good.

Executive Officers

Set forth below are the name, age and position and a brief account of the business experience of each of our executive officers as of March 3, 2008.

Name	Age		Position(s)
Christopher J. Reinhard		54	Executive Chairman of the Board of Directors
Diane S. Goostree		52	President and Chief Executive Officer and Director
Peter C. Wulff		48	Executive Vice President and Chief Financial Officer
Karla R. Kelly, J.D.		54	Chief Legal Officer, General Counsel and Corporate Secretary
Greg Kricorian, M.D.		38	Chief Medical Officer
Russell J. Anderson		52	Vice President — New Products Engineering
Larry J. Braga		46	Vice President — Manufacturing
Susan A. Brodsky-Thalken		54	Vice President — U.S. Sales and Training
Frank M. Fazio		38	Vice President — Marketing and International Markets
John F. Kay, Ph. D.		57	Vice President — Engineering and Development
Karon J. Morell		58	Vice President — Regulatory Affairs and Quality Affairs

Christopher J. Reinhard has been our Executive Chairman of the Board of Directors since June 2004. Since December 2003, Mr. Reinhard has also served as Chairman of the Board and Chief Executive Officer of Cardium Therapeutics, Inc., a publicly traded medical technology company. From July 2002 to December 2004, Mr. Reinhard served as Chief Executive Officer of Collateral Therapeutics, Inc., a publicly traded biotechnology company. Prior to the acquisition of Collateral Therapeutics, Inc. by Schering AG in July 2002, Mr. Reinhard worked for Collateral Therapeutics in a variety of roles from June 1995 to July 2002, including Chief Financial Officer and President. Mr. Reinhard holds a B.S. in Finance and an M.B.A. from Babson College.

Diane S. Goostree has been our Chief Executive Officer since November 2006 and our President since March 2006. She also served as our Chief Operating Officer from March 2006 to November 2006. From September 2002 to February 2006, Ms. Goostree was employed with SkinMedica, Inc., a dermatology specialty pharmaceutical company, most recently serving as Senior Vice President, Corporate Development and Operations. From May 2002 to September 2002, Ms. Goostree served as a consultant for SkinMedica, Inc. From November 2000 to May 2002, Ms. Goostree served as Vice President, Business Development at Elan Pharmaceuticals, Inc., a publicly traded biotechnology company. Prior to that, Ms. Goostree worked for Dura Pharmaceuticals, Inc., a publicly traded pharmaceutical company, in a variety of roles, including Regional Sales Director, and most recently as Vice President of Business Development from September 1995 until its acquisition by Elan Pharmaceuticals in

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November 2000. Ms. Goostree holds a B.S. in Chemical Engineering from the University of Kansas and an M.B.A. from the University of Missouri in Kansas City.

Peter C. Wulff has been our Executive Vice President since February 2007 and our Chief Financial Officer since January 2005. From May 2001 to May 2004, Mr. Wulff served as Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary of CryoCor, Inc., a publicly traded medical device company. From November 1999 to May 2001, Mr. Wulff was Chief Financial Officer and Treasurer at Natural Alternatives International, Inc., a publicly traded and international nutritional supplement manufacturer. Mr. Wulff holds a B.A. in both Economics and Germanic Languages and an M.B.A. in Finance from Indiana University. Mr. Wulff is also a Certified Management Accountant.

Karla R. Kelly, J.D. has been our Chief Legal Officer since June 2006. Prior to that, she was our Vice President, Legal Affairs from December 2005 to June 2006. She also has been our General Counsel and Corporate Secretary since December 2005. Ms. Kelly has provided legal services to us since 1999. Prior to joining us, Ms. Kelly practiced out of her own law firm, Karla R. Kelly, a Professional Law Corporation, from February 2003 to December 2005. From August 1998 to January 2003, Ms. Kelly practiced as Special Counsel with the law firm of Luce Forward Hamilton & Scripps LLP in San Diego, California. Ms. Kelly holds a B.A. in Nursing from the College of St. Catherine and a J.D. from the George Washington University National Law Center.

Greg J. Kricorian, M.D. has been our Chief Medical Officer since July 2007. Before Artes Medical, he served as Senior Director, Medical Affairs for Valeant Pharmaceuticals International, a leading global specialty pharmaceutical company, from February 2005 to July 2007. From May 2002 to February 2005, Dr. Kricorian held positions in Medical Affairs at ICN Pharmaceuticals (now Valeant), and prior to that was a practicing Dermatologist focusing on aesthetic procedures, including dermal fillers. Dr. Kricorian is a Board Certified Dermatologist and holds a B.S. in Biology from University of California, Los Angeles; an M.D. degree from Stanford University Medical School; and an M.B.A. degree from the University of California, Los Angeles.

Russell J. Anderson has been our Vice President, New Product Engineering since March 2007, and he previously served as our Vice President, Product Development and Engineering since June 2005. From February 2004 to May 2005, he served as our Vice President, Engineering and Manufacturing. Mr. Anderson was a Project Engineer at NuVasive, Inc., a publicly traded medical device company, from February 2003 to February 2004. From October 2002 to November 2003, Mr. Anderson was also a product development consultant for Boston Scientific Corp. and Target Therapeutics, Inc., both publicly traded medical device companies. From April 2001 to October 2002, Mr. Anderson was Director of Engineering at Novare Surgical Systems, Inc., a privately held medical device company. Mr. Anderson holds a B.S. in Environmental Engineering from California Polytechnic State University and an M.B.A. from California State University in Hayward.

Larry J. Braga has been our Vice President, Manufacturing since June 2005 and previously served as Senior Director, Collagen Manufacturing since June 2004. From April 2000 to May 2004, he served as Director of Manufacturing at Anosys, Inc., a privately held vaccine development company. From November 1997 to April 2000, Mr. Braga served as Senior Process Engineer at Cohesion Technologies Inc., a publicly traded medical device company. Mr. Braga holds a B.S. in biological sciences from California State University in Hayward. He also holds a California pharmacy exemptee license.

Susan A. Brodsky-Thalken has been our Vice President, U.S. Sales and Training since October 2006. From April 2006 to October 2006, she served as our Executive Director, U.S. Marketing and Aesthetic Market Development. From February 2003 to April 2006, Ms. Brodsky-Thalken was a principal at AAP, Inc. providing consulting services to the aesthetic medical device industry. From April 2002 to January 2003, Ms. Brodsky-Thalken served as Vice President, Sales of INAMED Corporation, a publicly traded medical device company. From February 1995 to March 2002, Ms. Brodsky-Thalken served as Regional Sales Director for INAMED Corporation. Ms. Brodsky-Thalken studied Biological Science at San Francisco State University.

Frank M. Fazio has been our Vice President, Marketing since June 2006. From March 2005 to May 2006, Mr. Fazio served as Director, Market Development of INAMED Corporation, a publicly traded medical device company. From May 2002 to March 2005, Mr. Fazio served as Director, Facial Aesthetics of INAMED Corporation. From April 2001 to May 2002, Mr. Fazio was a Principal at AMC Consulting, providing consulting services to

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companies in the medical device industry. Mr. Fazio holds a B.S. in Molecular and Cellular Biology from the University of Arizona.

John F. Kay, Ph.D. has been our Vice President, Engineering and Development since January 2008. From September 2003 to December 2007, Dr. Kay served as Chief Scientific Officer at IsoTis OrthoBiologics, now a division of Integra Life Sciences, a company that specializes in the research, development and manufacturing of bone grafts, where he was responsible for Global Research & Product Development, Regulatory and Clinical Affairs as well as providing technical marketing expertise in support of sales. From July 2001 to August 2003, Dr. Kay served as Vice President, Research & Development for GenSci OrthoBiologics. Additionally, from February 1987 to June 2001, Dr. Kay was President and Chief Executive Officer at Bio-Interfaces, Inc., a medical research and manufacturing company that developed and provided innovative biomaterials products to the orthopedic and dental marketplaces. From November 1981 to January 1987, Dr. Kay was a founder and Director of Research & Development at Calcitek, Inc. Prior to that he held senior research and development positions at Owens Corning Fiberglas. Dr. Kay holds a B.S., M.S., and Ph.D. in Materials Engineering from Rensselaer Polytechnic Institute.

Karon J. Morell has been our Vice President, Regulatory and Quality Affairs since December 2007. From April 2006 to November 2007, Ms. Morell served as Vice President, Quality Assurance and Regulatory Affairs at IsoTis OrthoBiologics, now a division of Integra Life Sciences, a company that specializes in the research, development and manufacturing of bone grafts. From March 2004 to March 2006 Ms. Morell served as Vice President, Quality and Regulatory Affairs at Medegen MMS, a company that specializes in Class I & II devices for intravascular solutions. From November 1993 to February 2004, Ms. Morell held senior regulatory, quality and compliance positions at Nobel Biocare USA, Cardiac Science, Inc., and Newport Medical Instruments. Ms. Morell received her B.A. in Business Management from Southern California University.

Additional Information

Our business was incorporated in Delaware in 1999. Our principal executive offices are located at 5870 Pacific Center Boulevard, San Diego, California 92121, and our telephone number is (858) 550-9999. Our website is located at http://www.artesmedical.com. The information contained in, or that can be accessed through, our website is not part of this Annual Report on Form 10-K.

We file and will continue to file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, electronically with the Securities and Exchange Commission. We make these reports available free of charge on our website under the investor relations page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities Exchange Commission.

Materials that we file with the Securities and Exchange Commission may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The Securities and Exchange Commission also maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the Securities and Exchange Commission.

Trademarks

Artes Medical^®, Artes^®, ArteFill^®, The Art of Soft Tissue Augmentation^tm, The First to Last^®, and Enduring Beauty^® are our trademarks. We have rights to these trademarks in the United States and have registrations issued and pending in the United States and other countries. All other service marks, trademarks, trade names and brand names referred to in this report are the property of their respective owners.

Item 1A.   Risk Factors.

An investment in our common stock involves a high degree of risk. Set forth below and elsewhere in this report and in other documents that we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements

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contained in this report and the other public statements we make. If any of the following risks or uncertainties actually occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We have limited commercial operating experience and a history of net losses, and we may never achieve or maintain profitability.

We have a limited commercial operating history and have focused primarily on research and development, product engineering, clinical trials, building our manufacturing capabilities and seeking FDA approval to market ArteFill. We received FDA approval to market ArteFill on October 27, 2006, and we commenced commercial shipments of ArteFill during the first quarter of 2007. All of our other product candidates are still in the early stages of research and development. We have incurred significant net losses since our inception, including net losses of approximately $22.2 million in 2005, $26.3 million in 2006 and $26.9 million in 2007. At December 31, 2007, we had an accumulated deficit of approximately $106.3 million. For the year ended December 31, 2007, we used net cash in operating activities of $23.7 million. We have and will continue to incur significant sales, marketing and manufacturing expenses in connection with the commercial distribution of ArteFill, and expect to incur significant operating losses for the foreseeable future as we increase our direct sales force and expand our other marketing activities. We cannot predict the extent of our future operating losses and accumulated deficit, and we may never generate sufficient revenues to achieve or sustain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability. Further, because of our limited operating history and because the market for injectable aesthetic products is relatively new and rapidly evolving, we have limited insight into the trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. We may not be able to successfully address any or all of the risks, uncertainties and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets such as ours. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.

We need to raise additional funds to support our operations beyond September 2008, and these funds may not be available on a timely basis or on acceptable terms.

We believe that our existing cash and cash equivalents, together with the proceeds from sales of ArteFill, the funds received from the financing arrangement we closed in February 2008, and the license payments from BioForm under the Second Agreement, will be sufficient to meet our anticipated cash requirements through the third quarter of 2008. We will need to raise additional capital to fund our operations beyond September 2008. Our auditors, Ernst & Young LLP, have issued a going concern qualification in their report accompanying our consolidated financial statements for the year ended December 31, 2007, expressing substantial doubt about our ability to continue as a going concern. Any future funding transaction may require us to relinquish rights to some of our intellectual property or product royalties, and we may be required to issue securities at a discount to the prevailing market price, resulting in further dilution to our existing stockholders. In addition, depending upon the market price of our common stock at the time of any transaction, we may be required to sell a significant percentage of common stock, potentially requiring a stockholder vote pursuant to Nasdaq rules, which could lead to a significant delay and closing uncertainty. We cannot guarantee that we will be able to complete any such transaction or secure additional capital on a timely basis, or at all, and we cannot assure that such transaction will be on reasonable terms. If we are unable to secure additional capital, we would need to significantly curtail or reorient our business activities in or around September 2008 and may be unable to sustain operations, and you may lose your entire investment in our company.

Our debt obligations expose us to risks that could restrict our ability to raise additional funds to support our operations and adversely affect our business, operating results and financial condition.

We have a substantial level of debt. As of March 3, 2008, we had approximately $21.5 million of indebtedness outstanding. We are required to make two principal payments of $7.5 million each in January 2012 and January 2013. To secure these obligations, we granted the holders of our indebtedness a security interest in substantially all

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of our tangible and intangible assets, including the U.S. rights to ArteFill. In addition, the agreements governing our debt instruments contain negative and other restrictive covenants. The level, the secured nature of our indebtedness and the financial and business restrictions in our agreements with our debt holders, among other things, could:

•  make it difficult for us to raise the necessary financing to support our operations;

•  limit our flexibility in planning for or reacting to changes in our business;

•  reduce funds available for use in our operations;

•  impair our ability to incur additional debt because of financial and other restrictive covenants;

•  make us more vulnerable in the event of a downturn in our business;

•  place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources;

•  restrict the operations of our business as a result of restrictive covenants; or

•  impair our ability to merge or otherwise effect the sale of the company due to the right of the holders of our indebtedness to accelerate the maturity date of the indebtedness in the event of a change of control of the company.

We need to raise additional funds to support our operations beyond September 2008, which raises substantial doubt about our ability to continue as a going concern. Even if we do raise additional funds, if we do not grow our revenues as we expect, we could have difficulty making required payments on our indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any indebtedness we may incur in the future. Any default under our indebtedness would have a material adverse effect on our business, operating results and financial condition.

Under our financing arrangement with CHRP, upon the occurrence of certain events, CHRP may require us to repurchase the right to receive revenues that we assigned to it or may foreclose on our assets that secure our obligations to CHRP. Any exercise by CHRP of its right to cause us to repurchase the assigned right or any foreclosure by CHRP could adversely affect our results of operations and our financial condition.

On January 28, 2008, we entered into a revenue interests assignment agreement with CHRP pursuant to which we assigned to CHRP the right to receive a portion of our net revenues from U.S. sales of ArteFill, our sole FDA-approved product. We also issued CHRP a senior secured note. To secure these obligations, we granted CHRP a security interest in substantially all of our tangible and intangible assets, including the U.S. rights to ArteFill.

Under our arrangement with CHRP, upon the occurrence of certain events, including if we experience a change of control, undergo certain bankruptcy or other insolvency events, agree to transfer any substantial portion of our assets, breach the covenants, representations or warranties under these agreements, CHRP may (i) require us to repurchase the rights we assigned to it, (ii) demand repayment of the senior secured note and (iii) foreclose on the assets that secure our obligations to CHRP.

If CHRP were to exercise its right to cause us to repurchase the right we assigned to it and repay the senior secured note, we cannot assure you that we would have sufficient funds available at that time. Even if we have sufficient funds available, we may have to use funds that we planned to use for other purposes and our results of operations and financial condition could be adversely affected. If CHRP were to foreclose on the assets that secure our obligations to CHRP, our results of operations and financial condition would be adversely affected. Due to CHRP’s right to cause us to repurchase the rights we assigned to it is triggered by, among other things, a change in control, transfer of all or substantially all of our assets, the existence of that right could discourage us or a potential acquirer from entering into a business transaction that would result in the occurrence of any of those events.

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Our operating results may fluctuate significantly in the future, and we may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls.

Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:

•  the level of demand for ArteFill, including seasonality in patient elective procedures and physician ordering;

•  the costs of our sales and marketing activities, including the additional expenses related to the increased size of our sales force;

•  the introduction of new technologies and competing products that may make ArteFill a less attractive treatment option for physicians and patients;

•  negative publicity concerning ArteFill, including concerns expressed about ArteFill based on negative perceptions of non-FDA approved dermal fillers sold outside the United States;

•  our pricing strategy and ability to protect the price of ArteFill against price erosion due to the availability of alternative treatments;

•  seasonal variations in demand;

•  our ability to attract and retain personnel with the skills required for effective operations;

•  product liability and other litigation;

•  the amount and timing of capital expenditures and other costs relating to conducting our long-term, post-market safety study for ArteFill, further automating and expanding capacity at our manufacturing facilities and conducting further studies regarding the use of ArteFill for other aesthetic applications;

•  government regulation and legal developments regarding our products in the United States and in the foreign countries in which we operate;

•  general economic conditions affecting the ability of patients to pay for elective cosmetic procedures.

Because we only commenced commercial shipments of ArteFill in February 2007, and due to the emerging nature of the injectable aesthetic product market in which we will compete, our historical financial data is of limited value in estimating future revenues. Our projected expense levels are based in part on our expectations concerning future revenues. However, our ability to generate any revenues depends on the successful commercial launch of ArteFill. Moreover, the amount of any future revenues will depend on the choices and demand of physicians and patients, which are difficult to forecast accurately. We believe that patients are more likely to pay for elective cosmetic procedures when the economy is strong, and as a result, any material adverse change in economic conditions may negatively affect our revenues. We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected or continued shortfall in revenues. Accordingly, a significant shortfall in demand for our products or a significant delay in the market acceptance of ArteFill will have a material adverse effect on our business, results of operations and financial condition. Further, our manufacturing costs and sales and marketing expenses will increase as we continue to expand our operations in connection with the commercialization of ArteFill. To the extent that expenses precede or are not followed by increased revenue, our business, results of operations and financial condition will be harmed.

We expect to derive substantially all of our future revenue from sales of ArteFill, and if we are unable to achieve and maintain market acceptance of ArteFill among physicians and patients, our business, operating results and financial condition will be harmed.

We expect sales of ArteFill to account for substantially all of our revenue for at least the next several years. Accordingly, our success depends on the acceptance among physicians and patients of ArteFill as a preferred injectable aesthetic treatment. Even though we have received FDA approval to market ArteFill in the United States, we may not achieve and maintain market acceptance of ArteFill among physicians or patients. ArteFill is the first product in a new category of non-resorbable aesthetic injectable products in the United States. As a result, the

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degree of market acceptance of ArteFill by physicians and patients is unproven and difficult to predict. We believe that market acceptance of ArteFill will depend on many factors, including:

•  the perceived advantages or disadvantages of ArteFill compared to other injectable aesthetic products and alternative treatments;

•  the safety and efficacy of ArteFill and the number and severity of reported adverse side effects, if any;

•  the availability and success of other injectable aesthetic products, including newly introduced injectable aesthetic products, and alternative treatments;

•  the price of ArteFill relative to other injectable aesthetic products and alternative treatments;

•  our success in building a sales and marketing organization and the effectiveness of our marketing, advertising and commercialization initiatives;

•  the willingness of patients to wait 28 days for treatment following the bovine collagen skin test that is required in connection with ArteFill;

•  our ability to provide additional clinical data to the satisfaction of the FDA regarding the potential long-term aesthetic benefits provided by ArteFill;

•  our success in training physicians in the proper use of the ArteFill injection technique and the convenience and ease of administration of ArteFill;

•  the success of our physician practice support programs; and

•  negative publicity concerning ArteFill or competing products, including negative publicity concerning non-FDA approved dermal fillers sold outside the United Sates, and alternative treatments.

We cannot assure you that ArteFill will achieve and maintain market acceptance among physicians and patients. Because we expect to derive substantially all of our revenue for the foreseeable future from sales of ArteFill, any failure of this product to satisfy physician or patient demands or to achieve meaningful market acceptance will seriously harm our business.

We face significant competition from companies with greater resources and well-established sales channels, which may make it difficult for us to achieve market penetration.

The market for injectable aesthetic products is extremely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our competitors primarily consist of companies that offer non-permanent injectable aesthetic products approved by the FDA for the correction of facial wrinkles, as well as companies that offer products that physicians currently use off-label for the correction of facial wrinkles. These companies include:

•  Allergan, Inc., which markets and sells Botox^® Cosmetic, a temporary muscle paralytic and the most widely used injectable aesthetic product in the United States, CosmoDerm^® and CosmoPlast^®, which are human collagen-based temporary dermal fillers, Zyderm^® and Zyplast^®, which are bovine collagen-based temporary dermal fillers, and Hylaform^®, Hylaform^® Plus, Captique^® and Juvederm, which are temporary dermal fillers comprised primarily of hyaluronic acid, a jelly-like substance that is found naturally in living organisms and acts to hydrate and cushion skin tissue;

•  Medicis Pharmaceutical Corporation, which markets and sells Restylane^®, the leading temporary dermal filler comprised primarily of hyaluronic acid;

•  BioForm Medical, Inc., which markets and sells Radiesse^tm, a calcium hydroxylapatite based dermal filler;

•  Anika Therapeutics, which received FDA approval in 2007 for its temporary dermal filler, Elevess, which is comprised primarily of hyaluronic acid and lidocaine; and

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•  Dermik Laboratories, a subsidiary of sanofi-aventis, which markets and sells Sculptra^®, which is approved by the FDA for restoration and/or correction of the signs of facial fat loss in people with human immunodeficiency virus.

Some of these companies are publicly traded and enjoy competitive advantages, including:

•  superior name recognition;

•  established relationships with physicians and patients;

•  integrated distribution networks;

•  large-scale FDA-approved manufacturing facilities; and

•  greater financial resources for product development, sales and marketing and patent litigation.

Many of our competitors spend significantly greater funds on the research, development, promotion and sale of new and existing products. These resources can enable them to respond more quickly to new or emerging technologies and changes in customer requirements. Even if we attempt to expand our technological capabilities in order to remain competitive, research and discoveries by others may make ArteFill a less attractive alternative for physicians and patients. For all the foregoing reasons, we may not be able to compete successfully against our current and future competitors. If we cannot compete effectively in the marketplace, our potential for profitability and our results of operations will suffer.

We have limited experience with commercialized products, and the successful commercialization of ArteFill will require us to build and maintain a sophisticated sales and marketing organization.

Prior to 2007, we had no prior experience with commercializing any product, and we need to build and maintain a sophisticated sales and marketing organization in order to successfully commercialize ArteFill. We have rapidly increased the size of our direct sales force, from 21 sales representatives in September 2007 to more than 40 sales representatives as of March 3, 2008. We intend to expand to 48 sales representatives by June 30, 2008. We have and intend to continue to target dermatologists, plastic surgeons and cosmetic surgeons whom we have identified as having significant experience with the tunneling injection technique used in ArteFill treatments. Selling ArteFill to physicians requires us to educate them on the comparative advantages of ArteFill over other injectable aesthetic products and alternative treatments. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need to undergo extensive training. We anticipate that it will take up to six months for each of our new sales representatives to achieve full productivity, yet we will be incurring the costs of these sales representatives from the date of hire. We will incur significant losses as we continue building our direct sales force. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives, or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and productive sales personnel, our ability to commercialize ArteFill and to generate revenues will be impaired, and our business and financial prospects will be harmed.

In February 2008, we met with the FDA to discuss what data would be needed in order for the FDA to approve treatment with ArteFill without a skin test. There can be no assurance, however, that any data that we gather will be acceptable by the FDA or sufficient for the FDA to approve treatment with ArteFill without a skin test.

Potential sales of ArteFill could be delayed or lost due to patients’ allergic reactions to the bovine collagen component of ArteFill, the need to test for such allergic reactions before treatment with ArteFill or patients’ reluctance to use animal-based products.

ArteFill contains bovine collagen. Although the bovine collagen that we use is purified, patients can experience an allergic reaction. Accordingly, the instructions for use that accompany ArteFill require that all patients must be tested for any such allergies at least 28 days prior to treatment with ArteFill. If patients test positive for allergic reactions to the bovine collagen at higher rates than we expect, sales of ArteFill will be lower than anticipated. The need for a skin test in advance of treatment with ArteFill also may render ArteFill less attractive to patients who seek an immediate aesthetic treatment. The 28-day interval between testing and treatment may also result in the loss of some potential patients who, regardless of test results, fail to reappear for treatment after

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administration of the skin test. In addition, physicians who are concerned that patients may not return for an ArteFill treatment have an incentive to provide an immediate treatment option to patients. We believe a number of these physicians recommend that patients get treated with a temporary dermal filler first, and then return for ArteFill treatment in the future, which could delay our sales to these patients by six months or more. Further, some potential patients may have reservations regarding the use of animal-based products. As a result of these factors, physicians may recommend alternative aesthetic treatments over ArteFill, which would limit or delay our sales and harm our ability to generate revenues.

If changes in the economy and consumer spending reduce demand for ArteFill, our sales and profitability could suffer.

We have and we intend to continue to position ArteFill as a premium-priced product in the injectable aesthetic product market. Treatment with ArteFill is an elective procedure, directly paid for by patients without reimbursement. As a result, sales of ArteFill will require that patients have sufficient disposable income to spend on an elective aesthetic treatment. Adverse changes in the economy may cause consumers to reassess their spending choices and choose less expensive alternative treatments over ArteFill, or may reduce the demand for elective aesthetic procedures in general. Many economists are predicting a slow down in consumer spending during fiscal year 2008. A shift of this nature could impair our ability to generate sales and could harm our business, financial condition and results of operations.

We have in the past and may continue to experience negative publicity concerning our product ArteFill, including concerns expressed about ArteFill based on negative perceptions of non-FDA approved dermal fillers sold outside the United States, and this negative publicity may harm our reputation and business.

ArteFill is a proprietary formulation comprised of polymethylmethacrylate, or PMMA, microspheres and bovine collagen, and is the only PMMA-based injectable product that has been approved by the FDA for the treatment of facial wrinkles. We are the sole manufacturer and distributor of ArteFill, and ArteFill is only available in the United States. We do not sell any other PMMA-based products, and we have not entered into distribution or licensing arrangements anywhere in the world with any third party for the distribution or sale of ArteFill or any other PMMA-based products. ArteFill is a third-generation product that resulted from agreements with the FDA regarding product formulation improvements and improvements to the manufacturing process used to generate the predecessor products.

There are a large number of dermal fillers offered in Europe and in other international markets that contain a permanent component, and are marketed as providing “long-lasting” or “permanent” treatment results. Several of these permanent dermal fillers contain some form of PMMA, including a dermal filler currently marketed as Artecoll. Artecoll is a predecessor product to ArteFill, and has been manufactured by third parties over the past 11 years using materials from various sources and with various specifications. None of the PMMA-based products marketed in other countries, including Artecoll, have the same formulation as ArteFill and are not manufactured using the same processes or material sources we utilize to prepare ArteFill. In addition, none of the parties offering dermal fillers containing a permanent component, including the PMMA-based products, have completed clinical trials in the United States, none have received FDA approval, and none have obtained FDA approval of their manufacturing facilities and quality control processes.

Several permanent dermal fillers, including Artecoll, have and may continue to generate or receive negative publicity in the news and other media. Statements by our competitors and other publicity regarding our company or ArteFill may include coverage that is negative in nature based on the negative perceptions of permanent dermal fillers, including those that are offered outside the United States. In addition, any negative side effects, or alleged or perceived negative side effects, relating to the use of ArteFill may result in negative publicity. Negative publicity regarding our company or ArteFill could reduce or delay market acceptance of ArteFill, and harm our reputation and business.

Countries within the European Union, or EU, may request the EU to more strictly regulate permanent dermal fillers based on the negative side effects, alleged or perceived negative side effects or concerns about the safety of the current permanent dermal fillers being offered in Europe. A number of the permanent dermal fillers offered in

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Europe obtained a CE mark based on limited review and approval requirements. We are aware that stricter registration processes for dermal fillers in the EU have been implemented over the last five years, and further requirements may be imposed in the EU. We support these initiatives and are cooperating with the regulatory bodies in Europe to ensure that all manufacturers of permanent dermal fillers comply with strict and rigorous requirements that ensure patient safety, similar to the processes currently employed by the FDA and to which ArteFill was subject to, during our FDA review and approval process. We have also sent cease and desist letters to the entities we have knowledge of that are manufacturing and distributing PMMA-based dermal fillers that infringe our patent.

We have been involved in product litigation in the past, and we may become involved in product litigation in the future, and any liability resulting from product liability or other related claims may negatively affect our results of operations.

Dermatologists, plastic surgeons, cosmetic surgeons and other practitioners who administer ArteFill, as well as patients who have been treated with ArteFill or any of our future products, may bring product liability and other claims against us. In August 2005, Elizabeth Sandor, an individual residing in San Diego, California, filed a complaint against us and Drs. Gottfried Lemperle, Stefan Lemperle and Steven Cohen in the Superior Court of the State of California for the County of San Diego. The complaint, as amended, set forth various causes of action against us, including product liability, fraud, negligence and negligent misrepresentation. The complaint also alleged that Dr. Gottfried Lemperle, our co-founder, former Chief Scientific Officer and a former member of our board of directors, treated Ms. Sandor with Artecoll and/or ArteFill in violation of medical licensure laws, that the product was defective and unsafe because it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections. In addition, the complaint alleged that Drs. Gottfried Lemperle and Stefan Lemperle, our other co-founder, former Chief Executive Officer and a former director, falsely represented to her that the product had received an approvability letter from the FDA, and was safe and without the potential for adverse reactions. The complaint also alleged medical malpractice against Dr. Cohen, the lead investigator in our U.S. clinical trial, for negligence in treating Ms. Sandor for the adverse side effects she experienced. We notified our directors’ and officers’ liability insurance carrier of Ms. Sandor’s claims and requested both a defense and indemnification for all claims advanced by Ms. Sandor. Our insurance carrier declined coverage. On June 1, 2006, the parties filed a stipulation to dismiss the case without prejudice and toll the statute of limitations. The court dismissed the case on June 5, 2006 as stipulated by the parties, and Ms. Sandor was allowed to refile her case at any time within 18 months from that date.

On December 5, 2007, Ms. Sandor re-filed a complaint for personal injury, compensatory and punitive damages against us, Dr. Gottfried Lemperle, Dr. Stefan Lemperle and Dr. Steven Cohen. The complaint contains many of the same allegations contained in the initial complaint filed in September 2005. The complaint sets forth various causes of action and alleges that Dr. Gottfried Lemperle administered injections of a product of ours in violation of medical licensure laws, that the product was defective and unsafe in that it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections. Ms. Sandor is seeking damages in an unspecified amount for special and actual damages, medical and incidental expenses, incidental and consequential damages, punitive and exemplary damages, reasonable attorney’s fees and costs of litigation. We have filed a demurrer to the complaint and written discovery has commenced in this matter.

Any negative publicity surrounding these events and this case may harm our business and negatively impact the price of our stock. Additionally, if it is determined that either Dr. Gottfried Lemperle or Dr. Stefan Lemperle did not act in their individual capacities or that we are liable because of the actions of Dr. Cohen, we may need to pay damages, which would reduce our cash and could cause a decline in our stock price. Further, if any of the individuals injected with Artecoll by Dr. Gottfried Lemperle in the United States, or if any of those individuals injected with Artecoll during the physician training sessions conducted in Mexico and Canada in 2006 bring claims against our company as a result of these injections, we may need to pay damages, which would reduce our cash and could cause a decline in our stock price. As of the date of this filing, none of these individuals has filed a claim against our company in connection with an injection of Artecoll, except for Ms. Sandor. There could be other individuals who were injected with Artecoll who are not known to us, who could bring similar claims against our company.

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To limit our product liability exposure, we have developed a physician training and education program. We cannot provide any assurance that our training and education program will help avoid complications resulting from the administration of ArteFill. In addition, although we intend to sell our product only to physicians, we will not be able to control whether other medical professionals, such as nurse practitioners or other cosmetic specialists, administer ArteFill to their patients, and we may be unsuccessful at avoiding significant liability exposure as a result. We maintain product liability insurance in an amount up to $20 million in the aggregate, but any insurance we maintain may not sufficient to provide coverage against any asserted claims. In addition, our insurance may not be sufficient to provide coverage for claims which may be asserted in the future by individuals injected with Artecoll by Dr. Gottfried Lemperle or during the physician training sessions conducted in Mexico and Canada. We also may be unable to maintain our insurance or obtain insurance in the future on acceptable terms, or at all. In addition, regardless of merit or eventual outcome, product liability and other claims may result in:

•  the diversion of management’s time and attention from our business and operations;

•  the expenditure of large amounts of cash on legal fees, expenses and payment of settlements or damages;

•  decreased demand for ArteFill among physicians and patients;

•  voluntary or mandatory recalls of our products; or

•  injury to our reputation.

If any of the above consequences of product liability litigation occur, it could adversely affect our results of operations, harm our business and cause the price of our stock to decline.

An investigation by the FDA or other regulatory agencies, including the current investigation by the FDA’s Office of Criminal Investigations, which we believe may concern improper uses of our product before FDA approval, could harm our business.

During negotiations with the parties involved in the litigation with Elizabeth Sandor discussed above, Dr. Gottfried Lemperle’s counsel informed us that she had contacted an investigator at the FDA’s Office of Criminal Investigations to determine whether any investigation of Dr. Gottfried Lemperle was ongoing. She also informed us that the FDA investigator had informed her that the FDA has an open investigation regarding us, Dr. Gottfried Lemperle and Dr. Stefan Lemperle, that the investigation had been ongoing for many months, that the investigation would not be completed within six months, and that at such time the investigation is completed, it could be referred to the U.S. Attorney’s office for criminal prosecution. In November 2006, we contacted the FDA’s Office of Criminal Investigations. That office confirmed the ongoing investigation but declined to provide any details of the investigation, including the timing, status, scope or targets of the investigation. We contacted the FDA’s Office of Criminal Investigations in February 2008. The Office of Criminal Investigations confirmed that the investigation is ongoing and has been referred to the U.S. Attorney’s office, but did not provide any additional information regarding this investigation or whether the U.S. Attorney’s office will commence an action.

To our knowledge, prior to or following this inquiry, none of our current or former officers or directors had been contacted by the FDA in connection with an FDA investigation. As a result, we have no direct information from the FDA regarding the subject matter of this investigation. We believe that the investigation may relate to the facts alleged in the Sandor litigation and the matters identified in the following correspondence from the FDA. In July 2004, we received a letter from the FDA’s Office of Compliance indicating that the FDA had received information suggesting that we may have improperly marketed and promoted ArteFill prior to obtaining final FDA approval. We also received a letter from the FDA’s MedWatch program, the FDA’s safety information and adverse event reporting program, on April 21, 2005, which included a Manufacturer and User Facility Device Experience Database, or MAUDE, report. The text of the MAUDE report contained facts similar to those alleged by the plaintiff in the Sandor litigation.

In May 2006, we received the FDA’s EIR, for its investigation of our San Diego manufacturing facility. The EIR referenced two anonymous consumer complaints received by the FDA. The first complaint, received by the FDA in December 2003, alleges that Dr. Stefan Lemperle promoted the unapproved use of ArteFill, providing, upon request, a list of local doctors who could perform injections of ArteFill. The second complaint, received by the FDA

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in June 2004, alleges complications experienced by an individual who had been injected with ArteFill by Dr. Gottfried Lemperle in his home. The second complaint further alleges that Dr. Stefan Lemperle marketed unapproved use of ArteFill.

We responded to the FDA’s correspondence in August 2004 and again in May 2006. In our responses, we informed the FDA that based on our internal investigations, Dr. Gottfried Lemperle had used Artecoll, a predecessor product to ArteFill, on four individuals in the United States. In July 2006, the FDA requested us to submit an amendment to our pre-market approval, application for ArteFill containing a periodic update covering the time period between January 16, 2004, the date of our approvable letter, and the date of the amendment. In response to this request, we completed additional inquiries regarding Dr. Gottfried Lemperle’s unauthorized uses of Artecoll outside our clinical trials in contravention of FDA rules and regulations. In August 2006, we filed an amendment to our pre-market approval application that included the periodic update requested by the FDA. In the amendment, we informed the FDA that as a result of our additional inquiries, we had identified nine individuals who had been treated with Artecoll in the United States by Dr. Gottfried Lemperle, four of whom we had disclosed to the FDA in our prior correspondence. We also informed the FDA that 16 individuals had been treated with Artecoll by physicians in Mexico or Canada, where Artecoll is approved for treatment, in connection with physician training sessions conducted in those countries. Further, we informed the FDA that Dr. Stefan M. Lemperle, had been injected with Artecoll in the United States in 2004 by his father, Dr. Gottfried Lemperle.

We intend to cooperate fully with any inquiries by the FDA or any other authorities regarding these and any other matters. We have no information regarding when any investigation may be concluded, and we are unable to predict the outcome of the foregoing matters or any other inquiry by the FDA or any other authorities. If the FDA or any other authorities elect to request additional information from us or to commence further proceedings, responding to such requests or proceedings could divert management’s attention and resources from our operations. We would also incur additional costs associated with complying with any such requests or responding to any such proceedings. Additionally, any negative developments arising from such requests or the investigation could potentially harm our relationship with the FDA. Any adverse finding resulting from the ongoing FDA investigation could result in a warning letter from the FDA that requires us to take remedial action, fines or other criminal or civil penalties, the referral of the matter to another governmental agency for criminal prosecution and negative publicity regarding our company. Any of these events could harm our business and negatively affect our stock price.

We have limited manufacturing experience, and if we are unable to manufacture ArteFill in commercial quantities successfully and consistently to meet demand, our growth will be limited.

Prior to receiving FDA approval, we manufactured ArteFill, including the PMMA microspheres used in the product, in limited quantities sufficient only to meet the needs for our clinical studies. To be successful, we will need to manufacture ArteFill in substantial quantities at acceptable costs. To produce ArteFill in the quantities that we believe will be required to meet anticipated market demand, we will need to increase and automate the production process compared to our current manufacturing capabilities, which will involve significant challenges and may require additional regulatory approvals. The development of commercial-scale manufacturing capabilities will require the investment of substantial additional funds and hiring and retaining additional technical personnel who have the necessary manufacturing experience. For example, we currently use a manual process to fill syringes with ArteFill and may need to hire additional personnel for this process in order to meet commercial demand if we are unable to automate the process as intended. The implementation of an automated manufacturing process is a significant manufacturing change that will require development, validation and documentation, and the preparation and submission to the FDA of a Prior Approval Supplement to our PMA application. The FDA’s review of a Prior Approval Supplement typically does not require a facility inspection, but the FDA will have six months to review the supplement. We may not successfully complete any required increase or automation of our manufacturing process in a timely manner or at all. If there is a disruption to our manufacturing operations at either facility, we would have no other means of producing ArteFill until we restore and re-qualify our manufacturing capability at our facilities or develop alternative manufacturing facilities. Additionally, any damage to or destruction of our U.S. or German facilities or our equipment, prolonged power outage or contamination at either of our facilities would significantly impair our ability to produce ArteFill. Our lack of manufacturing experience may adversely affect the quality of our product when manufactured in large quantities and therefore result in product recalls. Any recall could be expensive

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and generate negative publicity, which could impair our ability to market ArteFill and further affect our results of operations. If we are unable to produce ArteFill in sufficient quantities to meet anticipated customer demand, our revenues, business and financial prospects would be harmed. In addition, if our automated production process is not efficient or does not produce ArteFill in a manner that meets quality and other standards, our future gross margins, if any, will be harmed.

The results provided by ArteFill are highly dependent on its technique of administration, and the acceptance of ArteFill will depend on the training, skill and experience of physicians.

The administration of ArteFill to patients requires significant training, skill and experience with the tunneling injection technique. We provide training to physicians in order to ensure that they are trained to inject ArteFill using the tunneling injection technique, and intend to offer ArteFill only to physicians who have completed our training program. However, untrained or inexperienced physicians may obtain supplies of ArteFill from third parties without our authorization and may perform injections using an improper technique, causing suboptimal aesthetic results or adverse side effects in patients.

In addition, even physicians who have been trained by us and have significant experience may administer ArteFill using an improper technique or in areas of the body where it is not approved for use by the FDA. This may lead to negative publicity, regulatory action or product liability claims regarding ArteFill or our company, which could reduce market acceptance of ArteFill and harm our business.

Our ability to manufacture and sell ArteFill could be harmed if we experience problems with the supply of calf hides from the closed herd of domestic cattle from which we derive the bovine collagen component of ArteFill.

We derive the bovine collagen component of ArteFill from calf hides supplied through a herd that is isolated, bred and monitored in accordance with both FDA and United States Department of Agriculture, or USDA, guidelines to minimize the risk of contamination from bovine spongiform encephalopathy, or BSE, commonly referred to as mad cow disease. BSE is a chronic, degenerative disorder that affects the central nervous system. We currently rely on a sole domestic supplier, Lampire Biological Labs, Inc., for the calf hides from which we produce the purified bovine collagen used in ArteFill. If this herd were to suffer a significant reduction or become unavailable to us through disease, natural disaster or otherwise for a prolonged period, we would have a limited ability to access a supply of acceptable calf hides from a similarly segregated source. In addition, if there were to be any widespread discovery of BSE in the United States, our ability to access bovine collagen may be impaired even if our herd is unaffected by the disease, if third parties begin to demand calf hides from our herd. Although we have not experienced any problems with our supply of calf hides in the past, a significant reduction in the supply of acceptable calf hides due to contamination of our supplier’s herd, a supply shortage or interruption, or an increase in demand beyond our current supplier’s capabilities could harm our ability to produce and sell ArteFill until a new source of supply is identified, established and qualified with the FDA. Any delays or disruptions in the supply of calf hides would negatively affect our revenues. We currently have more than a two year supply of calf hides in stock and intend to maintain a supply of calf hides that will last for more than two years. If our stockpiled supply is damaged or contaminated, and we are unable to obtain acceptable calf hides in the time frames desired, or at all, our business and results of operations will be harmed.

We are limited to marketing and advertising ArteFill for the treatment of nasolabial folds with efficacy benefits of six months under the label approved by the FDA, and we may not be able to obtain FDA approval to enhance our labeling for ArteFill.

Our U.S. clinical trial demonstrated the efficacy of ArteFill for the treatment of nasolabial folds, or smile lines, at primary efficacy endpoints of up to six months by comparison to the control products. As a result, the FDA requires us to label, advertise and promote ArteFill only for the treatment of nasolabial folds with an efficacy of six months. This limitation restricts our ability to market or advertise ArteFill and could negatively affect our growth. If we wish to market and promote ArteFill for other indications or claim efficacy benefits beyond six months, we may have to conduct further clinical trials or studies to gather clinical information for submission to the FDA, which would be costly and take a number of years. In early 2007, we completed a five-year follow-up study of 145 patients

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who were treated with ArteFill in our U.S. clinical trial. Dr. Mark G. Rubin, presented the results of this study at a meeting of the American Academy of Dermatology in Washington, D.C. in February 2007. We submitted the results of the five-year follow-up study to the FDA in March 2007 to seek approval to enhance product labeling that would allow us to claim efficacy benefits of ArteFill beyond six months. The Company received the FDA’s comments to our submission and their request for additional information in August 2007. We are currently supplying this information to the FDA for consideration to complete their review of the supplement and enabling us to enhance the product label. There can be no assurance, however, that we will be successful in obtaining FDA approval to claim that the aesthetic benefits of ArteFill extend beyond six months or to expand our product labeling to cover additional indications. Without FDA approval to market ArteFill beyond six months, physicians may be slow to adopt ArteFill. Further, future studies of patients injected with ArteFill may indicate that the aesthetic benefits of ArteFill do not meet the expectations of physicians or patients. Such data would slow market acceptance of ArteFill, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable.

We are not permitted to market, advertise or promote ArteFill for off-label uses, which are uses that the FDA has not approved. Off-label use of ArteFill may occur in areas such as the treatment of other facial wrinkles, creases and other soft tissue defects. While off-label uses of aesthetic products are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications regarding such off-label use. As a result, we may not actively promote or advertise ArteFill for off-label uses, even if physicians use ArteFill to treat such conditions. This limitation will restrict our ability to market our product and may substantially limit our sales. The U.S. Attorney’s offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and, in certain cases, have initiated civil and criminal investigations and actions related to such practices. If we are found to have promoted off-label uses of ArteFill in violation of the FDA’s marketing approval requirements, we could face warning letters, significant adverse publicity, fines, legal proceedings, injunctions or other penalties, any of which would be harmful to our business.

We have increased the size of our company significantly in connection with the commercial launch of ArteFill, and difficulties managing our growth could adversely affect our business, operating results and financial condition.

We have hired and plan to continue to hire a substantial number of additional personnel in connection with the commercial launch of ArteFill, and such growth has and could continue to place a strain on our management and our administrative, operational and financial infrastructure. From December 31, 2006 to March 3, 2008, we have increased the size of our company from 110 to 155 employees, including a direct sales force of more than 40 sales professionals. Based on our current operating plan, we expect to hire additional sales personnel during the next several quarters. Our ability to manage our operations and growth requires the continued improvement of operational, financial and management controls, reporting systems and procedures, particularly to meet the reporting requirements of the Securities Exchange Act of 1934. If we are unable to manage our growth effectively or if we are unable to attract additional highly qualified personnel, our business, operating results and financial condition may be harmed.

We are dependent on our key management personnel. The loss of any of these individuals could harm our business.

We are dependent on the efforts of our current key management, including Christopher J. Reinhard, our Executive Chairman of the Board of Directors, Diane S. Goostree, our President and Chief Executive Officer and Peter C. Wulff, our Executive Vice President and Chief Financial Officer. We have entered into a severance protection agreement with Ms. Goostree and change of control agreements with each of our other executive officers, including Messrs. Reinhard and Wulff. Any of our key management personnel or other employees may elect to end their employment with us and pursue other opportunities at any time, for any or no reason. In addition, we do not have and have no present intention to obtain key man life insurance on any of our executive officers or key management personnel to mitigate the impact of the loss of any of these individuals. The loss of any of these individuals, or our inability to recruit and train additional key personnel, particularly senior sales and marketing and research and development employees, in a timely manner, could harm our business and our future product revenues and prospects. The market for skilled employees for medical technology and biotechnology companies in San Diego

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is competitive, and we can provide no assurance that we will be able to locate skilled and qualified employees to replace any of our employees that choose to depart. If we are unable to attract and retain qualified personnel, our business will be significantly harmed.

We may rely on third parties for our international sales, marketing and distribution activities.

Although we plan initially to market and sell ArteFill to physicians in the United States through our own sales force, we may in the future rely on third parties to assist us in sales, marketing and distribution, particularly in international markets. If and when our dependence on third parties for our international sales, marketing and distribution activities increases, we will be subject to a number of risks associated with our dependence on these third parties, including:

•  lack of day-to-day control over the activities of third-party contractors;

•  third-party contractors may not fulfill their obligations to us or otherwise meet our expectations;

•  third-party contractors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control; and

•  disagreements with our contractors could require or result in costly and time-consuming litigation or arbitration.

If we fail to establish and maintain satisfactory relationships with these third-party contractors, our revenues and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.

To the extent we engage in marketing and distribution activities outside the United States, we will be exposed to risks associated with exchange rate fluctuations, trade restrictions and political, economic and social instability.

If ArteFill is approved for sale in foreign markets and we begin marketing ArteFill in these markets, we will be subject to various risks associated with conducting business abroad. A foreign government may require us to obtain export licenses or may impose trade barriers or tariffs that could limit our ability to build our international presence. Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries, including terrorism. To the extent that we attempt to expand our sales efforts in international markets, we may also face difficulties in staffing and managing foreign operations, longer payment cycles and problems with collecting accounts receivable and increased risks of piracy and limits on our ability to enforce our intellectual property rights. In addition, for financial reporting purposes, results of operations of our foreign subsidiary will be translated from local currency into U.S. dollars based on average monthly exchange rates. We currently do not hedge our foreign currency transactions and therefore will be subject to the risk of changes in exchange rates. If we are unable to adequately address the risks of doing business abroad and build an international presence, our business, financial condition and results of operations may be harmed.

If we acquire any companies or technologies, our business may be disrupted and the attention of our management may be diverted.

In July 2004, we acquired assets and intellectual property from FormMed Biomedicals AG in connection with the establishment of our manufacturing facility in Germany. This transaction had an effective date as of January 1, 2004. Since the completion of this acquisition, we have spent approximately $750,000 to improve and upgrade the physical facilities, manufacturing processes and quality control systems at that facility to be in compliance with both U.S. and international regulatory quality requirements. We may make additional acquisitions of complementary companies, products or technologies in the future. Any acquisitions will require the assimilation of the operations, products and personnel of the acquired businesses and the training and motivation of these individuals. Acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our relationships with current employees, customers and strategic partners. We may need to incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities for an acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related

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costs or amortization or impairment costs for acquired goodwill and other intangible assets. We may not realize the intended benefits of any acquisitions if management is unable to fully integrate acquired businesses, products, technologies or personnel with existing operations. We are currently not party to any agreements, written or oral, for the acquisition of any company, product or technology, nor do we anticipate making any arrangements for any such acquisition in the foreseeable future.

Our business, which depends on a small number of facilities, is vulnerable to natural disasters, telecommunication and information systems failures, terrorism and similar problems, and we are not fully insured for losses caused by such incidents.

We conduct operations in two facilities located in San Diego, California and one in Frankfurt, Germany. These facilities could be damaged by earthquake, fire, floods, power loss, telecommunication and information systems failures or similar events. Our insurance policies have limited coverage levels of up to approximately $28.0 million for property damage and up to $15.0 million for business interruption in these events and may not adequately compensate us for any losses that may occur. These policies do not include earthquake or flood coverage in California. In addition, terrorist acts or acts of war may cause harm to our employees or damage our facilities. Further, the potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that we cannot predict. We are uninsured for these types of losses.

We are recording non-cash compensation expense that may result in an increase in our net losses for a given period.

Deferred stock-based compensation represents an expense associated with the recognition of the difference between the deemed fair value of common stock at the time of a stock option grant or issuance and the option exercise price or price paid for the stock. Deferred stock-based compensation is amortized over the vesting period of the option or issuance. At December 31, 2006, deferred stock-based compensation related to option grants and stock issuances totaled approximately $2.7 million. Effective January 1, 2006, we prospectively adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) required us to reclassify the $2.7 million of deferred stock-based compensation to additional paid-in capital. The $2.7 million will be expensed on a straight-line basis as the options or stock vest, generally over a period of four years. $563,000 of deferred stock-based compensation has been expensed through the twelve months ended December 31, 2007.

We also record non-cash compensation expense for equity stock-based instruments issued to non-employees. SFAS No. 123(R) now requires us to record stock-based compensation expense for equity instruments granted to employees and directors. $3,238,000 of stock based compensation has been expensed through the twelve months ended December 31, 2007.

Non-cash compensation expense associated with future equity compensation awards may result in an increase in our net loss, and adversely affect our reported results of operations.

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies for public companies, including policies governing revenue recognition, expenses, accounting for stock options and in-process research and development costs, are subject to further review, interpretation and guidance from relevant accounting authorities, including the SEC. Changes to, or interpretations of, accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements, including those contained in this report. For example, in 2006, the Financial Accounting Standards Board adopted a new accounting pronouncement requiring the recording of expense for the fair value of stock options granted. We rely heavily on stock options to motivate current employees and to attract new employees. As a result of the requirement to expense stock options, we may choose to reduce our reliance on stock options as a motivation tool. If we reduce our use of stock options, it may be more difficult for us to attract and

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retain qualified employees. However, if we do not reduce our reliance on stock options, our reported net losses may increase, which may have an adverse effect on our reported results of operations.

Impairment of our significant intangible assets may reduce our profitability.

The costs of our acquired patents and technology are recorded as intangible assets and amortized over the period that we expect to benefit from the assets. As of December 31, 2007, the net acquired intangible assets comprised approximately 6.6% of our total assets. We periodically evaluate the recoverability and the amortization period of our intangible assets. Some factors we consider important in assessing whether or not impairment exists include performance relative to expected historical or projected future operating results, significant changes in the manner of our use of the assets or the strategy for our overall business, and significant negative industry or economic trends. These factors, assumptions, and changes therein could result in an impairment of our long-lived assets. Any impairment of our intangible assets may reduce our profitability and harm our results of operations and financial condition.

Risks Related to Our Intellectual Property

Our ability to achieve commercial success depends in part on obtaining and maintaining patent protection and trade secret protection relating to ArteFill and our technology and future products, as well as successfully defending our patents against third party challenges. If we are unable to obtain and maintain protection for our intellectual property and proprietary technology, the value of ArteFill, our technology and future products will be adversely affected, and we will not be able to protect our technology from unauthorized use by third parties.

Our long-term success largely depends on our ability to maintain patent protection covering our product, ArteFill, and to obtain patent and intellectual property protection for any future products that we may develop and seek to market. In order to protect our competitive position for ArteFill and any future products, we must:

•  prevent others from successfully challenging the validity or enforceability of, or infringing, our issued patents and our other proprietary rights;

•  operate our business, including the manufacture, sale and use of ArteFill and any future products, without infringing upon the proprietary rights of others;

•  successfully enforce our patent rights against third parties when necessary and appropriate; and

•  obtain and protect commercially valuable patents or the rights to patents both domestically and abroad.

We currently have one U.S. patent and corresponding patents in 14 international jurisdictions that cover ArteFill, and other alloplastic implants, that contain inert materials and are made of smooth, round, injectable polymeric and non-polymeric microspheres, and can be used for soft tissue augmentation. The U.S. patent covering this invention, U.S. Patent No. 5,344,452, will expire in September 2011. Although we applied for an extension of the term of this patent until 2016, we cannot assure you that the U.S. Patent and Trademark Office, or the U.S. PTO, will grant the extension for the full five years or at all. In addition, our competitors or other patent holders may challenge the validity of our patents or assert that our products and the methods we employ are covered by their patents. If the validity or enforceability of any of our patents is challenged, or others assert their patent rights against us, we may incur significant expenses in defending against such actions, and if any such challenge is successful, our ability to sell ArteFill may be harmed.

Protection of intellectual property in the markets in which we compete is highly uncertain and involves complex legal and scientific questions. It may be difficult to obtain additional patents relating to our products or technology. Furthermore, any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.

Other risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

•  our issued patents may not be valid or enforceable or may not provide adequate coverage for our products;

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•  the claims of any issued patents may not provide meaningful protection;

•  our issued patents may expire before we are able to successfully commercialize ArteFill or any future product candidates or before we receive sufficient revenues in return;

•  patents issued to us may be successfully challenged, circumvented, invalidated or rendered unenforceable by third parties;

•  the patents issued or licensed to us may not provide a competitive advantage;

•  patents issued to other companies, universities or research institutions may harm our ability to do business;

•  other companies, universities or research institutions may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we attempt to patent;

•  other companies, universities or research institutions may design around technologies we have licensed, patented or developed;

•  because the information contained in patent applications is generally not publicly available until published (usually 18 months after filing), we cannot assure you that we have been the first to file patent applications for our inventions or similar technology;

•  the future and pending applications we will file or have filed, or to which we will or do have exclusive rights, may not result in issued patents or may take longer than we expect to result in issued patents; and

•  we may be unable to develop additional proprietary technologies that are patentable.

Our other intellectual property, particularly our trade secrets and know-how, are important to us, and our inability to safeguard it may adversely affect our business by causing us to lose a competitive advantage or by forcing us to engage in costly and time-consuming litigation to defend or enforce our rights.

We rely on trademarks, copyrights, trade secret protections, know-how and contractual safeguards to protect our non-patented intellectual property, including our manufacturing processes. Our employees, consultants and advisors are required to enter into confidentiality agreements that prohibit the disclosure or use of our confidential information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. There can be no assurance that we will be able to effectively enforce these agreements or that the subject confidential information will not be disclosed, that others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect our confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope and protectability of our confidential information, and failure to maintain the confidentiality of our confidential information could adversely affect our business by causing us to lose a competitive advantage maintained through such confidential information.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with consultants, advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our products, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could have a material adverse effect on our business, financial condition and results of operations by delaying or preventing our ability to commercialize innovations or by diverting our resources away from revenue-generating projects.

Pursuant to the terms of an intellectual property litigation settlement, we have licensed some of our technology to a competitor.

In October 2005, we and Dr. Martin Lemperle, the brother of Dr. Stefan M. Lemperle, our former Chief Executive Officer and a former director, entered into a settlement and license agreement with BioForm Medical, Inc. and BioForm Medical Europe B.V., or the BioForm entities, pursuant to which all outstanding disputes and litigation matters among the parties were settled. In connection with the settlement, we granted to the BioForm entities, which are competitors of us, an exclusive, world-wide, royalty-bearing license under certain of our patents to make and sell implant products containing calcium hydroxylapatite, or CaHA, particles and a non-exclusive,

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world-wide, royalty-bearing license under the same patents to make and sell certain other non-polymeric implant products. In September 2007, we entered into a second license agreement with the BioForm entities. Under the second agreement, the BioForm entities elected to pre-pay all future royalty obligations to us by making two payments totaling $5.5 million. These payments replaced any future royalty obligation of the BioForm entities to us under the settlement and license agreement. Our license grants allow BioForm to market and sell its Radiesse and Coaptite^® products and other potential future products. Sale of these products by BioForm may impair our ability to generate revenues from sales of ArteFill. In addition, if we become involved in litigation or if third parties infringe or threaten to infringe our intellectual property rights in the future, we may choose to make further license grants with respect to our technology, which could further harm our ability to market and sell ArteFill.

Our business may be harmed, and we may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

A third party may assert that we (including our subsidiary) have infringed, or one of our distributors or strategic collaborators has infringed, his, her or its patents and proprietary rights or challenge the validity or enforceability of our patents and proprietary rights. Our competitors, many of which have substantially greater resources than us and have made significant investments in competing technologies or products, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use and sell future products either in the United States or in international markets. Further, we may not be aware of all of the patents and other intellectual property rights owned by third parties that may be potentially adverse to our interests. Intellectual property litigation in the medical device and biotechnology industries is common, and we expect this trend to continue. We may need to resort to litigation to enforce our patent rights or to determine the scope and validity of a third party’s patents or other proprietary rights, or to defend our products, including ArteFill, against allegations of patent infringement. The outcome of any such proceedings is uncertain and, if unfavorable, could significantly harm our business. If we do not prevail in this type of litigation, we or our distributors or strategic collaborators may be required to:

•  pay actual monetary damages, royalties, lost profits and/or increased damages and the third party’s attorneys’ fees, which may be substantial;

•  expend significant time and resources to modify or redesign the affected products or procedures so that they do not infringe a third party’s patents or other intellectual property rights; further, there can be no assurance that we will be successful in modifying or redesigning the affected products or procedures;

•  obtain a license in order to continue manufacturing or marketing the affected products or services, and pay license fees and royalties; if we are able to obtain such a license, it may be non-exclusive, giving our competitors access to the same intellectual property, or the patent owner may require that we grant a cross-license to our patented technology; or

•  stop the development, manufacture, use, marketing or sale of the affected products through a court-ordered sanction called an injunction, if a license is not available on acceptable terms, or not available at all, or our attempts to redesign the affected products are unsuccessful.

Any of these events could adversely affect our business strategy and the value of our business. In addition, the defense and prosecution of intellectual property suits, interferences, oppositions and related legal and administrative proceedings in the United States and elsewhere, even if resolved in our favor, could be expensive, time consuming, generate negative publicity and could divert financial and managerial resources. Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater financial resources.

Our ability to market ArteFill in some foreign countries may be impaired by the activities and intellectual property rights of third parties.

Although we acquired all of the international intellectual property rights related to Artecoll and the ArteFill technology platform in 2004, we are aware that third parties located in Germany, the Netherlands and Canada have in the past, and may be currently, manufacturing and selling products for the treatment of facial wrinkles under the name Artecoll or ArteSense outside the United States. Following the establishment of ArteFill in the United States,

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we plan to explore opportunities to market and sell ArteFill in select international markets. To successfully enter into these markets and achieve desired revenues internationally, we may need to enforce our patent and trademark rights against third parties that we believe may be infringing on our rights. We have recently sent cease and desist letters to the entities we have knowledge of that are manufacturing and distributing PMMA-based dermal fillers that we believe infringe our patent, and may forward such letters to the appropriate European authorities.

The laws of some foreign countries do not protect intellectual property, including patents, to as great an extent as do the laws of the United States. Policing unauthorized use of our intellectual property is difficult, and there is a risk that despite the expenditure of significant financial resources and the diversion of management attention, any measures that we take to protect our intellectual property may prove inadequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our products, thus likely reducing our sales in these countries. Furthermore, some of our patent rights may be limited in enforceability to the United States or certain other select countries, which may limit our intellectual property rights abroad.

Risks Related to Government Regulation

ArteFill will be subject to ongoing regulatory review, and if we fail to comply with continuing U.S. and foreign regulations, ArteFill could be subject to a product recall or other regulatory action, which would seriously harm our business.

Even though the FDA has approved the commercialization of ArteFill in the United States, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping related to ArteFill continue to be subject to extensive ongoing regulatory requirements. We are subject to ongoing FDA requirements for submission of safety and other post-market information and reports, including results from any post-marketing studies or vigilance required as a condition of approval. In particular, the FDA has required us to monitor the stability of the bovine collagen manufactured at our U.S. facility for sufficient time to support an 18-month expiration date, and to conduct a post-market study of 1,000 patients to examine the significance of delayed granuloma formation for a period of five years after their initial treatment. The FDA and similar governmental authorities in other countries have the authority to require the recall of ArteFill in the event of material deficiencies or defects in design, manufacture or labeling. Any recall of ArteFill would divert managerial and financial resources and harm our reputation among physicians and patients.

Additionally, in connection with the ongoing regulation of ArteFill, the FDA or other regulatory authorities may also:

•  impose labeling and advertising requirements, restrictions or limitations, including the inclusion of warnings, precautions, contraindications or use limitations that could have a material impact on the future profitability of our product candidates;

•  impose testing and surveillance to monitor our products and their continued compliance with regulatory requirements; and

•  require us to submit products for inspection

Any manufacturer and manufacturing facilities we use to make our products will also be subject to periodic unannounced review and inspection by the FDA. If a previously unknown problem or problems with a product or a manufacturing and laboratory facility used by us is discovered, the FDA or foreign regulatory agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Material changes to an approved product, including the way it is manufactured or promoted, require FDA approval before the product, as modified, can be marketed. If we fail to comply with applicable regulatory requirements, a regulatory agency may:

•  issue warning letters;

•  impose fines and other civil or criminal penalties;

•  suspend or withdraw regulatory approvals for our products;

•  refuse to approve pending applications or supplements to approved applications filed by us;

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•  delay, suspend or otherwise restrict our manufacturing, distribution, sales and marketing activities;

•  close our manufacturing facilities; or

•  seize or detain products or require a product recall.

If any of these events were to occur, we would have limited or no ability to market and sell ArteFill, and our business would be seriously harmed.

If we, or the supplier of the calf hides used in our collagen, do not comply with FDA and other federal regulations, our supply of product could be disrupted or terminated.

We must comply with various federal regulations, including the FDA’s Quality System Regulations, or QSRs, applicable to the design and manufacturing processes related to medical devices. In addition, Lampire Biological Labs, Inc., the supplier of the calf hides used in our collagen, also must comply with manufacturing and quality requirements imposed by the FDA and the USDA. If we or our supplier fail to meet or are found to be noncompliant with QSRs or any other requirements of the FDA or USDA, or similar regulatory requirements outside of the United States, obtaining the required regulatory approvals, including from the FDA, to use alternative suppliers or manufacturers may be a lengthy and uncertain process. A lengthy interruption in the manufacturing of one or more of our products as a result of non-compliance could adversely affect our product inventories and supply of products available for sale which could reduce our sales, margins and market share, as well as harm our overall business and financial results.

The discovery of previously unknown problems with ArteFill may result in restrictions on the product, including withdrawal from manufacture. In addition, the FDA may revisit and change its prior determinations with regard to the safety or efficacy of ArteFill or our future products. If the FDA’s position changes, we may be required to change our labeling or cease to manufacture and market our products. Even prior to any formal regulatory action, we could voluntarily decide to cease the distribution and sale of, or to recall ArteFill if concerns about its safety or efficacy develop. In their regulation of advertising, the FDA and the Federal Trade Commission, or FTC, may issue correspondence alleging that our advertising or promotional practices are false, misleading or deceptive. The FDA and the FTC may impose a wide array of sanctions on companies for such advertising practices, which could result in any of the following:

•  incurring substantial expenses, including fines, penalties, legal fees and costs to comply with applicable regulations;

•  changes in the methods of marketing and selling products;

•  taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding or correcting previous advertisements or promotions; or

•  disruption in the distribution of products and loss of sales until compliance with the FDA’s position is obtained.

If any of the above sanctions are imposed on us, it could damage our reputation, and harm our business and financial condition. In addition, physicians may utilize ArteFill for uses that are not described in the product’s labeling or differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use. Companies cannot promote FDA-approved products for off-label uses, but under certain limited circumstances they may disseminate to practitioners’ articles published in peer-reviewed journals. To the extent allowed by law, we intend to distribute peer- reviewed articles on ArteFill and any future products to practitioners. If, however, our activities fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA.

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We have a manufacturing facility in Frankfurt, Germany, and will be subject to a variety of regulations in jurisdictions outside the United States that could have a material adverse effect on our business in a particular market or in general.

We presently manufacture the PMMA microspheres used in ArteFill at our manufacturing facility in Germany. We are currently subject to a variety of regulations in Germany and expect to become subject to additional foreign regulations as we expand our operations. Our failure to comply, or assertions that we fail to comply, with these regulations, could harm our business in a particular market or in general. To the extent we decide to commence or expand operations in additional countries, government regulations in those countries may prevent or delay entry into, or expansion of operations in, those markets. For example, the government of the Netherlands has received a request to conduct an investigation into the safety of permanent injectable aesthetic products, which could lead to restrictions on the sale or use of these products, or heighten the requirements for qualifying or licensing these products for sale. In addition, other countries within the European Union, or EU, may request the EU to more strictly regulate dermal fillers based on the negative side effects, alleged or perceived negative side effects or concerns about the safety of dermal fillers that contain a permanent component being offered in Europe. A number of the permanent dermal fillers offered in Europe obtained a CE mark based on limited review and approval requirements. We are aware that stricter registration processes for dermal fillers in the EU have been implemented over the last five years, and further requirements may be imposed in the EU. We support these initiatives and are cooperating with the regulatory bodies in Europe to ensure that all manufacturers of permanent dermal fillers comply with strict and rigorous requirements that ensure patient safety, similar to the processes currently employed by the FDA and to which ArteFill was subject to, during our FDA review and approval process. Nevertheless, government actions such as these could increase our regulatory approval costs and delay or prevent the introduction of ArteFill in international markets.

We may be subject, directly or indirectly, to state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.

Our operations may be directly or indirectly affected by various broad state healthcare fraud and abuse laws. In particular, our activities with respect to ArteFill will potentially be subject to anti-kickback laws in some states, which prohibit the giving or receiving of remuneration to induce the purchase or prescription of goods or services, regardless of who pays for the goods or services. These laws, sometimes referred to as all-payor anti-kickback statutes, could be construed to apply to certain of our sales and marketing and physician training and support activities. In particular, our provision of practice support services such as marketing or promotional activities offered to trained and accredited physicians could be construed as an economic benefit to these physicians that constitutes an unlawful inducement of the physicians to recommend ArteFill to their patients. If our operations, including our anticipated business relationships with physicians who use ArteFill, are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines and imprisonment. If enforcement action were to occur, our business and financial condition would be harmed.

Risks Related to Our Common Stock

We may be subject to the assertion of claims by our stockholders relating to prior financings, which could result in litigation and the diversion of our management’s attention.

Investors in certain of our prior financings may allege that we failed to satisfy all of the requirements of applicable securities laws in that certain disclosures to these investors regarding our capitalization may not have been accurate in all material respects, paperwork might not have been timely filed in certain states and/or certain offerings may not have come within a private-placement safe harbor. We believe that any such claims would not succeed because we believe we have complied with these laws in all material respects, such claims would be barred pursuant to applicable statutes of limitations or such claims could be resolved through compliance with certain state securities laws. However, to the extent we do not succeed in defending against any such claims and any such claims are not barred or resolved, they could result in judgments for damages. Even if we are successful in defending these claims, their assertion could result in litigation and significant diversion of our management’s attention and resources.

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The price of our common stock may be volatile, and any investments in our common stock could suffer a decrease in value.

Prior to our initial public offering in December 2006, there was been no public market for our common stock. The market price for our common stock has been and is likely to remain volatile, and the stock markets in general, and the markets for medical technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. There have also been periods, sometimes extending for many months and even years, where medical technology stocks, especially of smaller earlier stage companies like us, have been out of favor and trading prices have remained low relative to other sectors. In addition, the average daily trading volume in our common stock has been relatively low, which can lead to volatility in our stock price.

Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including:

•  news that we will be required to raise additional capital to support our operations during 2008, the risks that we will not be able to raise the capital on a timely basis on acceptable terms or at all, and concerns regarding the potential dilution of such financing transaction;

•  negative publicity concerning ArteFill, including concerns expressed about ArteFill based on negative perceptions of non-FDA approved dermal fillers sold outside the United States;

•  adverse actions taken by regulatory agencies with respect to open investigations, including the ongoing investigation by the FDA’s Office of Criminal Investigation involving Drs. Gottfried and Stefan Lemperle and our company;

•  other adverse actions taken by regulatory agencies with respect to our products, manufacturing processes or sales and marketing activities or those of our competitors;

•  developments in any lawsuit involving us, our intellectual property or our product or product candidates;

•  announcements of technological innovations or new products by our competitors;

•  announcements of adverse effects of products marketed or in clinical trials by our competitors;

•  regulatory developments in the United States and foreign countries;

•  announcements concerning our competitors or the medical device, cosmetics or pharmaceutical industries in general;

•  developments concerning any future collaborative arrangements;

•  actual or anticipated variations in our operating results;

•  lack of securities analyst coverage or changes in recommendations by analysts;

•  deviations in our operating results from the estimates of analysts;

•  sales of our common stock by our founders, executive officers, directors, or other significant stockholders or other sales of substantial amounts of common stock;

•  changes in accounting principles; and

•  loss of any of our key management, sales and marketing or scientific personnel and any claims against us by current or former employees.

Litigation has often been brought against companies whose securities have experienced volatility in market price. If litigation of this type were to be brought against us, it could harm our financial position and could divert management’s attention and our company’s resources.

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You could experience substantial dilution of your investment as a result of subsequent exercises of our outstanding warrants and options.

As of December 31, 2007, we had reserved approximately 8.0 million shares of our common stock for potential issuance upon the exercise of warrants and options (including outstanding warrants to purchase common stock, options already granted under our stock option plans, non-plan stock options already granted and shares reserved for future grant under our stock option plans), which represented approximately 36.2% of our common stock on a fully diluted basis (assuming the exercise of all outstanding warrants and options). Of the 8.0 million shares of common stock reserved at December 31, 2007, 3.1 million shares of common stock are reserved for outstanding stock options at a weighted average exercise price of $7.08 per share; 2.5 million shares of common stock are reserved for outstanding warrants to purchase common stock (after considering the impact of the warrant holder elections eliminating the automatic expiration and extending the terms of the warrants upon the closing of our initial public offering), at a weighted average exercise price $7.06 per share; and 2.4 million shares of common stock are reserved for future stock option grants under our 2006 Equity Incentive Plan. In February 2008, we issued 1,675,000 of warrants in relation to the financing arrangement with CHRP. 1,300,000 warrants have an exercise price of $5.00 while 375,000 warrants have an exercise price of $3.13. The issuance of these additional shares could dilute your ownership interest in our company.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

•  authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

•  providing for a classified board of directors with staggered terms;

•  requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;

•  eliminating the ability of stockholders to call special meetings of stockholders;

•  prohibiting stockholder action by written consent; and

•  establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

Item 1B.   Unresolved Staff Comments.

None.

Item 2.   Properties.

We lease a total of 67,000 square feet in two buildings for our corporate, manufacturing and research and development headquarters in San Diego, California under two separate seven-year leases that expire in December 2012. Our facilities include 14,000 square feet of clean room space, 15,000 square feet of manufacturing, support and laboratory space and 38,000 square feet of sales, marketing and administrative office space, which was in the

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process of being renovated as of December 31, 2007. We have a first right of refusal to purchase the facilities during the term of the lease, as well as the right to extend each lease term for an additional five years.

In addition, we lease a 3,550 square foot manufacturing and warehouse facility in Frankfurt, Germany, where we manufacture the PMMA microspheres used exclusively in ArteFill. The leases for our Frankfurt facility expire in November 2008, and are subject to automatic one-year extensions unless written notice of termination is given by either party at least six months prior to the beginning of the extension term.

We believe that our existing facilities are adequate to meet our needs for the foreseeable future.

Item 3.   Legal Proceedings.

Sandor Litigation

In August 2005, Elizabeth Sandor, an individual residing in San Diego, California, filed a complaint against us, Drs. Gottfried Lemperle, Stefan Lemperle and Steven Cohen in the Superior Court of the State of California for the County of San Diego. The complaint, as amended, set forth various causes of action against us, including product liability, fraud, negligence and negligent misrepresentation, and alleged that Dr. Gottfried Lemperle, our co-founder, former Chief Scientific Officer and a former director, treated Ms. Sandor with Artecoll and/or ArteFill in violation of medical licensure laws, that the product was defective and unsafe because it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections.

In addition, the complaint alleged that Dr. Gottfried Lemperle and his son, Dr. Stefan Lemperle, our co-founder, former Chief Executive Officer and a former director, falsely represented to her that the product had received an approvability letter from the FDA and was safe and without the potential for adverse reactions.

The complaint also alleged medical malpractice against Dr. Cohen, the lead investigator in our U.S. clinical trial, for negligence in treating Ms. Sandor for the adverse side effects she experienced. Ms. Sandor sought damages in an unspecified amount for pain and suffering, medical and incidental expenses, loss of earnings and earning capacity, punitive and exemplary damages, reasonable attorneys’ fees and costs of litigation. On June 1, 2006, the parties filed a stipulation to dismiss the case without prejudice and to toll the statute of limitations. The court dismissed the case on June 5, 2006 as stipulated by the parties, and Ms. Sandor was allowed to refile her case at any time within 18 months from that date.

On December 5, 2007, Ms. Sandor re-filed a complaint for personal injury, compensatory and punitive damages against us, Dr. Gottfried Lemperle, Dr. Stefan Lemperle and Dr. Steven Cohen. The complaint contains many of the same allegations contained in the initial complaint filed in September 2005. The complaint sets forth various causes of action and alleges that Dr. Gottfried Lemperle administered injections of a product of ours in violation of medical licensure laws, that the product was defective and unsafe in that it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections. Ms. Sandor is seeking damages in an unspecified amount for special and actual damages, medical and incidental expenses, incidental and consequential damages, punitive and exemplary damages, reasonable attorney’s fees and costs of litigation. We are preparing a demurrer to the complaint and written discovery has commenced in this matter.

FDA Investigation

During the Sandor litigation discussed above, Dr. Gottfried Lemperle’s counsel informed us that she had contacted an investigator in the FDA’s Office of Criminal Investigations to determine whether any investigation of Dr. Gottfried Lemperle was ongoing. She also informed us that the FDA investigator informed her that the FDA has an open investigation regarding us, Dr. Gottfried Lemperle and Dr. Stefan Lemperle, that the investigation had been ongoing for many months, that the investigation would not be completed within six months, and that at such time the investigation is completed, it could be referred to the U.S. Attorney’s office for criminal prosecution. In November 2006, we contacted the FDA’s Office of Criminal Investigations. That office confirmed the ongoing investigation, but declined to provide any details of the investigation, including the timing, status, scope or targets of the investigation. We contacted the FDA’s Office of Criminal Investigations in February 2008. The Office of Criminal Investigations confirmed that the investigation is ongoing and has been referred to the US Attorney’s office, but did

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not provide any additional information regarding this investigation or whether the U.S. Attorney’s office may commence an action.

To our knowledge, prior to, or following this inquiry, none of our current or former officers or directors had been contacted by the FDA in connection with an FDA investigation. As a result, we have no direct information from the FDA regarding the subject matter of this investigation or any action that may be commenced by the U.S. Attorney’s office. We believe that the investigation may relate to the facts alleged in the Sandor litigation and the matters identified in the following correspondence from the FDA. In July 2004, we received a letter from the FDA’s Office of Compliance indicating that the FDA had received information suggesting that we may have improperly marketed and promoted ArteFill prior to obtaining final FDA approval. We also received a letter from the FDA’s MedWatch program, the FDA’s safety information and adverse event reporting program, on April 21, 2005, which included a Manufacturer and User Facility Device Experience Database, or MAUDE, report.

The text of the MAUDE report contained facts similar to those alleged by the plaintiff in the Sandor litigation. In May 2006, we received the FDA’s EIR for its investigation of our San Diego manufacturing facility. The EIR referenced two anonymous consumer complaints received by the FDA. The first complaint, received by the FDA in December 2003, alleges that Dr. Stefan Lemperle promoted the unapproved use of ArteFill, providing, upon request, a list of local doctors who could perform injections of ArteFill.

The second complaint, received by the FDA in June 2004, alleges complications experienced by an individual who had been injected with ArteFill by Dr. Gottfried Lemperle in his home. The second complaint further alleges that Dr. Stefan Lemperle marketed unapproved use of ArteFill.

We responded to the FDA’s correspondence in August 2004 and again in May 2006. In our responses, we informed the FDA that based on our internal investigations; Dr. Gottfried Lemperle had used Artecoll, a predecessor product to ArteFill, on four individuals in the United States. In July 2006, the FDA requested us to submit an amendment to our pre-market approval application for ArteFill containing a periodic update covering the time period between January 16, 2004, the date of our approvable letter, and the date of the amendment. In response to this request, we completed additional inquiries regarding Dr. Gottfried Lemperle’s unauthorized uses of Artecoll outside our clinical trials in contravention of FDA rules and regulations. In August 2006, we filed an amendment to our pre-market approval application that included the periodic update requested by the FDA. In the amendment, we informed the FDA that as a result of our additional inquiries, we had identified nine individuals who had been treated with Artecoll in the United States by Dr. Gottfried Lemperle, four of whom we had disclosed to the FDA in our prior correspondence. We also informed the FDA that 16 individuals had been treated with Artecoll by physicians in Mexico or Canada, where Artecoll is approved for treatment, in connection with physician training sessions conducted in those countries. Further, we informed the FDA that Dr. Stefan M. Lemperle had been injected with Artecoll in the United States in 2004 by his father, Dr. Gottfried Lemperle.

We intend to cooperate fully with any inquiries by the FDA or any other authorities regarding these and any other matters. Since initiating a call in February 2008, we have not received any communications from the FDA’s Office of Criminal Investigations or the U.S. Attorney’s office regarding this matter. As a result, we have no information regarding when any investigation may be concluded or whether the U.S. Attorney’s office may commence an action, and we are unable to predict the outcome of the foregoing matters or any other inquiry by the FDA or any other authorities. In May 2006, we terminated our consulting relationship with Dr. Gottfried Lemperle, and in November 2006, Dr. Stefan Lemperle resigned as a director and employee. Neither Dr. Stefan Lemperle nor Dr. Gottfried Lemperle provide services to us in any capacity.

Item 4.   Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of our security holders during the quarter ended December 31, 2007.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information for Common Stock

Our common stock has been listed for trading on the NASDAQ Global Market under the symbol “ARTE” since December 20, 2006. The following table sets forth high and low sale closing prices per share of common stock during the periods indicated as reported on the NASDAQ Global Market.

	High		Low
Fourth Quarter beginning on December 20, 2006	$	9.50	$	7.01
First Quarter of 2007		10.50		7.21
Second Quarter of 2007		9.54		7.14
Third Quarter of 2007		8.15		3.82
Fourth Quarter of 2007		4.88		1.91

On March 3, 2008, the closing sale price of our common stock was $2.21 per share. On March 3, 2008, there were approximately 813 record holders of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, for development of our business and do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future. The terms of our financing arrangement with CHRP restrict our ability to declare or pay any dividends unless we obtain the prior written consent of CHRP.

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Stock Performance Graph

The following graph compares the cumulative total stockholder return data (through December 31, 2007) for the Company’s common stock since December 20, 2006 (the date on which the Company’s common stock was first registered under Section 12 of the Exchange Act) to the cumulative return over such period of (i) The NASDAQ Stock Market Composite Index, and (ii) NASDAQ Medical Equipment Index. The graph assumes that $100 was invested on the date on which the Company completed the initial public offering of its common stock, in the common stock and in each of the comparative indices. The graph further assumes that such amount was initially invested in the Common Stock of the Company at the price to which such stock was first offered to the public by the Company on the date of its initial public offering. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

COMPARISON OF 1 YEAR CUMULATIVE TOTAL RETURN*

Among Artes Medical Inc., The NASDAQ Composite Index

And The NASDAQ Medical Equipment Index

*  $100 invested on 12/20/06 in stock or 11/30/06 in index-including reinvestment of dividends. Fiscal year ending December 31.

Recent Sales of Unregistered Securities

We have issued the following securities that have not been registered under the Securities Act since January 1, 2007:

•  In April 2007, we issued a warrant exercisable for 25,000 shares of common stock at an exercise price of $8.07 to a former executive of the Company, in connection with a settlement agreement.

•  In February 2008, we issued warrants for an aggregate of 1,675,000 shares of our common stock to CHRP. 1,300,000 warrants have an exercise price of $5.00 while 375,000 warrants have an exercise price of $3.13.

The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder, as transactions by an issuer not involving any public offering.

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Use of Proceeds

We registered shares of our common stock in connection with our initial public offering under the Securities Act of 1933, as amended. The Registration Statement on Form S-1 (File No. 333-134086) filed in connection with our initial public offering was declared effective by the SEC on December 19, 2006. The offering commenced on December 20, 2006. We sold 4,600,000 shares of our registered common stock in the initial public offering and an additional 690,000 shares of our registered common stock in connection with the underwriters’ exercise of their over-allotment option. The underwriters of the offering were represented by Cowen and Company, LLC and Lazard Capital Markets LLC and Stifel, Nicolaus & Company, Incorporated.

All 5,290,000 shares of our common stock registered in the offering were sold at the initial public offering price of $6.00 per share, resulting in aggregate gross proceeds to us of $31.7 million. The net offering proceeds received by us, after deducting expenses incurred in connection with the offering, was approximately $25.3 million. These expenses consisted of direct payments of:

•  approximately $2.2 million in underwriters discounts, fees and commissions; and

•  approximately $4.2 million in legal, accounting and printing fees and miscellaneous expenses.

No payments for such expenses were directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

We have used the net proceeds of the initial public offering during 2007 for the intended uses outlined in our prospectus relating to our initial public offering, and as of December 31, 2007, we have approximately $20.3 million in cash and cash equivalents. We have used $23.7 million to fund our operations, $1.2 million to purchase property and equipment and $1.3 million to repay our outstanding debt and capital lease obligations. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

Purchases of Equity Securities

There were no share repurchases during the year of 2007.

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Item 6.   Selected Consolidated Financial Data.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this report. We derived the consolidated statements of operations data for the years ended December 31, 2007, 2006 and 2005, as well as the consolidated balance sheet data as of December 31, 2007 and 2006, from our audited consolidated financial statements included elsewhere in this report. Our historical results are not necessarily indicative of operating results to be expected in future periods.

	Years Ended December 31,
	2007			2006			2005			2004			2003
Consolidated Statements of Operations Data:
Revenues:
Product sales	$	7,084		$	—		$	—		$	—		$	—
License revenues		6,232			390			—			—			—
Total revenues		13,316			390			—			—			—
Cost of product sales		10,659			—			—			—			—
Gross profit		2,657			390			—			—			—
Expenses:
Research and development		6,023			8,084			10,189			3,634			974
Selling, general and administrative		24,331			17,299			10,137			5,155			2,976
Loss from operations		(27,697	)		(24,993	)		(20,326	)		(8,789	)		(3,950	)
Interest income (expense), net		272			(1,779	)		(4,416	)		(4,028	)		(2,170	)
Other income (expense), net		(2	)		(27	)		2,041			(22	)		—
Loss before benefit for income taxes		(27,427	)		(26,799	)		(22,701	)		(12,839	)		(6,120	)
Benefit for income taxes		542			476			458			454			—
Net loss	$	(26,885	)	$	(26,323	)	$	(22,243	)	$	(12,385	)	$	(6,120	)
Loss per share:
Basic and diluted	$	(1.63	)	$	(14.23	)	$	(18.76	)	$	(11.20	)	$	(5.76	)
Weighted average shares — basic and diluted		16,462,369			1,850,255			1,185,387			1,106,188			1,062,825
Stock-based compensation is included in the following categories:
Capitalized to inventory	$	575		$	263		$	—		$	—		$	—
Research and development	$	453		$	766		$	256		$	91		$	—
Selling, general and administrative		2,773			4,165			1,092			1,042			159
	$	3,226		$	4,931		$	1,348		$	1,133		$	159

See our consolidated financial statements and related notes for a description of the calculation of the net loss per share and the weighted-average number of shares used in computing the per share data.

	As of December 31,
	2007		2006		2005			2004			2003
	(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	20,293	$	46,258	$	6,930		$	2,269		$	36
Working capital (deficit)		16,489		39,406		(2,974	)		(3,792	)		(2,659	)
Total assets		35,721		60,613		20,320			10,296			450
Long-term debt and capital lease obligations, less current portion		2,231		3,362		66			5,323			371
Stockholders’ equity (deficit)		20,624		43,186		5,537			(4,594	)		(2,628	)

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report and those discussed in other documents we file with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.

Overview

We are a medical technology company focused on developing, manufacturing and commercializing a new category of injectable aesthetic products for the dermatology and plastic surgery markets. On October 27, 2006, the FDA approved ArteFill, our non-resorbable aesthetic injectable implant for the correction of facial wrinkles known as smile lines, or nasolabial folds. Currently, there are two categories of injectable aesthetic products used for the treatment of facial wrinkles: temporary muscle paralytics, which block nerve impulses to temporarily paralyze the muscles that cause facial wrinkles, and dermal fillers, which are injected into the skin or deeper facial tissues beneath a wrinkle to help reduce the appearance of the wrinkle. Unlike existing temporary muscle paralytics and other dermal fillers, which are temporary, and are comprised of materials that are completely metabolized and absorbed by the body, ArteFill is a proprietary formulation comprised of polymethylmethacrylate, or PMMA, microspheres and bovine collagen, or collagen derived from calf hides. PMMA is one of the most widely used artificial materials in implantable medical devices, and is not absorbed or degraded by the human body. Following injection, the PMMA microspheres in ArteFill remain intact at the injection site and provide a permanent support structure to fill in the existing wrinkle and help prevent further wrinkling. As a result, we believe that ArteFill will provide patients with aesthetic benefits that may last for years.

We commenced commercial shipments of ArteFill during the first quarter of 2007. Our strategy is to establish ArteFill as a leading injectable aesthetic product. We market and sell ArteFill to dermatologists, plastic surgeons and cosmetic surgeons in the United States through our direct sales force. We target dermatologists, plastic surgeons and cosmetic surgeons whom we have identified as having performed a significant number of procedures involving injectable aesthetic products. We provide physicians with comprehensive education and training programs. We believe our education and training programs enable physicians to improve patient outcomes and satisfaction. In addition, we may expand our product offering by acquiring complementary products, technologies or businesses.

Since our inception in 1999, we have incurred significant losses and have never been profitable. Prior to 2007, we were a development stage company, and devoted substantially all of our efforts to product development and clinical trials, to acquire international rights to certain intangible assets and know-how related to our technology, and to establish commercial manufacturing capabilities. As of December 31, 2007, our accumulated deficit was approximately $106.3 million. We expect our selling, general and administrative expenses to increase over the next several quarters as we expand the size of our direct sales and marketing force and continue to focus on our direct to consumer marketing, advertising and promotional activities.

We have financed our operations through sales of our preferred stock and common stock, options and warrants exercisable for our preferred and common stock, convertible and nonconvertible debt and through the initial public offering of our common stock. Since inception, we have raised $61.7 million through private equity financings, $1.6 million through the exercise of options and warrants, $28.1 million through convertible and nonconvertible debt, and $25.3 million through the initial public offering of our common stock. In November 2006, we entered into a loan and security agreement with Comerica Bank consisting of a revolving line of credit for up to $5,000,000 and a term loan for up to $5,000,000. At December 31, 2007, $8.6 million was outstanding under the loan and security agreement. As of December 31, 2007, our cash and cash equivalents were $20.3 million.

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In February 2008, we completed a revenue financing arrangement with Cowen Healthcare Royalty Partners, L.P., or CHRP, a leading healthcare investor and affiliate of Cowen Group, Inc., to immediately provide $21.5 million of financing for the Company, plus an additional $1 million in 2009 conditioned upon our attainment of a revenue milestone for fiscal year 2008. We intend to use the funds to support our operations, including funds necessary to expand both our dedicated sales force and consumer outreach programs. We used $8.6 million of the proceeds from the financing to payoff and terminate our existing credit facility with Comerica Bank. The financing closed on February 12, 2008, resulting in net cash of $12.6 million after paying certain transaction expenses and paying down our existing Comerica Bank debt.

Financial Operations Overview

Product Sales

We commenced commercial shipments of ArteFill during the first quarter of 2007. For the year ended December 31, 2007, we have generated $7.1 million in ArteFill product sales.

License Revenues

We generated $6.2 million and $0.4 million, respectively, in license revenue for the year ended December 31, 2007 and 2006. The increase in license revenue is related to the Second Agreement we entered into with BioForm, in which BioForm elected to pre-pay all future royalty obligations to us by making two payments totaling $5.5 million. We recognized $5.5 million in revenue in September 2007.

Cost of Product Sales

Cost of product sales consists primarily of expenses related to the manufacturing and distribution of ArteFill, including expenses related to our direct and indirect manufacturing personnel, quality assurance and quality control, manufacturing and engineering, supply chain management, facilities and occupancy costs. We also incur expenses related to manufacturing yield losses, product exchanges and rejects, procurement from our manufacturing materials supply and distribution partners and amortization of deferred stock-based compensation for our direct and indirect manufacturing personnel.

While the direct material costs for ArteFill are expected to represent a small portion of our cost of product sales, our manufacturing cost structure includes a large fixed cost component that will be spread out over future production unit volumes. We anticipate the economies of scale of manufacturing our product and future automation efforts will be a significant factor in reducing future unit manufacturing costs to generate improved gross margins.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses are comprised of the following:

•  sales and marketing expenses, which primarily consist of the personnel and related costs of our U.S. sales force, customer service, marketing and brand management functions, including direct costs for advertising and promotion of our product; and

•  general and administrative costs, which primarily consist of corporate executive, finance, legal, human resources, information systems, investor relations and general administrative functions.

From the year ended December 31, 2007, we spent an aggregate of approximately $24.3 million on selling, general and administrative expenses, which represented approximately 80% of total operating expenses. We anticipate substantial increases in our selling, general and administrative expenses as we continue to add personnel to our direct U.S. sales force and expand our other marketing functions and initiatives. The size of the increase depends on the size of our sales force, which we have increased to more than 40 sales representatives as of March 3, 2008, as well as the extent of marketing, advertising and promotional efforts either directly or through third parties. We also anticipate increases in general and administrative costs related to investor relations, financial reporting and corporate governance obligations applicable to publicly held companies.

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Research and Development Expenses

A significant majority of our research and development expenses has historically consisted of expenses incurred by external service providers for preclinical, clinical trials, technology and regulatory development projects. The addition of research and development management with multidisciplinary experience in basic science, process engineering, and product development, working in concert with the management additions in the regulatory and quality functions will allow for some of this activity to be conducted internally.

Our historical research and development expenses also include costs incurred for process development and validation to scale up our commercial operations to meet cGMP manufacturing requirements prior to final approval from the FDA to market our product. We have also incurred personnel costs related to internal development of our product.

Because in the past we have been focused on obtaining final FDA approval for ArteFill, we have historically maintained a limited in-house research and development organization for new product development and have concentrated our resources on manufacturing and process development to meet FDA cGMP requirements. In January 2004, we received an approvable letter from the FDA for our PMA application, indicating that ArteFill is safe and effective for the correction of facial wrinkles known as smile lines, or nasolabial folds. In January 2006, we submitted an amendment to our PMA application to address certain conditions to final marketing approval set forth in the FDA’s approvable letter, and in April 2006, the FDA completed comprehensive pre-approval inspections of our manufacturing facilities in San Diego, California and Frankfurt, Germany. On May 3, 2006, the FDA issued an EIR, indicating that its inspection of our facilities was completely closed, requiring no further action on the part of our company related to the inspection. On October 27, 2006, the FDA approved ArteFill for commercial sale in the United States.

We expense research and development costs as they are incurred. We currently plan to conduct research and clinical development activities to evaluate the feasibility, safety and efficacy of ArteFill for other aesthetic applications. In June 2007, we announced the formation of a new wholly-owned subsidiary to develop and commercialize new and innovative therapeutic medical applications of our proprietary microsphere tissue bulking technology through collaborative agreements with third parties.

Amortization of Acquired Intangible Assets

Acquired intangible assets, consisting of core technology and international patents, are recorded at fair market value as of the acquisition date. Fair market value is determined by an independent third party valuation and is amortized over the estimated useful life. This determination is based on factors such as technical know-how and trade secret development of our core PMMA technology, patent life, forecasted cash flows, market size and growth, barriers to competitive entry and existence and the strength of competing products.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 1 of the Notes to Consolidated Financial Statements included elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

We follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance. We recognize revenue from product sales when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists, (ii) delivery of the product has occurred and title has transferred to our customers, (iii) the selling price is fixed and

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determinable and (iv) collection is reasonably assured. Provisions for discounts to customers or other adjustments will be recorded as a reduction of revenue and provided for in the same period that the related product sales are recorded.

We recognize revenue when our products have reached the destination point and other criteria for revenue recognition have been met.

A substantial amount of our business is transacted using credit cards. We may offer an early payment discount to certain customers.

We have a no return policy for our product except in the case of product that may be shipped in error or damaged in shipment. During 2007, we shipped product to customers which did not provide for sufficient shelf life for certain customers to utilize the product before expiration. As a result, we exchanged product that was going to expire for product with sufficient shelf life to be utilized by the customers. These exchanges were substantially completed by December 31, 2007. At December 31, 2007, we had a sales reserve of $150,000 for exchanges which were completed in early 2008. During the last half of 2007, we refined our shipping policies to eliminate the shipment of product without adequate shelf life.

Allowance for Doubtful Accounts

We determine our allowance for doubtful accounts based on our analysis of the collectibility of our accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. The expense related to the allowance for doubtful accounts is recorded in selling, general and administrative. We do not write off individual accounts receivable until we have exhausted substantially all avenues of legal recourse to collect the outstanding amount.

Valuation of Inventory

Inventories are stated at the lower of cost or market, with cost being determined under a standard cost method, which approximates a first-in, first-out basis. Our inventories are evaluated and any non-usable inventory is expensed. In addition, we reserve for any inventory that may be excess or potentially non-usable. Charges for such write-offs and reserves are recorded as a component of cost of sales. Changes in demand in the future could cause us to have additional write-offs and reserves.

Impairment of Long-Lived Assets

We review long-lived assets, including property and equipment and intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. To date, we have not recorded any impairment losses.

Intangible Assets

Intangible assets are comprised of acquired core technology and patents recorded at fair market value less accumulated amortization. Amortization is recorded on the straight-line method over the estimated useful lives of the intangible assets.

Deferred Taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowances recorded against our net deferred tax assets. We have historically had net losses and have not been required to provide for income tax liabilities. We have established a valuation allowance with respect to all of our U.S. deferred tax assets. Changes in our estimates of future taxable income may cause us to reduce the valuation allowance and require us to report income tax expense in amounts approximating the statutory rates.

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Deferred Tax Liability

A deferred tax liability was created on the date of purchase of our wholly-owned German-based manufacturing subsidiary as there was no allocation of the purchase price to the intangible asset for tax purposes, and the foreign subsidiary’s tax basis in the intangible asset remained zero.

Emerging Issues Task Force, or EITF, Issue No. 98-11, Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations, requires the recognition of the deferred tax impact of acquiring an asset in a transaction that is not a business combination when the amount paid exceeds the tax basis of the asset on the acquisition date. Further, EITF 98-11 requires the use of simultaneous equations to determine the assigned value of an asset and the related deferred tax liability.

Stock-Based Compensation Expense

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS No. 123(R)), which revises SFAS No. 123, Accounting for Stock-Based Compensation and (SFAS No. 123), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS No. 123(R) requires that share-based payment transactions with employees and directors be recognized in the financial statements based on their grant-date fair value and recognized as compensation expense over the requisite service period. Prior to January 1, 2006, we accounted for our stock- based employee and director compensation plans using the intrinsic value method under the recognition and measurement provisions of Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, and related guidance. We adopted SFAS No. 123(R) effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006, therefore prior period results have not been restated. We recognized stock-based compensation expense for the year ended December 31, 2007 and 2006 of $3,238,000 and $1,300,000, respectively. Of these amounts, $403,000 and $146,000 have been capitalized to inventory, $336,000 and $139,000 were included in research and development expenses and $2,499,000 and $1,015,000 were included in selling, general and administrative expenses.

Under SFAS No. 123(R), we calculated the fair value of the stock option grants using the Black-Scholes option-pricing model. For the year ended December 31, 2007, the fair value was based on the following weighted average assumptions: the expected term of 6.0 years; the expected volatility of 48%, the risk free interest rate of 4.75% and 0% for the dividend yield. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.

The weighted average expected term for the year ended December 31, 2007 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107 (SAB 107), which was issued in March 2005. The simplified method defines the expected term as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

Estimated volatility for the year ended December 31, 2007 also reflects the application of SAB 107 interpretive guidance and, accordingly incorporates historical volatility of similar public entities.

Total unrecognized stock-based compensation costs related to unvested stock option and warrant awards at December 31, 2007 is $6,403,000, all of which arose from the adoption of SFAS No. 123(R). The unrecognized cost is expected to be recognized on a straight-line basis over a weighted average period of four years.

Equity instruments issued to non-employees are recorded at their fair values as determined in accordance with SFAS 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically revalued as the options vest and are recognized as expense over the related service period.

During the years ended December 31, 2007 and 2006, we recognized $245,000 and $535,000, respectively for stock options and warrants issued to non-employees.

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Deferred Stock-Based Compensation

Deferred stock-based compensation, which is a non-cash charge, results from employee stock option grants at exercise prices that, for financial reporting purposes, are deemed to be below the estimated fair value of the underlying common stock on the date of grant. Given the absence of an active market for our common stock through 2005, our board of directors considered, among other factors, the liquidation preferences, anti-dilution protection and voting preferences of the preferred stock over the common stock in determining the estimated fair value of the common stock for purposes of establishing the exercise prices for stock option grants.

As a result of initiating the public offering process, in 2005, and based on discussions with our investment bankers, we have revised our estimate of the fair value of our common stock for periods beginning on and after July 1, 2004 for financial reporting purposes. Our management, all of whom qualify as related parties, determined that the stock options granted on and after July 1, 2004 were granted at exercise prices that were below the reassessed fair value of our common stock on the date of grant. We completed the reassessment of the fair value without the use of an unrelated valuation specialist and started with the proposed valuation from our investment bankers, considering a number of accomplishments in 2004 and 2005 that would impact our valuation, including achievement of key clinical milestones, hiring executive officers, and the increased possibility of completing this offering. Accordingly, deferred stock-based compensation of $740,000 was recorded within stockholders’ equity (deficit) during 2004 which represented the difference between the weighted-average exercise price of $4.25 and the weighted-average fair value of $6.38 on 324,705 options granted to employees during 2004. Deferred stock-based compensation of $2,383,000, net of forfeitures, was recorded within stockholders’ equity (deficit) during 2005 which represented the difference between the weighted-average exercise price of $5.31 and the weighted-average fair value of $9.18 on 620,000 options granted to employees during 2005.

The deferred stock-based compensation is being amortized on a straight-line basis over the vesting period of the related awards, which is generally four years. The expected future amortization expense for deferred stock-based compensation for stock options granted through December 31, 2006, is $463,000 and $337,000 for the years ending December 31, 2008 and 2009, respectively.

During the years ended December 31, 2007 and 2006 we recognized expense of $563,000 and $719,000, respectively, in expense related to deferred stock-based compensation.

Upon the adoption of SFAS No. 123(R) on January 1, 2006, this deferred stock-based compensation was reclassified against additional paid-in capital.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, or GAAP. See our consolidated financial statements and notes thereto included in this report, which contain accounting policies and other disclosures required by GAAP.

Results of Operations

Comparison of Year Ended December 31, 2007 to December 31, 2006

Product sales.  We commenced commercial shipments of ArteFill during the first quarter of 2007 and began generating product sales from ArteFill. Product revenues increased by $7.1 million to $7.1 million for the year ended December 31, 2007 from no revenues for the year ended December 31, 2006.

License revenues.  We generated $6.2 million in license revenue for the year ended December 31, 2007 compared to $0.4 million for the year ended December 31, 2006 related to our technology license agreement with BioForm. The increase in license revenue is related to the Second Agreement we entered into with BioForm, in which BioForm elected to pre-pay all future royalty obligations to us by making two payments totaling $5.5 million. We recognized this $5.5 million in revenue in September 2007, which was paid in full by December 2007.

Cost of product sales.  Cost of sales increased by $10.7 million to $10.7 million for the year ended December 31, 2007, from no cost of sales for year ended December 31, 2006. The increase was attributable to the commercial launch of ArteFill during the first quarter of 2007, as well as increases to our excess and obsolete inventory reserve of $3.8 million and an excess capacity charge of $1.1 million for the year ended December 31,

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2007. The excess and obsolete expenses are primarily related to product produced in 2006 and 2007 that was not utilized or may not be utilized in the future. The excess capacity expenses are related to lower production levels in 2007 compared to our normal plant capacity, which required us to expense more manufacturing expenses to cost of product sales rather than capitalize such expenses to inventory.

Research and development.  Research and development expense decreased by $2.1 million to $6.0 million for the year ended December 31, 2007 from $8.1 million for the year ended December 31, 2006. The decrease was primarily attributable to our transition from the process development stage to the manufacturing of our product. Included in our research and development expenses is $1.2 million of amortization of core technology and patents for each of the years ended December 31, 2007 and December 31, 2006.

Selling, general and administrative.  The following table sets forth our selling, general and administrative expense for the years ended December 31, 2007 and December 31, 2006 (in thousands):

					Amount of
	2007		2006		Change
Sales and marketing	$	12,573	$	6,480	$	6,093
General and administrative		11,758		10,819		939
Total selling, general and administrative	$	24,331	$	17,299	$	7,032

Sales and marketing expense increased by $6.1 million to $12.6 million for the year ended December 31, 2007 from $6.5 million for the year ended December 31, 2006. The increase was primarily attributable to (i) $3.8 million in payroll and travel expenses for additional personnel, (ii) $0.5 million in professional services, primarily related to marketing research, (iii) $2.2 million for the development of marketing and promotion programs, offset by (iv) a $0.4 million decrease in non-cash stock compensation expense.

General and administrative expense increased by $0.9 million to $11.7 million for the year ended December 31, 2007 from $10.8 million for the year ended December 31, 2006. The increase was primarily attributable to (i) $1.2 million in facilities occupancy costs, (ii) a $0.8 million increase in professional service fees primarily related to increased legal costs, offset by (iii) a $0.1 million decrease in executive and administrative personnel and related travel expenses and (iv) a $1.0 million decrease in non-cash stock compensation expense.

Interest, net.  Net interest decreased by $2.1 million to $0.3 million of interest income for the year ended December 31, 2007 from $1.8 million of interest expense for the year ended December 31, 2006. The net decrease was primarily attributable to a decrease in non-cash interest expense associated with common stock warrants issued with promissory notes offset by an increase in interest income earned on our cash balances.

Income tax benefit.  We recognized an income tax benefit of $0.5 million and $0.5 million for the years ended December 31, 2007 and 2006, respectively. The income tax benefit arose from the amortization of the deferred tax liability attributable to the intangible asset acquired in the purchase of our wholly-owned German-based manufacturing subsidiary. A deferred tax liability was created on the date of purchase as there was no allocation of the purchase price to the intangible asset for tax purposes, and the foreign subsidiary’s tax basis in the intangible asset remained zero. EITF 98-11 requires the recognition of the deferred tax impact of acquiring an asset in a transaction that is not a business combination when the amount paid exceeds the tax basis of the asset on the acquisition date. Further, EITF 98-11 requires the use of simultaneous equations to determine the assigned value of an asset and the related deferred tax liability.

Comparison of Year Ended December 31, 2006 to December 31, 2005

Research and development.  Research and development expense decreased by $2.1 million to $8.1 million for the year ended December 31, 2006 from $10.2 million for the year ended December 31, 2005. The decrease was primarily attributable to our transition from the process development stage to the manufacturing of our product. Included in our research and development expenses is $1.2 million of amortization of core technology and patents for each of the years ended December 31, 2006 and December 31, 2005. Also included in research and development expenses for the year ended December 31, 2006 is a one-time warrant modification charge of $0.1 million.

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Selling, general and administrative.  The following table sets forth our selling, general and administrative expense for the years ended December 31, 2006 and December 31, 2005 (in thousands):

					Amount of
	2006		2005		Change
Sales and marketing	$	6,480	$	2,777	$	3,703
General and administrative		10,819		7,360		3,459
Total selling, general and administrative	$	17,299	$	10,137	$	7,162

Sales and marketing expense increased by $3.7 million to $6.5 million for the year ended December 31, 2006 from $2.8 million for the year ended December 31, 2005. The increase was primarily attributable to (i) $1.8 million in payroll and travel expenses for additional personnel, (ii) $0.5 million in cash severance payments, (iii) $0.2 million for the development of marketing and promotion programs, (iv) $0.1 million in facilities occupancy costs and staff support and (v) $1.1 million in non-cash compensation expense, including a one-time warrant modification charge of $0.6 million and non-cash severance of $0.3 million.

General and administrative expense increased by $3.4 million to $10.8 million for the year ended December 31, 2006 from $7.4 million for the year ended December 31, 2005. The increase was primarily attributable to (i) a $0.8 million increase due to additional executive and administrative personnel and related travel expenses, (ii) $0.9 million in cash severance payments, (iii) $0.6 million in facilities occupancy costs, (iv) $1.4 million in non-cash compensation expense, which included a one-time warrant modification charge of $0.2 million and non-cash severance of $0.7 million and (v) $0.3 million in office related expenses offset by (vi) a $0.9 million decrease in professional service fees primarily related to lower legal costs;

Interest expense, net.  Net interest expense decreased by $2.6 million to $1.8 million for the year ended December 31, 2006 from $4.4 million for the year ended December 31, 2005. The net decrease was primarily attributable to non-cash interest expense associated with common stock warrants issued with a convertible promissory note offset by an increase in interest income earned on our cash balances. Included in interest expense for the year ended December 31, 2006 is a one-time warrant modification charge of $0.5 million.

Income tax benefit.  We recognized an income tax benefit of $0.5 million and $0.5 million for the years ended December 31, 2006 and 2005, respectively. The income tax benefit arose from the amortization of the deferred tax liability attributable to the intangible asset acquired in the purchase of our wholly-owned German-based manufacturing subsidiary. A deferred tax liability was created on the date of purchase as there was no allocation of the purchase price to the intangible asset for tax purposes, and the foreign subsidiary’s tax basis in the intangible asset remained zero. EITF 98-11 requires the recognition of the deferred tax impact of acquiring an asset in a transaction that is not a business combination when the amount paid exceeds the tax basis of the asset on the acquisition date. Further, EITF 98-11 requires the use of simultaneous equations to determine the assigned value of an asset and the related deferred tax liability.

Liquidity and Capital Resources

Sources of Liquidity

We have a history of recurring losses from operations and have an accumulated deficit of $106.3 million as of December 31, 2007. As of December 31, 2007, we had available cash and cash equivalents totaling $20.3 million and working capital of $16.5 million.

We launched our product, ArteFill, in February 2007 and recorded $7.1 million in product sales during 2007. We plan to increase product sales during 2008, but no assurances can be given that we will meet our sales forecast. Our 2008 expenses are expected to be significantly higher than 2007 due to our planned expansion of our sales force, increasing our marketing activities for ArteFill to increase consumer demand and expanding our clinical trial activities to meet FDA post-market study requirements and to investigate removal of the skin test requirement.

A successful transition to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill our planned expenses and achieving a level of revenues adequate to support our cost structure. In addition to the net amounts raised from Cowen Healthcare Royalty Partners, L.P., or CHRP, in January 2008, we

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intend to seek additional debt or equity financing until we become cash flow positive. There can be no assurances that there will be adequate financing available to us on acceptable terms, or at all. If we are unable to obtain additional financing during 2008, we would need to significantly curtail or reorient our operations during 2008.

The conditions noted above raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements for the year ended December 31, 2007 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. See Funding Requirements below for management’s plans in regards to these matters.

We have financed our operations through sales of our preferred stock and common stock, options and warrants exercisable for our preferred and common stock, convertible and nonconvertible debt and through the initial public offering of our common stock. Since inception, we have raised $61.7 million through private equity financings, $1.6 million through the exercise of options and warrants, $28.1 million through convertible and nonconvertible debt, and $25.3 million through the initial public offering of our common stock. In November 2006, we entered into a loan and security agreement with Comerica Bank consisting of a revolving line of credit for up to $5,000,000 and a term loan for up to $5,000,000. At December 31, 2007, $8.6 million was outstanding under the loan and security agreement. As of December 31, 2007, our cash and cash equivalents were $20.3 million.

In January 2008, we entered into a financing arrangement with CHRP to raise $21.5 million, and up to an additional $1 million in 2009 contingent upon our satisfaction of a net product sales milestone in fiscal 2008. We intend to use the proceeds to expand both its dedicated U.S. sales force and consumer outreach programs. We used $8.6 million of the proceeds to payoff and terminate our existing credit facility with Comerica Bank. The financing closed on February 12, 2008, resulting in net proceeds of $12.6 million after the payoff of our credit facility with Comerica Bank and after certain transaction expenses.

Under the revenue interest financing and warrant purchase agreement, or Revenue Agreement, CHRP acquired the right to receive a revenue interest on our U.S. net product sales from October 2007 through December 2017. We are required to pay a revenue interest on U.S. net product sales of ArteFill^®, any improvements to ArteFill^®, any internally developed products and any products in-licensed or purchased by us, provided that such improvements, internally developed, in-licensed or purchased products are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or dermatologic procedures. The scope of the products subject to CHRP’s revenue interest narrows following the date the cumulative payments we make to CHRP first exceed a specified multiple of the consideration paid by CHRP for the revenue interest.

The revenue interest payable to CHRP on net product sales starts as a high single digit rate and declines to a low single digit rate following our satisfaction of an aggregate net product sales threshold during the term. In addition to the revenue interest payments, we are required to make two lump sum payments of $7.5 million to CHRP, the first in January 2012 and the second in January 2013. Once the cumulative revenue interest and lump sum payments to CHRP reach a specified multiple of the consideration paid by CHRP for the revenue interest, the rate will automatically step down for the balance of the term. We have the right to prepay the revenue interest and lump sum payments without penalty at any time to reach the step-down rate early.

Under the Revenue Agreement, we issued CHRP a warrant to purchase 375,000 shares of common stock, at an exercise price equal to $3.13 per share. This warrant has a 5 year term, and will allow for cashless exercise.

As part of the financing, we also entered into a note and warrant purchase agreement, or the Note and Warrant Agreement, with CHRP pursuant to which we issued and sold to CHRP, at the closing of the financing, a 10% senior secured note in the principal amount of $6,500,000. The note has a term of five (5) years and bears interest at 10% per annum, payable monthly in arrears. We have the option to prepay all or a portion of the note at a premium. In the event of an event of default, with “event of default” defined as (i) a put event, (ii) a failure to pay the note when due, (iii) our material breach of our covenants and agreements in the Note and Warrant Agreement, (iv) our failure to perform an existing agreement with a third party that accelerates the majority of any debt in excess of $500,000 or (v) subject to a cure period, material breach of the covenants, representations or warranties in the financing documents, the outstanding principal and interest in the note, plus the prepayment premium, shall become immediately due and payable.

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Under the Note and Warrant Agreement, we issued CHRP a warrant to purchase 1,300,000 shares of common stock, at an exercise price equal to $5.00 per share. This warrant has a 5 year term, and allows for cashless exercise.

Cash Flow

Net cash used in operating activities.  During the year ended December 31, 2007, our operating activities used cash of approximately $23.7 million, compared to approximately $21.6 million for the year ended December 31, 2006, an increase of $2.1 million. The increase in cash used was due primarily to an increase in the net loss of approximately $0.6 million, primarily attributable to an increase in operating expenses, offset by a decrease of $3.1 million in adjustments for non-cash expenses and a $1.6 million net increase in operating assets and liabilities primarily due to an increase in inventory and accounts receivable offset by payments on accounts payable.

Net cash used in investing activities.  Our investing activities used cash of approximately $1.5 million during the year ended December 31, 2007, compared to $4.8 million for the year ended December 31, 2006. Investing activities during the years ended December 31, 2007 and 2006 were comprised of $1.2 and $1.6 million, respectively, of purchases of plant and production equipment and tenant improvements related to the expansion of our offices and the build-out of our production and manufacturing facilities.

Net cash used by financing activities.  Cash used by financing activities was approximately $0.8 million for the year ended December 31, 2007, compared to approximately cash provided of $65.7 million for the year ended December 31, 2006. Financing activities during the year ended December 31, 2007 include payment on term loan and capital leases obligation of $1.3 million, partially offset by $0.5 million proceeds from exercise of stock options and warrants. Financing activities during the year ended December 31, 2006 resulted in $29.5 million in net proceeds from the closing of our initial public offering, $31.8 million in proceeds from the issuance of preferred stock, $9.8 million in proceeds from our Comerica Bank loan and security agreement, net of repayments of $0.1 million, $1.1 million in proceeds from the exercise of stock options, repayments of $6.5 million on convertible notes payable and $0.05 million in repayments on capital lease obligations.

In January 2008, we announced that we entered into a revenue financing arrangement with CHRP, to immediately provide $21.5 million of financing, plus an additional $1 million in 2009 upon attainment of a revenue milestone in fiscal 2008. The financing is intended to be used to support our operations, including funds necessary to expand both our dedicated sales force and consumer outreach programs. We also used proceeds from the financing to payoff and terminate our existing credit facility. The transaction closed on February 12, 2008 and we received net cash of $12.6 million after paying down existing debt of $8.6 million under the term loan and the line of credit with Comerica Bank and payment of certain transaction expenses.

Funding Requirements

We believe that our cash and cash equivalents at December 31, 2007, together with the interest thereon, proceeds from sales of ArteFill, and the funds from our financing arrangement with CHRP, will be sufficient to meet our anticipated cash requirements with respect to the commercial launch of ArteFill, the automation and scale-up of our manufacturing capabilities and our research and development activities and to meet our other anticipated cash needs through the third quarter of 2008.

Our future capital requirements are difficult to forecast and will depend on many factors, including, among others:

•  growth in sales and related collections;

•  the costs of maintaining and expanding the sales and marketing organization required for successful commercialization of ArteFill;

•  the costs and effectiveness of our sales, marketing, advertising and promotion activities related to ArteFill, including physician training and education;

•  the costs related to maintaining and expanding our manufacturing and distribution capabilities;

•  the clinical trial costs required to meet FDA post-market study requirements and to investigate the removal of the skin test requirement:

•  the costs relating to changes in regulatory policies or laws that affect our operations;

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•  the level of investment in research and development to maintain and improve our competitive position, as well as to maintain and expand our technology platform;

•  the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

•  the costs of, and our ability to enter into, foreign distribution agreements in certain concentrated international markets; and

•  our need or determination to acquire or license complementary products, technologies or businesses.

We intend to seek additional equity and debt financing to provide capital to fund the expansion of our commercial operations by the third quarter of 2008. If we are unable to secure such funding, or we cannot achieve our forecasted sales, we would be required to reorient, delay, reduce the scope of, eliminate or divest one or more of our sales and marketing programs, manufacturing capabilities, research and development programs, or our entire business. Due to the uncertainty of financial markets, financing may not be available to us when we need it on acceptable terms or at all. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Contractual Obligations

The following summarizes our long-term contractual obligations as of December 31, 2007:

	Payments Due by Period
	Total		2008		2009		2010		2011		2012
	(In thousands)
Contractual Obligations
Comerica Bank term loan	$	3,646,000	$	1,250,000	$	1,250,000	$	1,146,000	$	—	$	—
Comerica Bank revolving line of credit		5,000,000		5,000,000		—		—		—		—
Equipment lease obligations		21,000		21,000		—		—		—		—
Operating lease obligations		8,134,000		1,487,000		1,556,000		1,626,000		1,696,000		1,769,000
Other contractual obligations		597,000		522,000		75,000		—		—
Total	$	17,398,000	$	8,280,000	$	2,881,000	$	2,772,000	$	1,696,000	$	1,769,000

Our long-term obligations consist primarily of our revolving line of credit and term loan with Comerica Bank that are due in November 2008 and 2010, respectively, facilities leases that expire in March and December 2012 and our equipment financing obligations that expire in April and July 2008. Other contractual obligations include amounts due under our agreements with Lampire Biological Labs, Inc. and Therapeutics, Inc.

In November 2006, we entered into a loan and security agreement with Comerica Bank, pursuant to which we obtained a credit facility consisting of a revolving line of credit in the amount of up to $5 million and a term loan in the amount of up to $5 million. Interest on the revolving line of credit and the term loan will be at prime plus 2%. As of December 31, 2007, $8.6 million was outstanding under the revolving line of credit and term loan under the credit facility. In February 2008, we repaid the total amount due of $8.6 million to Comerica Bank under the term loan and the line of credit, in accordance to our financing arrangement with CHRP.

In August 2007, we entered into a Severance Protection Agreement with Diane S. Goostree, our President and Chief Executive Officer and Change of Control Agreements with the following named executive officers: Christopher J. Reinhard, Peter C. Wulff and Larry J. Braga, and with the following executive officers: Karla R. Kelly, J.D., Russell J. Anderson, Susan A. Brodsky-Thalken, Frank M. Fazio and Greg Kricorian, M.D. Under these agreements, we are obligated to make certain severance payments to these individuals in the event their employment with us is terminated under certain circumstances.

In January 2008, we entered into a financing arrangement with CHRP to raise $21.5 million, and the potential for an additional $1 million in 2009 contingent upon the Company’s satisfaction of a net product sales milestone in fiscal 2008. Two principal payments of $7.5 million each are due in January 2012 and January 2013.

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In March 2008, we entered into Change of Control Agreements with John Kay, Ph. D. and Karon J. Morell. Under these agreements, we are obligated to make certain severance payments to these individuals in the event their employment with us is terminated under certain circumstances.

Related Party Transactions

For a description of our related party transactions, see “Related Party Transactions” elsewhere in this report.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has not yet completed its evaluation of the impact of adopting SFAS No. 157.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently evaluating whether SFAS No. 159 will have a material effect on its consolidated financial statements.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

During fiscal 2007, our exposure to interest rate risk was primarily the result of borrowings under our then existing credit facility with Comerica Bank. At December 31, 2007, $8.6 million was outstanding under our credit facility. Borrowings under our credit facility are secured by first priority security interests in substantially all of our tangible and intangible assets. Our results of operations are not materially affected by changes in market interest rates on these borrowings. In February 2008, we repaid the total amount due of $8.6 million to Comerica Bank under the term loan and the line of credit, in accordance to our financing arrangement with CHRP.

The primary objective of our cash management activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. As of December 31, 2007, we had cash and cash equivalents in a bank operating account that provides daily liquidity and through an overnight sweep account that is a money market mutual fund and invests primarily in money market investments and corporate and U.S. government debt securities. Due to the liquidity of our cash, cash equivalents and investment securities, a 1% movement in market interest rates would not have a material impact on the total value of our cash, cash equivalents and investment securities. We do not have any holdings of derivative financial or commodity instruments, or any foreign currency denominated transactions.

We will continue to monitor changing economic conditions. Based on current circumstances, we do not expect to incur a substantial increase in costs or a material adverse effect on cash flows as a result of changing interest rates.

Impact of Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2007, 2006, or 2005. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of operations.

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Item 8.   Consolidated Financial Statements and Supplementary Data.

Reference is made to the consolidated financial statements, the notes thereto, and the report thereon, commencing on page F-1 of this report, which financial statements, notes, and report are incorporated herein by reference.

Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.   Controls And Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.  Under the supervision and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and Chief Financial Officer, who is our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report on Form 10-K.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumventions or overriding of controls. Consequently, even effective internal controls can only provide reasonable assurances with respect to any disclosure controls and procedures and internal control over financial statement preparation and presentation.

Management’s Report on Internal Control Over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2007. This report, which expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2007, is included herein.

Changes in Internal Control over Financial Reporting:

During the year ending December 31, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Artes Medical, Inc.

We have audited Artes Medical Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Artes Medical, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Artes Medical, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Artes Medical, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion thereon, and included an explanatory paragraph that highlighted a going concern uncertainty.

/s/ Ernst & Young LLP

San Diego, California

March 13, 2008

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Item 9B.   Other Information.

None.

PART III

Item 10.   Directors and Executive Officers and Corporate Governance.

The information required by this Item relating to our directors and our corporate governance, including our code of business conduct and ethics, is incorporated herein by reference to our definitive Proxy Statement we intend to file pursuant to Regulation 14A of the Exchange Act for our 2008 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, “Business — Executive Officers.”

Item 11.   Executive Compensation.

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement we intend to file pursuant to Regulation 14A of the Exchange Act for our 2008 Annual Meeting of Stockholders.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement we intend to file pursuant to Regulation 14A of the Exchange Act for our 2008 Annual Meeting of Stockholders.

Item 13.   Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement we intend to file pursuant to Regulation 14A of the Exchange Act for our 2008 Annual Meeting of Stockholders.

Item 14.   Principal Accountant Fees and Services.

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement we intend to file pursuant to Regulation 14A of the Exchange Act for our 2008 Annual Meeting of Stockholders.

PART IV

Item 15.   Exhibits and Financial Statement Schedules.

(a) Financial Statements and Financial Statement Schedules

The following documents are filed as part of this report:

(1) Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report, including the report of Ernst & Young LLP, our independent registered public accounting firm.

(2) The financial statement schedules listed under Item 15(c) hereof are filed as part of this Annual Report on Form 10-K.

(3) See subsection (b) below.

(b) Exhibits

Exhibit			Exhibit
Number			Description
	3	.4**	Amended and Restated Certificate of Incorporation.
	3	.6**	Amended and Restated Bylaws.

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Exhibit			Exhibit
Number			Description
	3	.7**	Certificate of Amendment to Amended and Restated Bylaws.
	4	.1**	Specimen common stock certificate.
	4	.2	Amended and Restated Investor Rights Agreement dated June 23, 2006, by and among us and the stock and warrant holders listed on Schedule A thereto, as corrected.
	4	.3#**	Form of warrant to purchase common stock, issued to employees, consultants and service providers.
	4	.4#**	Amended warrant to purchase up to 650,000 shares of common stock, dated June 9, 2006, issued to Christopher J. Reinhard, as corrected.
	4	.5**	Form of warrant to purchase common stock, issued to certain investors in a bridge loan financing transaction.
	4	.6**	Form of warrant to purchase Series C-1 preferred stock, issued to certain investors in a bridge loan financing transaction.
	4	.7**	Form of warrant to purchase common stock, issued to certain investors in our Series D preferred stock financing.
	4	.8**	Form of warrant to purchase Series D preferred stock, issued to certain investors in a bridge loan financing transaction.
	4	.9**	Warrant to purchase 200,000 shares of Series E preferred stock issued to Legg Mason Wood Walker, Inc. on December 22, 2005.
	4	.10**	Form of warrant to purchase Series E preferred stock issued to certain investors in our Series E preferred stock financing.
	4	.11**	Form of warrant to purchase Series E preferred stock issued to National Securities Corporation in consideration for placement agent services provided to us in our Series E preferred stock financing.
	4	.12#**	Amended warrant to purchase up to 150,000 shares of common stock, dated June 9, 2006, issued to Christopher J. Reinhard, as corrected.
	4	.13#**	Amendment dated June 23, 2006, to warrant to purchase common stock, issued to employees, consultants and service providers, entered into by us and each of the warrant holders listed on Exhibit A thereto.
	4	.14**	Amendment dated June 23, 2006, to warrant to purchase common stock, issued to certain investors in a bridge loan financing transaction, entered into by us and each of the warrant holders listed on Exhibit A thereto.
	4	.15**	Amendment dated June 23, 2006, to warrant to purchase Series C-1 preferred stock, issued to certain investors in a bridge loan financing transaction, entered into by us and each of the warrant holders listed on Exhibit A thereto.
	4	.16**	Amendment dated June 23, 2006, to warrant to purchase common stock, issued to certain investors in our Series D preferred stock financing, entered into by us and each of the warrant holders listed on Exhibit A thereto.
	4	.17**	Amendment dated June 23, 2006, to warrant to purchase Series D preferred stock, issued to certain investors in a bridge loan financing transaction, entered into by us and each of the warrant holders listed on Exhibit A thereto.
	4	.18**	Warrant to purchase 28,235 shares of Series E preferred stock issued to Comerica Bank on November 27, 2006.
	4	.19†	Investor Rights Agreement, dated February 12, 2008, by and between us and CHRP.
	4	.20†	Warrant to purchase 1,300,000 shares of common stock issued to CHRP on February 12, 2008.
	4	.21†	Warrant to purchase 375,000 shares of common stock issued to CHRP on February 12, 2008.

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Exhibit			Exhibit
Number			Description
	10	.1#**	2000 Stock Option Plan.
	10	.2#**	Form of Non-Qualified Stock Option Agreement under the 2000 Stock Option Plan.
	10	.3#**	Amended and Restated 2001 Stock Option Plan.
	10	.4#**	Form of Notice of Option Grant under the Amended and Restated 2001 Stock Option Plan.
	10	.5#**	Form of Incentive Stock Option Agreement under the Amended and Restated 2001 Stock Option Plan.
	10	.6#**	Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2001 Stock Option Plan.
	10	.7#**	2006 Equity Incentive Plan.
	10	.8.1#**	Form of Notice of Grant of Stock Option under 2006 Equity Incentive Plan.
	10	.8.2#**	Form of Option Exercise and Stock Purchase Agreement under 2006 Equity Incentive Plan.
	10	.8.3#**	Form of Restricted Stock Grant Notice under 2006 Equity Incentive Plan.
	10	.9#**	Director’s Agreement, dated June 1, 2004, between us and Christopher Reinhard.
	10	.10#**	Employment Agreement dated February 15, 2004 between us and Russell Anderson.
	10	.11#**	Employment Agreement dated June 1, 2004 between us and Lawrence Braga.
	10	.14#**	Separation Agreement dated March 16, 2006 between us and Gottfried Lemperle.
	10	.15#**	Form of indemnification agreement between us and each of our directors and executive officers (as amended).
	10	.16**	Form of consulting agreement for medical/scientific advisory board between us and each of our Medical Advisory Board members.
	10	.19**	Commercial Space Lease Agreement, dated September 27, 1999, between Ms. Marianne Kämpf and MediPlant GmbH(1).
	10	.20†**	Purchase Agreement for a Partial Enterprise, dated July 22, 2004, between us and FormMed Biomedicals AG.
	10	.21†**	Manufacturing and Supply Agreement, dated November 1, 2005, between us and Artes Medical Germany GmbH (formerly MediPlant GmbH Biomaterials and Medical Devices).
	10	.22†**	Fixed Price Supply Agreement, dated March 1, 2006, between us and Lampire Biological Labs, Inc.
	10	.23**	Termination and General Release, dated May 11, 2006, between us and Gottfried Lemperle.
	10	.24**	Settlement Agreement, dated May 12, 2006, between us and Stifel, Nicolaus & Company, Incorporated, as successor in interest to Legg Mason Wood Walker, Incorporated.
	10	.25†**	Settlement and License Agreement dated October 31, 2005, among us, BioForm Medical, Inc., BioForm Medical Europe B.V. and Dr. Martin Lemperle.
	10	.26**	Settlement Agreement and Release of Claims dated October 26, 2005, among us, FormMed Biomedicals AG and Dr. Martin Lemperle.
	10	.27#**	Offer of Employment dated February 13, 2006 between us and Diane Goostree.
	10	.28**	Separation Agreement and General Release dated November 17, 2006 between us and Stefan M. Lemperle, M. D.
	10	.29#**	First Amended Offer of Employment dated November 27, 2006 between us and Diane Goostree.
	10	.31**	Confidential Settlement Agreement and Release of All Claims, dated January 10, 2007, between us and William von Brendel.
	10	.32**	Confidential Settlement Agreement and Release of All Claims, dated January 31, 2007, between us and Harald Schreiber

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Exhibit			Exhibit
Number			Description
	10	.33#(2)	Settlement and Release Agreement, dated April 2, 2007, between us and Melvin Ehrlich.
	10	.34#(3)	Severance Protection Agreement between us and Diane S. Goostree, dated August 7, 2007.
	10	.35#(3)	Form Change of Control Agreement between us and each of Christopher J. Reinhard, Peter C. Wulff, Adelbert L. Stagg and Larry J. Braga, each dated August 7, 2007 and each of Karon J. Morell and John F. Kay, Ph.D. each dated March 10, 2008.
	10	.36(4)	Amended and Restated Building Lease Agreement, dated August 21, 2007.
	10	.37(4)	Building Lease Agreement, dated August 21, 2007.
	10	.38(4)	Master Services Agreement, dated June 4, 2007 between us and Therapeutics, Inc.
	10	.39(4)	First Amendment to Fixed Price Supply Agreement, dated August 14, 2007, between us and Lampire Biological Labs, Inc.
	10	.40(5)	Second License Agreement, dated September 21, 2007, between Artes Medical, Inc., BioForm Medical, Inc. and BioForm Medical Europe B.V.
	10	.41#(6)	Consulting Agreement, dated as of September 18, 2007, between Artes Medical, Inc. and Adelbert Stagg, Ph.D.
	10	.42(7)	Artes Medical, Inc. Annual Bonus Incentive Plan, dated April 10, 2007.
	10	.43†	Revenue Interest Financing and Warrant Purchase Agreement, dated January 28, 2008, by and between us and CHRP.
	10	.44†	Note and Warrant Purchase Agreement, dated January 28, 2008, by and between us and CHRP.
	23	.1	Consent of Ernst & Young LLP, independent registered public accounting firm.
	24	.1	Powers of Attorney (included on signature page).
	31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
	31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
	32	.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350.
	32	.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350.

#	Indicates management contract or compensatory plan.
†	The Commission has granted confidential treatment to us with respect to certain omitted portions of this exhibit (indicated by asterisks). We have filed separately with the Commission an unredacted copy of the exhibit.
**	Incorporated by reference to the same numbered exhibit filed with or incorporated by reference in our Registration Statement on Form S-1 (File No. 333-134086), dated December 19, 2006.
(1)	In accordance with Rule 12b-12 of the Securities Exchange Act of 1934, this exhibit is an English translation of the original German document.
(2)	Incorporated by reference to the same numbered exhibit filed with our Report on Form 10-Q, dated May 8, 2007.
(3)	Incorporated by reference to the same numbered exhibit filed with our Report on Form 10-Q, dated August 10, 2007.
(4)	Incorporated by reference to the same numbered exhibit filed with our Report on Form 10-Q, dated November 11, 2007.
(5)	Incorporated by reference to Exhibit 10.1 filed with our Report on Form 8-K, dated September 24, 2007.

74

(6)	Incorporated by reference to Exhibit 10.1 filed with our Report on Form 8-K, dated September 21, 2007.
(7)	Incorporated by reference to Exhibit 10.1 filed with our Report on Form 8-K, dated April 27, 2007.

(c) Financial Statement Schedules

The following financial statement schedule is filed as part of this Annual Report on Form 10-K:

Schedule Number	Description		Page
II		Valuation and Qualifying Accounts		106

75

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ARTES MEDICAL, INC.

By:  /s/  Diane S. Goostree

Diane S. Goostree

President and Chief Executive Officer

Date: March 14, 2008

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Diane S. Goostree and Peter C. Wulff, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title(s)	Date
/s/  Diane S. Goostree Diane S. Goostree	President, Chief Executive Officer and Director (principal executive officer)	March 14, 2008
/s/  Peter C. Wulff Peter C. Wulff	Executive Vice President and Chief Financial Officer (principal financial and accounting officer)	March 14, 2008
/s/  Christopher J. Reinhard Christopher J. Reinhard	Executive Chairman of the Board of Directors	March 14, 2008
/s/  John R. Costantino John R. Costantino	Director	March 14, 2008
/s/  Lon E. Otremba Lon E. Otremba	Director	March 14, 2008
/s/  Beverly Huss Beverly Huss	Director	March 14, 2008
/s/  Robert Sherman Robert Sherman	Director	March 14, 2008
/s/  Todd C. Davis Todd C. Davis	Director	March 14, 2008

76

Artes Medical, Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	78
Consolidated Balance Sheets	79
Consolidated Statements of Operations	80
Consolidated Statements of Stockholders’ Equity (Deficit)	81
Consolidated Statements of Cash Flows	82
Notes to Consolidated Financial Statements	83

77

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Artes Medical, Inc.

We have audited the accompanying consolidated balance sheets of Artes Medical, Inc. as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Artes Medical, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, Artes Medical, Inc. changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has recurring operating losses, an accumulated deficit of $106.3 million and working capital of $16.5 million at December 31, 2007. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The 2007 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Artes Medical, Inc.’s internal control over financial reporting as of December 31, 2007, based upon criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California

March 13, 2008

78

Artes Medical, Inc.

Consolidated Balance Sheets

	December 31,
	2007			2006
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	20,293		$	46,258
Accounts receivable (net of allowance for doubtful accounts of $20 and $0 at December 31, 2007 and December 31, 2006, respectively)		792			—
Prepaid expenses		754			304
Inventory, net		5,528			4,761
Other assets		290			102
Total current assets		27,657			51,425
Property and equipment, net		5,034			5,271
Intellectual property, net		2,385			3,578
Deposits and other assets		645			339
Total assets	$	35,721		$	60,613
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,880		$	2,218
Accrued compensation and benefits		1,802			1,774
Accrued severance		—			920
Accrued expenses		1,194			690
Income taxes payable		—			73
Capital lease obligations, current portion		21			45
Revolving credit line		5,000			5,000
Term note payable, current portion		1,250			1,250
Deferred rent, current portion		21			49
Total current liabilities		11,168			12,019
Term note payable (net of discount of $165 and $305 at December 31, 2007 and 2006, respectively)		2,231			3,341
Capital lease obligations, less current portion		—			21
Deferred rent, less current portion		783			678
Deferred tax liability		915			1,368
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value 200,000,000 shares authorized at December 31, 2007 and 2006; 16,514,163 and 16,361,246 shares issued and outstanding at December 31, 2007 and 2006, respectively		17			16
Additional paid-in capital		126,894			122,572
Accumulated deficit		(106,287	)		(79,402	)
Total stockholders’ equity		20,624			43,186
Total liabilities and stockholders’ equity	$	35,721		$	60,613

See accompanying notes.

79

Artes Medical, Inc.

Consolidated Statements of Operations

	Years Ended December 31,
	2007			2006			2005
	(In thousands, except share and per share data)
Revenues:
Product sales	$	7,084		$	—		$	—
License revenues		6,232			390			—
Total revenues		13,316			390			—
Cost of product sales		10,659			—			—
Gross profit		2,657			390			—
Operating expenses:
Research and development		6,023			8,084			10,189
Selling, general and administrative		24,331			17,299			10,137
Loss from operations		(27,697	)		(24,993	)		(20,326	)
Interest income		1,391			675			52
Interest expense		(1,119	)		(2,454	)		(4,468	)
Other income (expense), net		(2	)		(27	)		2,041
Loss before benefit for income taxes		(27,427	)		(26,799	)		(22,701	)
Benefit for income taxes		542			476			458
Net loss	$	(26,885	)	$	(26,323	)	$	(22,243	)
Loss per share:
Basic and diluted	$	(1.63	)	$	(14.23	)	$	(18.76	)
Weighted average shares — basic and diluted		16,462,369			1,850,255			1,185,387

See accompanying notes.

80

Artes Medical, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

														Convertible												Total
	Convertible								Common		Common			Preferred			Additional			Deferred						Stockholders’
	Preferred			Stock			Common		Stock		Stock			Stock			Paid-In			Stock-Based			Accumulated			Equity
	Shares			Amount			Shares		Amount		Issuable			Subscribed			Capital			Compensation			Deficit			(Deficit)
Balance at December 31, 2004		7,167,819		$	7			1,138,644	$	1		—		$	3,543		$	23,322		$	(631	)	$	(30,836	)	$	(4,594	)
Issuance of common stock upon exercise of stock options in March		—			—			5,882		—		—			—			25			—			—			25
Issuance of common stock upon exercise of options and warrants		—			—			23,731		—		—			—			120			—			—			120
Issuance of common stock for services rendered in April through December		—			—			51,528		—		—			—			386			—			—			386
Issuance of common stock in connection with settlement agreement in October		—			—			9,768		—		—			—			102			—			—			102
Common stock issuable in exchange for guarantee on convertible debt in December		—			—			—		—		735			—			—			—			—			735
Issuance of Series D preferred stock in exchange for convertible notes and accrued interest, and cash, in May, at $2.00 per share, net of issuance costs		9,754,761			10			—		—		—			(3,543	)		14,245			—			—			10,712
Issuance of Series D preferred stock at $2.00 in exchange for services in May		265,096			—			—		—		—			—			367			—			—			367
Issuance of warrants in connection with Series D convertible preferred stock in May		—			—			—		—		—			—			809			—			—			809
Issuance of warrants in connection with convertible note payable in January through September		—			—			—		—		—			—			2,007			—			—			2,007
Issuance of warrants in connection with amendment of convertible notes in December		—			—			—		—		—			—			276			—			—			276
Issuance of Series E preferred stock for cash, in December 2005, at $2.50 per share, net of issuance costs		3,089,615			3			—		—		—			—			7,703			—			—			7,706
Series E preferred stock subscriptions at $2.50 per share for cash in December		—			—			—		—		—			6,900			—			—			—			6,900
Issuance of Series E preferred stock at $2.50 per share in exchange for termination agreement in December		124,000			—			—		—		—			—			310			—			—			310
Issuance of Series E preferred stock at $2.50 per share in exchange for amendment of convertible note payable in December		250,000			—			—		—		—			—			625			—			—			625
Stock-based compensation		—			—			—		—		—			—			959			—			—			959
Deferred stock compensation		—			—			—		—		—			—			2,383			(2,383	)		—			—
Amortization of deferred compensation		—			—			—		—		—			—			—			335			—			335
Net loss and comprehensive loss		—			—			—		—		—			—			—			—			(22,243	)		(22,243	)
Balance at December 31, 2005		20,651,291			20			1,229,553		1		735			6,900			53,639			(2,679	)		(53,079	)		5,537
Issuance of common stock upon exercise of warrants and stock options		—			—			114,506		—		—			—			440			—			—			440
Issuance of common stock for services in January through May		—			—			8,048		—		—			—			89			—			—			89
Issuance of common stock in connection with intellectual property in January		—			—			4,705		—		—			—			49			—			—			49
Issuance of Series E convertible preferred stock at $2.50 per share for cash, in January, net of issuance costs		3,994,000			4			—		—		—			(6,750	)		9,367			—			—			2,621
Issuance of Series E convertible preferred stock at $2.50 per share for cash, in February, net of issuance costs		5,484,200			6			—		—		—			(150	)		12,444			—			—			12,300
Issuance of Series E convertible preferred stock at $2.50 per share for cash, in March, net of issuance costs		7,712,406			8			—		—		—			—			16,888			—			—			16,896
Issuance of Series C-1 convertible preferred stock upon exercise of warrants for cash in May		50,000			—			—		—		—			—			50			—			—			50
Issuance of common stock in connection with guarantee on convertible debt		—			—			70,588		—		(735	)		—			735			—			—			—
Issuance of common stock upon initial public offering		—			—			5,290,000		5		—			—			25,279			—			—			25,284
Exercise of warrants upon initial public offering		—			—			276,334		—		—			—			583			—			—			583
Issuance of warrants to purchase Series E convertible preferred stock in connection with financing agreement		—			—			—		—		—			—			253			—			—			253
Conversion of convertible preferred stock upon initial public offering		(37,891,897	)		(38	)		9,367,512		10		—			—			28			—			—			—
Acceleration of vesting of outside director stock options upon initial public offering		—			—			—		—		—			—			547			—			—			547
Stock-based compensation		—			—			—		—		—			—			2,526			—			—			2,526
Stock-based severance		—			—			—		—		—			—			958			—			—			958
Deferred stock compensation		—			—			—		—		—			—			(2,679	)		2,679			—			—
Warrant modification expense		—			—			—		—		—			—			1,376			—			—			1,376
Net loss and comprehensive loss		—			—			—		—		—			—			—			—			(26,323	)		(26,323	)
Balance at December 31, 2006		—		$	—			16,361,246	$	16	$	—		$	—		$	122,572		$	—		$	(79,402	)	$	43,186
Issuance of common stock upon exercise of warrants and stock options		—			—			152,917		1		—			—			535			—			—			536
Initial public offering cost		—			—			—		—		—			—			(14	)		—			—			(14	)
Stock-based compensation		—			—			—		—		—			—			3,238			—			—			3,238
Deferred stock compensation		—			—			—		—		—			—			563			—			—			563
Net loss and comprehensive loss		—			—			—		—		—			—			—			—			(26,885	)		(26,885	)
Balance at December 31, 2007		—		$	—			16,514,163	$	17	$	—		$	—		$	126,894		$	—		$	(106,287	)	$	20,624

81

Artes Medical, Inc.

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2007			2006			2005
				(In thousands)
Operating activities
Net loss	$	(26,885	)	$	(26,323	)	$	(22,243	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,653			2,428			1,742
Bad debt expense		72			—			—
Benefit for income taxes		(453	)		(478	)		(458	)
Non-cash interest expense associated with issuance of warrants and convertible notes		140			2,350			4,308
Warrant modification expense		—			899			—
Stock-based compensation		3,801			4,032			1,294
Issuance of stock for services		—			90			558
Issuance of stock for settlement and termination agreements		—			—			412
Issuance of common stock for intellectual property		—			49			—
Loss on disposal of fixed assets		—			43			—
Deferred rent		77			42			200
Deferred taxes		—			—			(27	)
Changes in operating assets and liabilities:
Accounts receivable		(864	)		—			—
Inventory		(767	)		(4,070	)		(442	)
Prepaid expenses and other assets		(638	)		172			(208	)
Accounts payable		(336	)		(1,099	)		(398	)
Accrued compensation and benefits		28			275			1,346
Accrued severance		(920	)		920			—
Accrued expenses		504			(896	)		834
Income taxes payable		(73	)		3			27
Net cash used in operating activities		(23,661	)		(21,563	)		(13,055	)
Investing activities
Acquisition of intellectual property, net of cash acquired		—			—			(2,250	)
Purchases of property and equipment		(1,223	)		(1,623	)		(4,554	)
Deposits and other assets		(306	)		(3,156	)		(950	)
Net cash used in investing activities		(1,529	)		(4,779	)		(7,754	)
Financing activities
Proceeds from term loan payable		—			4,945			—
Payments on term loan payable		(1,251	)		(104	)		—
Payments on revolving line of credit		(476	)		—			—
Proceeds from revolving credit line		476			5,000			—
Proceeds from issuance of convertible notes payable		—			—			6,970
Payments on convertible notes payable		—			(6,525	)		—
Proceeds from capital lease obligations		—			—			157
Payments on capital lease obligations		(45	)		(49	)		(41	)
Proceeds from subscribed preferred stock		—			—			6,900
Proceeds from issuance of preferred stock, net		—			31,816			11,456
Proceeds from issuance of common stock		(14	)		29,513			—
Proceeds from exercise of stock options and warrants		535			1,074			28
Net cash (used in) provided by financing activities		(775	)		65,670			25,470
Net (decrease) increase in cash and cash equivalents		(25,965	)		39,328			4,661
Cash and cash equivalents at beginning of year		46,258			6,930			2,269
Cash and cash equivalents at end of year	$	20,293		$	46,258		$	6,930
Noncash financing activities
Issuance of subscribed preferred stock	$	—		$	6,900		$	3,543
Issuance of warrants and common stock in connection with intellectual property acquisition	$	—		$	49		$	—
Conversion of convertible notes and interest into convertible preferred stock	$	—		$	—		$	8,246
Issuance of convertible notes payable as commission for financing	$	—		$	—		$	203
Conversion of payables to convertible notes payable	$	—		$	—		$	95
Supplemental activities
Cash paid for income taxes	$	1		$	1		$	1
Cash paid for interest	$	979		$	104		$	160

See accompanying notes.

82

Artes Medical, Inc.

Notes to Consolidated Financial Statements

1.   Organization and Summary of Significant Accounting Policies

Organization and Business

Artes Medical, Inc., (the “Company”), formerly known as Artes Medical USA, Inc., was incorporated in Delaware on August 24, 1999, and is focused on the development, manufacture and commercialization of a new category of injectable aesthetic products for the dermatology and plastic surgery markets, principally in the United States. The Company’s initial product, ArteFill, is a non-resorbable aesthetic injectable implant for the correction of facial wrinkles known as smile lines, or nasolabial folds. The Company received FDA approval to market ArteFill on October 27, 2006 and commenced commercial shipments of ArteFill during the first quarter of 2007. Prior to 2007, the Company was a development stage company. Since inception, and through December 31, 2007, the Company has an accumulated deficit of $106.3 million.

Basis of Presentation and Management’s Plan

The Company has a history of recurring losses from operations and has an accumulated deficit of $106.3 million as of December 31, 2007. As of December 31, 2007, the Company had available cash and cash equivalents totaling $20.3 million and working capital of $16.5 million. Additionally, the Company will require additional cash funding to execute against its strategic plan for 2008. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and this does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

A successful transition to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill its planned expenses and achieving a level of revenues adequate to support the Company’s cost structure. In addition to the net amounts raised from Cowen Healthcare Royalty Partners, L.P. in January 2008 (See Note 12), the Company intends to seek additional debt or equity financing to support its operations until it becomes cash flow positive. There can be no assurances that there will be adequate financing available to the Company on acceptable terms or at all. If the Company is unable to obtain additional financing, or cannot achieve its forecasted sales during 2008, the Company would need to significantly curtail or reorient its operations during 2008, which could have a material adverse effect on the Company’s ability to achieve its business objectives.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and Artes Medical Germany GmbH. All intercompany accounts have been eliminated in consolidation.

In June 2007, the Company announced the formation of a new wholly-owned subsidiary named Spheris Medical, Inc. to develop and commercialize new and innovative therapeutic medical applications of its proprietary microsphere tissue bulking technology through collaborative agreements with third parties. As of December 31, 2007, there were no tangible assets or accounting transactions involving Spheris Medical, Inc.

Reverse Stock Split, Conversion to Common Stock and Initial Public Offering

In connection with the Company’s initial public offering, the Company effected a 1-for-4.25 reverse stock split of its common stock on December 19, 2006. In addition to the reverse stock split, all outstanding shares of the Company’s preferred stock were converted to common stock immediately prior to the closing of the Company’s initial public offering on December 26, 2006. Each outstanding share of Series A, Series D and Series E preferred stock was converted into one share of common stock, and as a result of anti-dilution provisions, each share of Series B preferred stock was converted into 1.35 shares of common stock and each share of Series C-1 preferred stock was converted into 1.375 shares of common stock. On December 26, 2006, after giving effect to the 1-for-4.25

83

Artes Medical, Inc.

Notes to Consolidated Financial Statements — (Continued)

reverse stock split, and the anti-dilution provisions associated with the Series B and C-1 preferred stock, all of the outstanding shares of preferred stock were automatically converted into 9,367,512 shares of common stock. In addition, as a result of the conversion to common stock, all warrants or other rights to purchase the Company’s preferred stock outstanding on December 26, 2006 were automatically converted into the right to purchase shares of common stock at the applicable conversion ratios for the particular series of preferred stock. The actions necessary to effect the reverse stock split and the conversion of the preferred stock to common stock were approved by the Company’s Board of Directors and the required vote of the Company’s stockholders.

The accompanying consolidated financial statements and related notes give retroactive effect to the reverse stock split for all periods presented with respect to outstanding shares of common stock and options and warrants exercisable for common stock. The accompanying consolidated financial statements and related notes do not reflect the conversion to common stock (or the reverse stock split) for all periods presented with respect to outstanding shares of preferred stock and warrants exercisable for preferred stock.

On December 26, 2006, the Company closed an initial public offering of its common stock in which it sold 5,290,000 shares of common stock for gross proceeds of $31.7 million. After underwriting discounts, commissions and other offering expenses, the Company received net proceeds of $25.3 million from this offering.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. License revenues from the year ended December 31, 2006 have been reclassified to license revenues in the 2007 statement of operations instead of other income and certain balance sheet accounts have been combined.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of less than three months when purchased to be cash equivalents.

Revenue Recognition

The Company follows the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance. The Company recognizes revenue from product sales when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists, (ii) delivery of the product has occurred and title has transferred to its customers, (iii) the selling price is fixed and determinable and (iv) collection is reasonably assured. Provisions for discounts to customers or other adjustments are recorded as a reduction of revenue and provided for in the same period that the related product sales are recorded based upon analysis of historical discounts and exchanges.

The Company recognizes revenue when its products have reached the destination point and other criteria for revenue recognition have been met.

A substantial amount of business is transacted using credit cards. The Company may offer an early payment discount to certain customers.

The Company has a no return policy for its product except in the case of product that may be shipped in error or damaged in shipment. During 2007, the Company shipped product to customers which did not provide for sufficient

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shelf life for certain customers to utilize the product before expiration. As a result, the Company exchanged product that was going to expire for product with sufficient shelf life to be utilized by the customers. These exchanges were substantially completed by December 31, 2007. At December 31, 2007, the Company had a sales reserve of $150,000 for exchanges which were completed in early 2008. During the last half of 2007, the Company refined its shipping policies to eliminate the shipment of product without adequate shelf life.

Allowance for Doubtful Accounts

The Company determines its allowance for doubtful accounts based on an analysis of the collectibility of accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. The expense related to the allowance for doubtful accounts is recorded in selling, general and administrative. The Company does not write off individual accounts receivable until all avenues of legal recourse to collect the outstanding amount have been exhausted.

Valuation of Inventory

Inventories are stated at the lower of cost or market, with cost being determined under a standard cost method, which approximates a first-in, first-out basis. The Company’s inventories are evaluated and any non-usable inventory is expensed. In addition, the Company reserves for any inventory that may be excess or potentially non-usable. Charges for such write-offs and reserves are recorded as a component of cost of sales.

Fair Value of Financial Instruments

The carrying amount of cash, accounts receivable, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. The Company believes the carrying amount of the notes payable approximate their respective fair values.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company’s customers are primarily physicians and no single customer represents more than 10% of revenues for any period presented. Credit to customers is granted based on analysis of customers’ credit worthiness and credit losses have not been significant.

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (three to seven years) using the straight-line method. Leasehold improvements are amortized over the lesser of the term of the related lease or the useful life of the asset.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment and intellectual property. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company will record impairment losses on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company’s current and historical operating losses and cash flows are indicators of impairment, the Company believes the future cash flows to be received

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support the carrying value of its long-lived assets and, accordingly, the Company has not recognized any impairment losses through December 31, 2007.

Deferred Rent

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under the lease agreements is recorded as deferred rent in the accompanying consolidated balance sheets. Landlord construction allowances and other such lease incentives are recorded as deferred rent and are amortized on a straight-line basis as a reduction to rent expense.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as general and administrative expenses as incurred since recoverability of such expenditures is uncertain.

Research and Development Expenses

Research and development costs are expensed as incurred and such costs consist primarily of costs to further the Company’s research and development activities and include compensation and other expenses for research and development personnel, costs associated with clinical trials, non-clinical activities, process development activities, regulatory activities, supplies and development materials, costs for consultants, research-related overhead expenses, amortization of purchased technology, and depreciation.

Shipping and Handling Costs

Shipping and handling costs are classified in cost of product sales.

Advertising

Advertising costs are expensed as incurred and included in sales and marketing expenses. Advertising expenses include external advertising and promotional literature. Advertising expenses were $573,000, $119,000 and $37,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Sales Taxes

Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with a corresponding offset recorded to sales tax payable. These balances are removed from the consolidated balance sheet as cash is collected from the customers and remitted to the tax authority.

Income Taxes

The Company uses the liability method of accounting for income taxes as required by SFAS No. 109, Accounting for Income Taxes.

Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

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Foreign Currency Translation and Transactions

The financial statements of foreign subsidiaries are denominated in local currency and are then remeasured into U.S. dollars as the U.S. dollar is the functional currency. The remeasurement of local currency amounts into U.S. dollars creates translation adjustments that are included as Other Expenses in the Statements of Operations for the applicable period. Transaction and translation gains or losses were not material to the financial statements for any periods presented.

Stock-based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS No. 123(R)) using the prospective transition method, and therefore, prior period results have not been restated. SFAS No. 123(R), which revises SFAS No. 123, Accounting for Stock-Based Compensation and (SFAS No. 123), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. Under this transition method, the compensation cost related to all equity instruments granted prior to, but not yet vested as of, the adoption date is recognized based on the grant-date fair value which is estimated in accordance with the original provisions of SFAS No. 123. Compensation costs related to all equity instruments granted after January 1, 2006 is recognized at the grant-date fair values of the awards in accordance with the provisions of SFAS No. 123(R). Additionally, under the provisions of SFAS No. 123(R), the Company is required to include an estimate of the number of awards that will be forfeited in calculating compensation costs, which is recognized over the requisite service period of the awards on a straight-line basis.

For purposes of calculating the stock-based compensation under SFAS 123(R), the Company estimates the fair value of stock options using a Black-Scholes option-pricing model which is consistent with the model used for pro forma disclosures under SFAS 123 prior to the adoption of SFAS 123(R). The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and interest rates. In accordance with SFAS 123(R) share-based compensation expense recognized in the statement of operations is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Prior to the adoption of SFAS 123(R), the Company used the minimum value method for valuing stock options granted to employees and directors. For periods prior to 2006, the Company accounted for forfeitures as they occurred.

The assumptions used to estimate the fair value of stock options granted to employee and directors during the years ended December 31, 2007, 2006 and 2005 are as follows:

	Years Ended December 31,
	2007			2006	2005
	Actual			Actual	Pro Forma
Volatility		48	%	60%	0%
Expected term (years)		6.0		6.0	4.0
Risk free interest rate		4.75	%	4.55%	3.00% — 4.50%
Expected dividend yield		0	%	0%	0%
Forfeiture rate		14	%	14%	4%

The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected life of options was calculated using the simplified method as prescribed by the SEC’s SAB No. 107 (SAB No. 107). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility also reflects the application of SAB No. 107, incorporating a combination of the historical volatility of comparable companies whose share prices are publicly available and the Company’s historical volatility. The estimated

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forfeiture rate is based on historical data for forfeitures and the Company is recognizing compensation expense only for those equity awards expected to vest.

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2007 and 2006 was $7.58 and $8.00 per share, respectively.

During the year ended December 31, 2007, the Company recorded approximately $3,238,000 of stock-based compensation expense. Of this amount, $403,000 has been capitalized to inventory, $336,000 is included in research and development expenses and $2,499,000 is included in selling, general and administrative expenses. During the year ended December 31, 2006, the Company recorded approximately $1,300,000 of stock-based compensation expense. Of this amount, $146,000 has been capitalized to inventory, $139,000 is included in research and development expenses and $1,015,000 is included in selling, general and administrative expenses.

Total unrecognized stock-based compensation costs related to non-vested stock options granted during the year ended December 31, 2007 was approximately $6,403,000, which related to 3,181,958 options issued and outstanding. This unrecognized cost is expected to be recognized on a straight-line basis over a weighted average period of approximately four years.

Equity instruments issued to non-employees are recorded at their fair values as determined in accordance with SFAS 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically revalued as the options vest and are recognized as expense over the related service period. The Company recorded stock-based compensation for options granted to non-employees of $245,000, $156,000, $107,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The fair value of each option was determined using the Black-Scholes valuation model and periodically re-measured and recognized over the related service period.

During the years ended December 31, 2007, 2006, 2005, the Company recognized $245,000, $535,000 and $959,000, respectively, for stock options and warrants issued to non-employees.

Deferred Stock-Based Compensation

No employee related stock-based compensation expense was reflected in the Company’s reported net loss in any period prior to 2004, as all options granted to employees had an exercise price equal to the estimated fair value of the underlying common stock on the date of the grant. Stock-based compensation was recognized in 2004 for warrants granted to a member of the Board of Directors as the exercise price of the warrants was less than the estimated fair value of the underlying common stock on the date of grant.

On September 13, 2005, the Company commenced the initial public offering process, and based on discussions with its investment bankers, reassessed the fair value of its common stock going back to July 1, 2004. The Company’s management, all of whom qualify as related parties, determined that the stock options granted from July 1, 2004 forward were granted at exercise prices that were below the reassessed fair value of the common stock on the date of grant. The Company completed the reassessment of its fair value without the use of an unrelated valuation specialist and started with the proposed valuation from its investment bankers, considering a number of accomplishments in 2004 and 2005 that would impact its valuation, including achievement of key clinical milestones, hiring executive officers, and the increased possibility of completing an initial public offering. Accordingly, deferred stock-based compensation of $740,000 was recorded within Stockholders’ Equity (deficit) during 2004 which represented the difference between the weighted-average exercise price of $4.25 and the weighted-average fair value of $6.38 on 324,705 options granted to employees during 2004. Deferred stock-based compensation of $2,383,000, net of forfeitures, was recorded within Stockholders’ Equity during 2005 which represented the difference between the weighted-average exercise price of $5.31 and the weighted-average fair value of $9.18 on 620,000 options granted to employees during 2005.

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The deferred stock-based compensation is being amortized on a straight-line basis over the vesting period of the related awards, which is generally four years.

During the years ended December 31, 2007, 2006 and 2005, the Company recognized $563,000, $719,000, and $335,000, respectively, in amortization of deferred stock-based compensation which was provided for prior to the adoption of SFAS 123(R).

Unrecognized deferred stock-based compensation related to non-vested stock option and warrant awards granted prior to January 1, 2006 was approximately $800,000 at December 31, 2007.

The expected future amortization expense for deferred stock-based compensation for stock options granted through December 31, 2007, is as follows (in thousands):

2008	$	463
2009		337
Total	$	800

Upon the adoption of SFAS No. 123(R) on January 1, 2006, deferred stock-based compensation was reclassified against additional paid-in capital.

The stock-based compensation expense that has been included in the statement of operations for all stock-based compensation arrangements was as follows:

	Years Ended December 31,
	2007		2006		Pro Forma 2005
	(In thousands, except per share amounts)
Capitalized to inventory	$	575	$	263		—
Research and development expense	$	453	$	766	$	256
Sales, general and administrative expense		2,773		4,165		1,092
	$	3,226	$	4,931	$	1,348
Net effect on basic and diluted net loss per share	$	0.20	$	2.67	$	1.14

Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has not yet completed its evaluation of the impact of adopting SFAS No. 157.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently evaluating whether SFAS No. 159 will have a material effect on its consolidated financial statements.

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2.   Net Loss Per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, stock options and the outstanding warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

Historical outstanding anti-dilutive securities not included in the diluted net loss per common calculation:

	December 31,
	2007		2006		2005
Convertible preferred stock		—		—		5,307,180
Warrants to purchase preferred and common stock		2,470,638		2,530,336		2,423,758
Options to purchase common stock		3,181,958		2,133,842		1,149,000
		5,652,596		4,664,178		8,879,938

3.   Acquisitions

MediPlant Acquisition Settlement Agreement

In October 2005, the Company, FormMed Biomedicals AG, and Dr. Martin Lemperle, one of the Company’s founders, entered into a settlement agreement to accelerate two installment payments due under a purchase agreement dated July 22, 2004, and to settle and mutually release all parties regarding reimbursement of certain production and development costs incurred by FormMed prior to the date of the purchase agreement and reimbursement to Dr. Martin Lemperle of certain legal expenses. Upon final settlement of the litigation with one of the Company’s competitors (see Note 5) and receipt of the settlement amount in 2005, the Company paid FormMed $750,000 as the final payment and secured the release of certain tangible and intangible assets held in escrow, as required pursuant to the terms of the original MediPlant purchase agreement.

The Company paid FormMed 428,000 Euro for the prior production and development costs on a payment schedule through June 30, 2006. In addition, the Company issued FormMed 7,214 shares of Company common stock as consideration for accrued interest. The Company paid Dr. Martin Lemperle 150,000 Euro in 2006 for all legal costs incurred as a result of the settlement and litigation agreements with a competitor (see Note 5). In addition, the Company issued Dr. Martin Lemperle 2,549 shares of Company common stock as consideration for accrued interest.

All parties agreed that both the cash payments and common stock grant covers in full all prior period production, development and legal costs incurred by FormMed and Dr. Martin Lemperle.

4.   License Agreement

On September 21, 2007, the Company entered into a Second License Agreement (the “Second Agreement”) with BioForm Medical, Inc. and BioForm Medical Europe B.V. (together, “BioForm”). Under the Second Agreement, BioForm elected to pre-pay all future royalty obligations to the Company by making two payments totaling $5.5 million. These payments replaced any future royalty obligation of BioForm to the Company under the Settlement and License Agreement, dated October 31, 2005.

The Company recognized license revenue of $5.5 million related to this agreement in the third quarter of 2007.

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5.   Balance Sheet Details

Inventory

Inventory consists of raw materials used in the manufacture of ArteFill, work in process and finished good ready for sale. Inventory is carried at the lower of cost or market. Cost is determined using a standard cost method, which approximates a first-in, first-out basis, with provisions made for obsolete or slow moving goods.

Inventory consisted of the following (in thousands):

	December 31,
	2007			2006
Raw materials	$	1,147		$	727
Work in process		2,462			1,619
Unpackaged finished goods		3,555			3,169
Finished goods		602			—
		7,766			5,515
Less: reserve for excess and obsolete inventory		(2,238	)		(754	)
Total	$	5,528		$	4,761

Property and Equipment

Property and equipment consisted of the following (in thousands):

		December 31,
	Useful Lives	2007			2006
Furniture and fixtures	7 years	$	625		$	588
Office equipment	3 - 5 years		949			734
Lab equipment	3 - 5 years		2,726			2,464
Leasehold improvements	Life of lease		4,050			3,351
			8,350			7,137
Less accumulated depreciation and amortization			(3,316	)		(1,866	)
Total		$	5,034		$	5,271

As of December 31, 2007 and 2006, lab equipment and office equipment includes approximately $130,000 and $130,000, respectively, of equipment financed under capital leases with accumulated depreciation of approximately $109,000 and $46,000, respectively.

Total depreciation expense, which includes amortization of assets recorded under capital leases, for the years ended December 31, 2007, 2006 and 2005 was $1,460,000, $1,235,000, and $549,000, respectively.

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Intellectual Property

Intellectual property consisted of the following (in thousands):

	December 31, 2007						December 31, 2006
			Accumulated		Net Book				Accumulated		Net Book
	Gross		Amortization		Value		Gross		Amortization		Value
Patents	$	287	$	192	$	95	$	287	$	144	$	143
Core technology		6,868		4,578		2,290		6,868		3,433		3,435
Total	$	7,155	$	4,770	$	2,385	$	7,155	$	3,577	$	3,578

Patents and core technology are amortized over a useful life of six years. Amortization expense was $1,193,000 for each of the years ended December 31, 2007, 2006 and 2005. Amortization expense for patents and core technology is estimated to be $1,193,000 for each of 2008 and 2009.

6.   Commitments and Contingencies

On November 27, 2006, the Company entered into a loan and security agreement with Comerica Bank, pursuant to which the Company obtained a credit facility with Comerica Bank, consisting of a revolving line of credit in the amount of up to $5,000,000 and a term loan in the amount of up to $5,000,000. Interest on the revolving line and the term loan accrues at prime plus 2%. The revolving line and term loan mature on November 27, 2008 and 2010, respectively. The agreement requires the Company to meet certain liquidity ratios and imposes certain restrictions on mergers, acquisitions and distributions. In addition the Company granted the bank a warrant to purchase 120,000 shares of Series E preferred stock at an exercise price of $2.50 per share. The fair value of the warrant plus the related beneficial conversion feature totaled $253,000; this amount plus an additional $54,000 of actual loan costs was recorded as debt discount and will be amortized over the life of the term loan using the effective interest method. The debt is secured by substantially all of the assets of the Company.

The following is a summary of the credit facility at December 31, 2007 (in thousands):

Comerica Bank revolving line of credit	$	5,000
Comerica Bank term loan		3,646
		8,646
Less current portion		6,250
		2,396
Debt discount		(165	)
Long-term debt	$	2,231

In February 2008, the Company repaid and terminated its credit facilities with Comerica Bank.

The Company leases equipment under various equipment financing arrangements which expire in 2008 and have interest rates ranging from 8.5% to 9.3%.

In June 2007, the Company has a master service agreement with Therapeutics, Inc., an independent clinical research organization, to conduct clinical studies for the Company, including the 5-year post-approval safety study required by the FDA as part of its approval of ArteFill. Therapeutics Inc. will conduct project management, medical monitoring, case reports, subject recruitment, data analysis and other clinical study activities for clinical studies the Company initiates or that are conducted by third parties under a grant the Company provides to the third parties.

In August 2007, the Company entered into a supply agreement with Lampire Biological Labs, Inc. for bovine corium, which the Company uses to produce its highly purified and partly denatured bovine collagen contained in ArteFill. Under the terms of this agreement, pricing is based on unit fees for the acquisition of calves and for

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processing. Lampire has agreed to process the bovine corium in strict accordance with general and manufacturing process requirements to ensure safety and quality, and to ensure that the bovine collagen is free from BSE. The agreement requires that the Company purchase at least $612,000 of bovine corium during the one-year term.

In August 2007, the Company entered into an amended and restated building lease agreement for the 35,000 square foot corporate, manufacturing and research and development headquarters in San Diego, California with the new owner of the facilities, Biomed Realty, L.P. Under the amended and restated lease, the Company extended the existing lease term from December 2011 to December 2012, maintained the Company’s option to extend the lease term for an additional 5-year period and extended the Company’s current right of first refusal to include the property adjacent to this property that the Company leases for additional office space.

Also in August 2007, the Company entered into a building lease agreement with Biomed Realty, L.P. for 32,000 square feet of office space in a building adjacent to the Company’s headquarters in San Diego, California. The Company had previously subleased 8,000 square feet in this building. The lease expires in December 2012. The Company has a first right of refusal to purchase the facility during the term of the lease, as well as the right to extend the lease term for an additional 5-year period. The landlord has also extended the Company a $1.14 million tenant improvement allowance. The building will be used for general office administration, research and development labs and outbound distribution.

In addition, the Company leases a 3,550 square foot manufacturing and warehouse facility in Frankfurt, Germany, where the Company manufactures the PMMA microspheres used exclusively in ArteFill. The leases for the Company’s Frankfurt facility expire in November 2008, and are subject to automatic one-year extensions unless written notice of termination is given by either party at least six months prior to the beginning of the extension term.

Future annual minimum rental payments under the Company’s operating leases are as follows (in thousands):

Years ended December 31, 2008		1,487
2009		1,556
2010		1,626
2011		1,696
2012		1,769
Total minimum lease payments	$	8,134

The Company’s leases include annual escalations in base rent and rent abatements. Rent expense was $1,097,000, $919,000, $954,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

In August 2007, the Company entered into a Severance Protection Agreement with Diane S. Goostree, President and Chief Executive Officer and Change of Control Agreements with the following named executive officers: Christopher J. Reinhard, Peter C. Wulff and Larry J. Braga, and with the following executive officers: Karla R. Kelly, J.D., Russell J. Anderson, Susan A. Brodsky-Thalken, Frank M. Fazio and Greg Kricorian, M.D. Under these agreements, the Company is obligated to make certain severance payments to these individuals in the event their employment is terminated under certain circumstances.

In March 2008, the Company entered into Change of Control Agreements with John Kay, Ph. D. and Karon J. Morell. Under these agreements, the Company is obligated to make certain severance payments to these individuals in the event their employment with the Company is terminated under certain circumstances.

The Company is subject to various legal actions and proceedings in the normal course of business. While the ultimate outcome of these matters cannot be predicted with certainty, management does not believe these matters will have a material adverse effect on the Company’s financial statements.

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Litigation Settlement Agreement

On October 31, 2005, the Company and Dr. Martin Lemperle, one of the Company’s founders, resolved all of their outstanding disputes and litigation matters with an independent company competing in the aesthetics market (the “Competitor”). According to the terms of the settlement agreement, the Company has granted the Competitor an exclusive, world-wide license under certain of its patents to make and sell implant products containing Calcium Hydroxylapatite particles, and a nonexclusive, world-wide license under the same patents to make and sell certain other nonpolymeric implant products. The Competitor paid the Company $2,058,000 in November 2005 for the settlement plus past royalties. This amount is included in other income in the 2005 consolidated statements of operations.

Settlement Agreements

In March 2006, the Company entered into a separation agreement with a founder in connection with his retirement and resignation. Under the terms of the agreement, the Company agreed to pay a cash bonus of $70,000 for his performance during fiscal year 2005 and to retain him as a consultant for an initial term of up to 24 months beginning March 15, 2006, subject to an extension for an additional 12 months under certain circumstances. In connection with the separation agreement, the parties also entered into a voting agreement, pursuant to which the founder agreed to vote all shares of voting capital stock owned by him as directed by a majority of the board of directors on all matters presented for a vote of the stockholders. In May 2006, the Company terminated the consulting arrangement as permitted under the terms of the separation agreement and the Company paid a lump sum payment of $366,667, the amount to which the founder would have been entitled had he completed the initial term of the separation agreement.

In May 2006, the Company paid $500,000 to Stifel, Nicolaus & Company, Incorporated in connection with a settlement agreement related to a dispute arising out of an engagement agreement between the parties.

On November 2, 2006, the Company received a notice of demand for arbitration from a former employee in connection with the termination of his employment. On January 31, 2007, the Company entered into a Confidential Settlement and Release of Claims Agreement whereby the Company paid a cash settlement amount of $284,000 in February 2007. In addition to the cash settlement amount, the Company agreed to accelerate the vesting of certain stock options and warrants previously granted to the employee. The Company recorded a non-cash expense charge of $135,000 associated with the accelerated vesting of these options and warrants.

On November 16, 2006, the Company received a notice of demand for arbitration from a former employee in connection with the termination of his employment. On January 10, 2007, the Company entered into a Confidential Settlement and Release of Claims Agreement whereby the Company paid a cash settlement amount of $242,000. Of the $242,000, $39,000 was paid in 2006 and the remaining balance was paid in 2007. In addition to the cash settlement amount, the Company agreed to accelerate the vesting of certain stock options previously granted to the employee. The Company recorded a non-cash stock compensation expense charge of $116,000 associated with the accelerated vesting of these stock options.

On November 17, 2006, the Company entered into a separation agreement and mutual general release with Dr. Stefan M. Lemperle in connection with his resignation as a director and as an employee. Pursuant to the agreement, the Company paid $690,000 in cash severance payments. Of the $690,000, $428,000 was paid in 2006 and the balance of $262,000 was paid in 2007. Dr. Stefan M. Lemperle was also eligible to receive an additional severance payment of $400,000, contingent upon the Company’s completion of a qualifying transaction, as defined in the agreement, before March 31, 2007. The Company’s IPO in December 2006 did not meet the definition of a qualifying transaction as defined in the agreement, so no additional payments were due to Dr. Lemperle. In connection with the agreement, the Company also amended the terms of the outstanding stock options held by Dr. Stefan M. Lemperle to provide for the full acceleration of all unvested shares under his stock options, and the Company has agreed to issue to Dr. Stefan M. Lemperle a warrant to purchase up to 117,647 shares of common

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stock, subject to reduction in an amount determined in accordance with the terms of the agreement. The Company recorded a non-cash expense charge of $378,000 associated with the accelerated vesting of these options and warrants in the year ended December 31, 2006.

On November 6, 2006, the Company filed a demand for arbitration with the American Arbitration Association against Melvin Ehrlich, who served as the Company’s President and Chief Operating Officer from January 2004 to April 2004. The Company was seeking declaratory relief regarding the number of shares of common stock Mr. Ehrlich was entitled to purchase under a warrant issued to him in connection with his employment agreement. The parties settled this action in March 2007. The Company paid Mr. Ehrlich $250,000 and issued Mr. Ehrlich 26,710 shares of common stock and a warrant to purchase 25,000 shares of common stock, at an exercise price of $8.07 per share. The settlement also contained a mutual release of claims and a mutual covenant not to sue. The Company accrued the expenses related to this settlement in the year ended December 31, 2006.

On August 13, 2007, Stefan Lemperle, the former Chief Executive Officer of the Company, filed a Demand for Arbitration with the American Arbitration Association, arising out of his November 17, 2006 Separation Agreement and General Release with the Company (the “Separation Agreement”). The Demand includes claims for breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty. In the Separation Agreement, the Company agreed to use commercially reasonable efforts to resolve an existing dispute with Mel Ehrlich, its former President and Chief Operating Officer, who claimed he had a right to acquire 470,588 shares of the Company’s Common Stock. Based on the payment the Company made to Mr. Ehrlich to resolve this dispute, the Separation Agreement provided that Stefan Lemperle was entitled to receive a warrant to purchase up to 2,207 shares of Common Stock. The Company resolved its dispute with Mr. Ehrlich and agreed to issue Dr. Lemperle a warrant in accordance with the terms of the Separation Agreement. Dr. Lemperle claimed that the Company did not use commercially reasonable efforts to resolve its dispute with Mr. Erhlich. The matter settled on February 11, 2008 for a payment of $30,000 to Dr. Lemperle in consideration for a general release of all claims.

Sandor Litigation

In August 2005, Elizabeth Sandor, an individual residing in San Diego, California, filed a complaint against the Company, Drs. Gottfried Lemperle, Stefan Lemperle and Steven Cohen in the Superior Court of the State of California for the County of San Diego. The complaint, as amended, set forth various causes of action against the Company, including product liability, fraud, negligence and negligent misrepresentation, and alleged that Dr. Gottfried Lemperle, the Company’s co-founder, former Chief Scientific Officer and a former director, treated Ms. Sandor with Artecoll and/or ArteFill in violation of medical licensure laws, that the product was defective and unsafe because it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections.

In addition, the complaint alleged that Dr. Gottfried Lemperle and his son, Dr. Stefan Lemperle, the Company’s co-founder, former Chief Executive Officer and a former director, falsely represented to her that the product had received an approvability letter from the FDA and was safe and without the potential for adverse reactions.

The complaint also alleged medical malpractice against Dr. Cohen, the lead investigator in the Company’s U.S. clinical trial, for negligence in treating Ms. Sandor for the adverse side effects she experienced. Ms. Sandor sought damages in an unspecified amount for pain and suffering, medical and incidental expenses, loss of earnings and earning capacity, punitive and exemplary damages, reasonable attorneys’ fees and costs of litigation. On June 1, 2006, the parties filed a stipulation to dismiss the case without prejudice and to toll the statute of limitations. The court dismissed the case on June 5, 2006 as stipulated by the parties, and Ms. Sandor was allowed to refile her case at any time within 18 months from that date.

On December 5, 2007, Ms. Sandor re-filed a complaint for personal injury, compensatory and punitive damages against the Company, Dr. Gottfried Lemperle, Dr. Stefan Lemperle and Dr. Steven Cohen. The complaint

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contains many of the same allegations contained in the initial complaint filed in September 2005. The complaint sets forth various causes of action and alleges that Dr. Gottfried Lemperle administered injections of a product of the Company in violation of medical licensure laws, that the product was defective and unsafe in that it had not received FDA approval at the time it was administered to Ms. Sandor, and that Ms. Sandor suffered adverse reactions as a result of the injections. Ms. Sandor is seeking damages in an unspecified amount for special and actual damages, medical and incidental expenses, incidental and consequential damages, punitive and exemplary damages, reasonable attorney’s fees and costs of litigation. The Company is preparing a demurrer to the complaint, and written discovery has commenced in this matter.

FDA Investigation

In March 2006, the counsel for Dr. Gottfried Lemperle, the Company’s former Chief Scientific Officer and a former member of the Company’s board of directors, in the Sandor litigation discussed above informed the Company that she had contacted an investigator in the FDA’s Office of Criminal Investigations. She further stated that the FDA investigator informed her that the FDA has an open investigation regarding the Company, Dr. Gottfried Lemperle and his son, Dr. Stefan Lemperle, the Company’s former Chief Executive Officer and a former director, that the investigation had been ongoing for many months, that the investigation would not be completed within six months, and that when the investigation is completed, it could be referred to the U.S. Attorney’s office for criminal prosecution. In November 2006, the Company contacted the FDA’s Office of Criminal Investigations. That office confirmed the ongoing investigation involving the Company, but declined to provide any details of the investigation, including the timing, status, scope or targets of this investigation. The Company contacted the FDA’s Office of Criminal Investigations in February 2008. The Office of Criminal Investigations confirmed that the investigation is ongoing and has been referred to the U.S. Attorney’s office, but did not provide any additional information regarding this investigation or whether the U.S. Attorney’s office intends to commence an action.

7.   Convertible Notes Payable

In May 2005, the Company received $6,970,000 in proceeds by issuing unsecured convertible promissory notes (“2005 Bridge Loan”) that were to accrue simple interest at 10% per annum until the maturity date of November 3, 2005. At the sole discretion of the Company, the maturity date was subject to a one-time extension to February 3, 2006. The Company exercised its right of the one-time extension, the applicable interest rate increased to 12% retroactively to the date of issuance of the 2005 Bridge Loan. At the closing of the next equity financing, the holders of the 2005 Bridge Loan elected not to convert all or a portion of the outstanding principal and accrued but unpaid interest into the new equity shares at the per share price of those shares but rather to be repaid the balance due under the 2005 Bridge Loan.

Simultaneously upon issuance of the 2005 Bridge Loan, the Company issued warrants to purchase Series D convertible preferred stock equal to 30% of the principal amounts of the 2005 Bridge Loan divided by the warrant exercise price of $2.00 per share, or warrants to purchase 1,045,500 shares of Series D convertible preferred stock. The warrants expire in May 2010.

In accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company initially recorded its convertible debt net of a discount for the (i) the estimated fair value of the warrants issued in the amount of $1,003,500 and (ii) the intrinsic value of the related beneficial conversion feature in the same amount for a total of $2,007,000. The estimated fair value of the warrants was determined in accordance with the Black-Scholes valuation model. The discount associated with the warrants and beneficial conversion feature is being amortized to interest expense over the term of the outstanding convertible notes payable.

Interest expense related to the warrants and beneficial conversion features was $0, $235,000 and $1,772,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

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On September 30, 2005, outstanding principal amount of $970,000 and accrued interest of $39,000 under the convertible notes issued in the 2005 Bridge Loan converted into 403,412 shares of Series E convertible preferred stock at a rate of $2.50 per share.

On December 30, 2005, the Company entered into an amendment of the 2005 Bridge Loan with an investor who held convertible promissory notes representing an outstanding principal amount of $5,500,000, whereby the Company paid, in January 2006, a total of $3,246,000, consisting of $3,000,000 of outstanding principal and $246,000 of accrued interest, upon the second closing of the Series E Financing. In February 2006, upon the third closing of the Series E Financing, the Company paid an additional $2,738,000, consisting of $2,500,000 of outstanding principal and $238,000 of accrued interest, the final amount due under the 2005 Bridge Loan.

Per the note amendment, the investor waived both its conversion and redemption options under the original note and extended the due date of the remaining outstanding principal of $2,500,000 from February 3, 2006 to February 15, 2006. As additional consideration, the Company granted the investor a stock grant of 250,000 shares of Series E convertible preferred stock in December 2005. In addition, three Company directors personally guaranteed the remaining outstanding principal under the amended note agreement. In exchange for the personal guarantees, the Company issued each of these three directors 23,529 shares of common stock. At December 31, 2005, the common stock had not yet been issued and is included as common stock issuable in the 2005 consolidated balance sheet and the consolidated statement of stockholders’ equity.

8.   Stockholders’ Equity

On December 26, 2006, the Company closed an initial public offering of its common stock in which it sold 5,290,000 shares of common stock at $6.00 per share for gross proceeds of $31.7 million. After underwriting discounts, commissions and offering expenses, the Company received net proceeds of $25.3 million. Upon the closing of the offering, all outstanding shares of convertible preferred stock converted into 9,367,512 shares of common stock.

Convertible Preferred Stock

In May 2005, the Company issued 5,789,801 shares of Series D convertible preferred stock at $1.25 per share and 4,230,055 shares of Series D convertible preferred stock at $2.00 per share for a total of $15,197,000 and interest accrued to the holders of a 2004 convertible notes payable (2004 Notes) of $500,000. The total investment was comprised of $8,460,000 in subscriptions for a total of 4,230,055 shares of Series D convertible preferred stock and $7,237,000 of convertible promissory notes payable (2004 Notes), including accrued interest of $500,000, which converted into a total of 5,789,801 shares of Series D convertible preferred stock.

The Company issued warrants to purchase an aggregate of 198,310 shares of common stock, at an exercise price of $8.50 per share, to certain purchasers of Series D convertible preferred stock. The warrants may be exercised any time for a period of five years. The purchasers that were issued shares of Series D convertible preferred stock in connection with the conversion of promissory notes previously issued by the Company did not receive such warrants.

In August 2005, the Company obtained stockholder approval to open an offering to sell approximately ten million shares of Series E convertible preferred stock at $2.50 per share for gross proceeds of $25 million (the “Series E Financing”).

The Series E Financing closed in five rounds from December 2005 through March 2006, resulting in gross proceeds of $50.7 million, including the conversion of $1,009,000 of the outstanding 2005 Bridge Loan and related accrued interest.

On December 22, 2005, the first round closed with total proceeds of $7.7 million, including the conversion of $970,000 of the outstanding 2005 Bridge Loan and $39,000 of accrued interest, resulting in the issuance of

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3,213,615 shares of Series E convertible preferred stock. Cash proceeds were received of $6.7 million for the purchase of 2,686,203 shares. An additional 403,412 shares were issued for the conversion of $1,009,000 of the outstanding 2005 Bridge Loan including accrued interest of $39,000.

In December 2005, the Company engaged a placement agent to secure the sale of up to $10 million in additional Series E convertible preferred stock. A purchaser of less than $5.0 million of Series E convertible preferred stock would receive a warrant to purchase one share of Series E convertible preferred stock for each five shares of Series E convertible preferred stock purchased, or 20% of the amount purchased. A purchaser of $5.0 million or more of Series E convertible preferred stock would receive a warrant to purchase one share of Series E convertible preferred stock for each 14.0 shares of Series E convertible preferred stock purchased, or 30% of the amount purchased. The warrants have an exercise price of $10.63 per share. The warrants may be exercised any time for a period of five years.

On January 6, 2006, the Company closed the second round of its Series E Financing. Upon closing, total gross proceeds of $6,750,000 were received resulting in the issuance of 2,700,000 shares of Series E convertible preferred stock and warrants for the future purchase of 702,000 shares of Series E convertible preferred stock at $2.50 per share. The warrants expire January 6, 2011. In addition, the Company issued a warrant for the future purchase of 16,875 shares of common stock at $5.31 per share. This warrant expires January 6, 2011.

On January 13, 2006, the Company closed the third round of Series E Financing. Upon closing, total gross proceeds of $3,235,000 were received resulting in the issuance of 1,294,000 shares of Series E convertible preferred stock and warrants for the future purchase of 536,440 shares of Series E convertible preferred stock at $2.50 per share. The warrants expire January 13, 2011. In addition, the Company issued a warrant for the future purchase of 8,088 shares of common stock at $5.31 per share. This warrant expires January 13, 2011.

On February 14, 2006, the Company closed its fourth round of Series E Financing. Upon closing, total gross proceeds of $13,711,000 were received resulting in the issuance of 5,484,200 shares of Series E convertible preferred stock and warrants for the future purchase of 948,420 shares of convertible Series E convertible preferred stock at $2.50 per share. The warrants expire February 14, 2011. In addition, the Company issued a warrant for the future purchase of 5,727 shares of common stock at $5.31 per share. This warrant expires February 14, 2011.

On March 28, 2006, the Company closed the fifth and final round of Series E Financing. Upon closing, total gross proceeds of $19,281,000 were received resulting in the issuance of 7,712,406 shares of Series E convertible preferred stock and warrants for the future purchase of 1,451,582 shares of Series E convertible preferred stock at $2.50 per share. The warrants expire March 28, 2011.

In October 2005, the Company entered into a termination agreement with certain financial advisors. In exchange for the termination agreement the Company issued 124,000 shares of Series E convertible preferred stock at $2.50 per share. The Company expensed $310,000 as stock-based compensation during the year ended December 31, 2005 related to this termination agreement.

At December 31, 2007, 2006 and 2005, the Company was authorized to issue 10,000,000, 10,000,000 and 35,000,000 shares of preferred stock, respectively.

Conversion

In connection with the Company’s initial public offering, the Company effected a 1-for-4.25 reverse stock split of its common stock on December 19, 2006. In addition to the reverse stock split, all outstanding shares of the Company’s preferred stock were converted to common stock immediately prior to the closing of the Company’s initial public offering on December 26, 2006. Each outstanding share of Series A, Series D and Series E preferred stock was converted into one share of common stock, and as a result of anti-dilution provisions, each one share of Series B preferred stock was converted into 1.35 shares of common stock and each one share of Series C-1 preferred stock was converted into 1.375 shares of common stock.

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On December 26, 2006, after giving effect to the 1-for-4.25 reverse stock split, and the anti-dilution provisions associated with the Series B and C-1 convertible preferred stock, all of the outstanding shares of convertible preferred stock were automatically converted into 9,367,512 shares of common stock.

Stock Option Plans

In 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) for eligible employees, officers, directors, advisors, and consultants that provides for the grant of incentive and nonstatutory stock options and other awards. The Company has 5,882,353 shares of common stock options authorized under the 2006 Plan. Terms of the stock option agreements, including vesting requirements, are determined by the Board of Directors, subject to the provisions of the 2006 Plan. Options granted by the Company generally vest over two to four years and vested options are exercisable from the date of grant for a period of ten years. The exercise price of the incentive stock options must equal at least the fair market value of the stock on the date of grant.

In 2001, the Company adopted the 2001 Stock Option Plan (the “2001 Plan”) for eligible employees, officers, directors, advisors, and consultants that provides for the grant of incentive and nonstatutory stock options. The 2001 Plan superseded the Company’s 2000 Stock Option Plan (the “2000 Plan”). Following the adoption of the 2001 Plan, no further option grants were made under the 2000 Plan. Terms of the stock option agreements, including vesting requirements, are determined by the Board of Directors, subject to the applicable provisions of the 2000 Plan or 2001 Plan. Options granted by the Company generally vest over four years and vested options are exercisable from the date of grant for a period of ten years. The exercise price of the incentive stock options must equal at least the fair market value of the stock on the date of grant. All the shares of stock that remained available for issuance and not subject to outstanding options under the 2000 Plan and 2001 Plan became part of the available pool of shares under the 2006 Plan. No further option grants will be made under the 2000 Plan or 2001 Plan.

The exercise price of nonstatutory stock options under the 2000 Plan and the 2001 Plan must equal at least 85% of the fair market value of the stock on the date of grant. The exercise price of any incentive stock option granted to a 10% stockholder may be no less than 110% of the fair value of the Company’s common stock on the date of grant. As of December 31, 2007, there were 25,880 and 3,126,198 options outstanding under the 2000 Plan and 2006 Plan, respectively, and 29,880 options granted outside the 2000 Plan and 2006 Plan.

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The following table summarizes stock option activity under the Company’s stock option plans (shares in thousands):

				Weighted-Average
	Options			Exercise Price
Outstanding, December 31, 2004		560		$	3.57
Granted		611			5.31
Exercised		(6	)		4.25
Canceled		(16	)		5.31
Outstanding, December 31, 2005		1,149			4.46
Granted		1,320			8.00
Exercised		(99	)		3.49
Canceled		(236	)		4.91
Outstanding, December 31, 2006		2,134			6.65
Granted		1,392			7.58
Exercised		(47	)		2.47
Canceled		(297	)		7.05
Outstanding, December 31, 2007		3,182		$	7.08
Vested or expected to vest at December 31, 2007		2,577		$	6.99

The weighted average remaining contractual term of outstanding options at December 31, 2007 is 8.27 years. The aggregate intrinsic value of such options is $73,515. The weighted average remaining contractual term of exercisable options at December 31, 2007 is 7.21 years. The aggregate intrinsic value of such options is $65,399. Intrinsic value represents the difference between the option price at grant date and the market price of the Company’s common stock, which was $2.27 at December 31, 2007.

The total intrinsic value of options exercised during the year ended December 31, 2007 is $194,866.

The following table summarizes information about options outstanding at December 31, 2007 under the 2000, 2001 and 2006 Plans:

Options Outstanding							Options Exercisable
			Weighted-
			Average
			Remaining		Weighted-				Weighted-
	Number		Contractual		Average		Number		Average
Grant Exercise Price	Outstanding		Life		Exercise Price		Exercisable		Exercise Price
$ 0.43 - $ 4.25		387,222		6.2 years	$	3.19		210,464	$	3.27
$ 5.31 - $ 5.31		715,452		7.7 years		5.31		415,957		5.31
$ 6.31 - $ 7.86		1,167,008		8.8 years		7.47		304,456		7.71
$ 7.90 - $ 9.96		635,700		9.1 years		9.20		126,434		8.62
$10.63 - $10.63		276,576		8.4 years		10.63		109,204		10.63
		3,181,958		8.3 years	$	7.08		1,166,515	$	6.42

On December 26, 2006, upon the closing of the Company’s initial public offering, stock options to purchase 78,855 shares of common stock granted to Outside Directors became fully vested. The Company recorded $547,000 related to the acceleration of these stock options.

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Warrants

As of December 31, 2006, after giving effect to a 1- for- 4.25 reverse stock split of the Company’s outstanding common stock and the conversion of all outstanding shares of the Company’s preferred stock into common stock (taking into account the anti-dilution provisions of the Series B convertible preferred stock and the Series C-1 convertible preferred stock) in connection with the initial public offering of the Company’s common stock, warrants to purchase 2,530,336 shares of the Company’s common stock, at a weighted average exercise price of $7.03 were outstanding.

The following table summarizes warrant activity for the year ended December 31, 2007:

				Weighted Avg.
	Warrants			Exercise Price
Outstanding, December 31, 2006		2,530,336		$	7.00
Granted		25,000			8.07
Exercised		(78,816	)		5.31
Cancelled		(5,882	)		8.50
Outstanding, December 31, 2007		2,470,638		$	7.06

All outstanding warrants are exercisable as of December 31, 2007.

In February 2008, the Company issued 1,675,000 of warrants in relation to the financing arrangement with CHRP (Note 12). 1,300,000 warrants have an exercise price of $5.00 while 375,000 warrants have an exercise price of $3.13.

Common Shares Reserved for Issuance

The following table summarizes common shares reserved for future issuance on exercise or conversion of the following:

	December 31,
	2007
Warrants for common and preferred stock		2,470,638
Common stock options outstanding previous to 2001 Plan		55,760
Common stock options outstanding under 2001 and 2006 Plans		3,126,198
Common stock options available for future grant		2,381,582
Total common shares reserved for issuance		8,034,178

9.   Income Taxes

In June 2006, the FASB issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FAS 109. FIN 48 provides clarification for the financial statement measurement and recognition of tax positions that are taken or expected to be taken in a tax return. The Company adopted FIN 48 effective January 1, 2007.

The adoption of FIN 48 did not impact the Company’s financial condition, results of operations or cash flows for the year ended December 31, 2007. At December 31, 2007, the Company had net deferred tax assets of $3.7 million. These deferred tax assets are primarily composed of differences in inventory basis, deferred rent and stock compensation expense. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the company’s net operating loss and research and development credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have

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occurred previously or that could occur in the future. The Company has not yet determined whether such an ownership change has occurred; however the Company is in the process of completing a Section 382 analysis regarding the limitation of the net operating loss and research and development credits. Until this analysis has been completed the Company has removed the deferred tax assets associated with these carryforwards from its deferred tax asset schedule and has recorded a corresponding decrease to their valuation allowance. When the Section 382 analysis is completed, the Company plans to update its unrecognized tax benefits under FIN 48. The Company expects the Section 382 analysis to be completed within the next twelve months.

Significant components of the Company’s net deferred tax assets at December 31, 2007 and 2006 are shown below (in thousands). A valuation allowance of $3.5 million and $28.4 million has been established to offset the net deferred tax assets as of December 31, 2007 and 2006, respectively, as realization of such assets is uncertain.

At December 31, 2007, the Company had federal and California tax net operating loss carryforwards of approximately $83 million and $82 million, respectively. The federal and state tax loss carryforwards begin to expire in 2019 and 2009, respectively, unless previously utilized.

	December 31,
	2007			2006
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	—		$	24,885
Reserves and other		3,677			3,840
Total deferred tax assets		3,677			28,725
Valuation allowance for deferred tax assets		(3,538	)		(28,447	)
		139			278
Deferred tax liabilities:
Foreign intangible		(915	)		(1,368	)
Other		(139	)		(278	)
Total deferred tax liabilities		(1,054	)		(1,646	)
Net deferred tax liabilities	$	(915	)	$	(1,368	)

The components of the benefit (expense) for income taxes are as follows (in thousands):

	Years Ended December 31,
	2007		2006		2005
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		90		—		(37	)
		90		—		(37	)
Deferred:
Federal		—		—		—
State		—		—		—
Foreign		452		476		495
		452		476		495
	$	542	$	476	$	458

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Reconciliation of the statutory federal income tax benefit to the Company’s effective tax benefit (in thousands):

	December 31,
	2007			2006			2005
Tax benefit at federal statutory rate	$	9,325		$	9,114		$	7,718
State, net of federal benefit		1,576			1,541			1,324
Tax credits		198			308			—
Foreign tax		437			476			458
Change in valuation allowance due to 382 study pending		(33,448	)		—			—
Change in valuation allowance excluding change applicable to purchased intangibles		24,909			(9,101	)		(8,202	)
Change in valuation allowance applicable to purchased intangibles		—			—			5
Other foreign loss		(371	)		(408	)		(457	)
Other permanent differences		(2,084	)		(1,454	)		(388	)
Benefit for income taxes	$	542		$	476		$	458

10.   Employee Benefit Plan

Effective January 1, 2000, the Company adopted a defined contribution 401(k) profit sharing plan (the “Plan”) covering substantially all employees that meet certain age requirements. Employees may contribute up to 100% of their compensation per year (subject to a maximum limit by federal law). The Plan does allow for employer matching. To date, no employer match has been made.

11.   Related-Party Transactions

On December 30, 2005, the Company entered into an amendment of the 2005 Bridge Loan with an investor. Per the note amendment, the investor waived both its conversion and redemption options under the original note and extended the due date of the remaining outstanding principal. Three Company directors personally guaranteed the remaining outstanding principal under the amended note agreement. In exchange for the personal guarantees, the three Company directors were each granted 23,529 shares of common stock. At December 31, 2005, the common stock had not yet been issued and is included as common stock issuable in the 2005 consolidated balance sheet and the consolidated statement of stockholders’ equity. On January 3, 2006, the common shares were issued.

12.   Subsequent Events

In January 2008, the Company entered into a entered into a financing arrangement (the “Financing”) with Cowen Healthcare Royalty Partners, L.P. (“CHRP”) to raise $21.5 million, and the potential for an additional $1 million in 2009 contingent upon the Company’s satisfaction of a net product sales milestone. The Company intends to use the proceeds to expand both its dedicated U.S. sales force and consumer outreach programs. In February 2008, the Company repaid the total amount due of $8.6 million to Comerica Bank under the term loan and the line of credit and terminated the line of credit. After the Comerica Bank payment and the payment of certain transaction expenses, the Company received net proceeds of $12.6 million.

Under the Revenue Interest Financing and Warrant Purchase Agreement (the “Revenue Agreement”), CHRP acquired the right to receive a revenue interest on the Company’s U.S. net product sales from October 2007 through December 2017 (the “Term”). The Company is required to pay a revenue interest on U.S. net product sales of ArteFill^®, any improvements to ArteFill^®, any internally developed products and any products in-licensed or purchased by the Company, provided that such improvements, internally developed, in-licensed or purchased products are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or

103

Artes Medical, Inc.

Notes to Consolidated Financial Statements — (Continued)

dermatologic procedures. The scope of the products subject to CHRP’s revenue interest narrows following the date the cumulative payments the Company makes to CHRP first exceed a specified multiple of the consideration paid by CHRP for the revenue interest. In addition, the Company is required to make two lump sum payments of $7.5 million to CHRP, the first in January 2012 and the second in January 2013.

Under the Revenue Agreement, the Company issued CHRP a warrant to purchase 375,000 shares of Common Stock, at an exercise price equal to $3.13 per share. This warrant has a 5 year term, and allows for cashless exercise.

As part of the Financing, the Company also entered into a Note and Warrant Purchase Agreement (the “Note and Warrant Agreement”) with CHRP pursuant to which the Company agreed to issue and sell to CHRP, at the closing of the Financing, a 10% senior secured note in the principal amount of $6,500,000 (the “Note”). The Note has a term of five (5) years and bears interest at 10% per annum, payable monthly in arrears. The Company will have the option to prepay all or a portion of the Note at a premium. In the event of an event of default, with “event of default” defined as (i) a Put Event, (ii) a failure to pay the Note when due, (iii) the Company’s material breach of its covenants and agreements in the Note and Warrant Agreement, (iv) the Company’s failure to perform an existing agreement with a third party that accelerates the majority of any Debt in excess of $500,000 or (v) subject to a cure period, material breach of the covenants, representations or warranties in the Financing documents, the outstanding principal and interest in the Note, plus the prepayment premium, shall become immediately due and payable.

Under the Note and Warrant Agreement, the Company issued CHRP a warrant to purchase 1,300,000 shares of Common Stock, at an exercise price equal to $5.00 per share. This warrant has a 5 year term, and allows for cashless exercise.

13.   Quarterly Information (Unaudited)

The following quarterly information includes all adjustments which management considers necessary for a fair statement of such information. For interim quarterly financial statements, the provision for income taxes is estimated using the best available information for projected results for the entire year.

	2007
	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
	(In thousands, except per share data)
Product sales	$	1,442		$	2,055		$	1,220		$	2,367
License revenues		—			732			5,500			—
Total revenues		1,442			2,787			6,720			2,367
Cost of product sales		1,720			2,159			3,002			3,778
Gross profit (loss)		(278	)		628			3,718			(1,411	)
Research and development		1,032			1,136			1,541			2,314
Selling, general and administrative		5,570			6,327			5,868			6,566
Loss from operations		(6,880	)		(6,835	)		(3,691	)		(10,291	)
Net loss	$	(6,609	)	$	(6,656	)	$	(3,682	)	$	(9,938	)
Net loss per share — Basic and diluted	$	(0.40	)	$	(0.40	)	$	(0.22	)	$	(0.60	)
Shares used in calculating net loss per share — Basic and diluted		16,380,633			16,459,103			16,493,767			16,514,163

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Artes Medical, Inc.

Notes to Consolidated Financial Statements — (Continued)

	2006
	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
	(In thousands, except per share data)
License revenues	$	—		$	390		$	—		$	—
Total revenues		—			390			—			—
Research and development		2,949			1,530			1,219			2,386
Selling, general and administrative		3,194			4,868			3,401			5,836
Loss from operations		(6,143	)		(6,008	)		(4,620	)		(8,222	)
Net loss	$	(7,981	)	$	(6,186	)	$	(4,402	)	$	(7,754	)
Net loss per share — Basic and diluted	$	(6.14	)	$	(4.59	)	$	(3.17	)	$	(2.32	)
Shares used in calculating net loss per share — Basic and diluted		1,300,634			1,347,993			1,387,036			3,348,125

105

Schedule II

Artes Medical, Inc.

Valuation and Qualifying Accounts

For the years ended December 31, 2007, 2006 and 2005

	Balance at		Charged to
	Beginning		Costs and				Balance at
	of Year		Expenses		Deductions		End of Year
Allowance for doubtful accounts receivable
2005	$	—	$	—	$	—	$	—
2006		—		—		—		—
2007		—		72,474		52,474		20,000
Reserve for excess, obsolete and short-dated inventories
2005	$	—	$	—	$	—	$	236,750
2006		236,750		917,137		399,513		754,374
2007		754,374		3,764,188		2,280,861		2,237,701

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EX-4.2

EXHIBIT 4.2

ARTES MEDICAL, INC.

AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

     THIS AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT (this “Agreement”), is made and entered into as of June 23, 2006, by and among Artes Medical, Inc., a Delaware corporation (the “Company”), and each of the individuals or entities whose names are set forth on Schedule A hereto (each, a “Stockholder” and collectively, the “Stockholders”).

RECITALS:

     WHEREAS, the Company and the holders of the Company’s Series A Preferred Stock, par value $0.001 per share (the “Series A Preferred” and such holders, the “Series A Investors”), have previously entered into an Investors’ Rights Agreement dated as of June 30, 2000 (the “Series A Agreement”).

     WHEREAS, the Company and the holders of the Company’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred” and such holders, the “Series B Investors”), have previously entered into an Investors’ Rights Agreement dated as of December 15, 2000 (the “Series B Agreement”).

     WHEREAS, the Company and the holders of the Company’s Series C-1 Preferred Stock, par value $0.001 per share (the “Series C-1 Preferred” and such holders, the “Series C-1 Investors”), have previously entered into an Investors’ Rights Agreement dated as of April 10, 2003 (the “Series C-1 Agreement”).

     WHEREAS, the Company and the holders of the Company’s Series D Preferred Stock, par value $0.001 per share (the “Series D Preferred” and such holders, the “Series D Investors”), have previously entered into an Investors’ Rights Agreement dated as of May 1, 2005 (the “Series D Agreement”).

     WHEREAS, the Company and the holders of the Company’s Series E Preferred Stock, par value $0.001 per share (the “Series E Preferred” and such holders, the “Series E Investors”) (together with the Series A Investors, the Series B Investors, the Series C-1 Investors and the Series D Investors, the “Prior Investors”), have previously entered into (a) an Investors’ Rights Agreement dated as of December 22, 2005, (b) an Investors’ Rights Agreement dated as of December 30, 2005 and/or (c) an Investors’ Rights Agreement dated as of February 3, 2006 (collectively, the “Series E Agreements”) (together with the Series A Agreement, the Series B Agreement, the Series C-1 Agreement and the Series D Agreement, the “Prior Agreements”).

     WHEREAS, the Company and the Prior Investors desire to enter into this Agreement in order to amend, restate and replace their rights and obligations under the Prior Agreements with the rights and obligations set forth in this Agreement.

     WHEREAS, the Series A Agreement may be amended by agreement of the Company and Series A Investors holding at least a majority of the “Registrable Securities” (as defined in the Series A Agreement) then outstanding, calculated on an as-converted basis.

     WHEREAS, the Series B Agreement may be amended by agreement of the Company and Series B Investors holding at least a majority of the “Registrable Securities” (as defined in the Series B Agreement) then outstanding, calculated on an as-converted basis.

     WHEREAS, the Series C-1 Agreement may be amended by agreement of the Company and Series C-1 Investors holding at least a majority of the “Registrable Securities” (as defined in the Series C-1 Agreement) then outstanding, calculated on an as-converted basis.

     WHEREAS, the Series D Agreement may be amended by agreement of the Company and Series D Investors holding at least a majority of the “Registrable Securities” (as defined in the Series D Agreement) then outstanding, calculated on an as-converted basis.

     WHEREAS, each of the Series E Agreements may be amended by agreement of the Company and Series E Investors holding at least a majority of the “Registrable Securities” (as defined in the applicable Series E Agreement) then outstanding, calculated on an as-converted basis.

     WHEREAS, the Company has executed this Agreement, and the Prior Investors who are signatories to this Agreement hold at least that number of shares necessary to amend and restate each of the Prior Agreements.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual promises and covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Prior Investors who are parties to the Prior Agreements hereby agree that each of the Prior Agreements is superseded and replaced in its entirety by this Agreement, including with respect to those Prior Investors who are not signatories to this Agreement, and the parties hereto further agree as follows:

     1. Restatement and Termination of Prior Agreements. Effective and contingent upon execution of this Agreement by the Company and the holders of at least a majority of the “Registrable Securities,” as that term is defined in each of the Prior Agreements, each of the Prior Agreements is hereby amended and restated in its entirety to read as set forth in this Agreement and are hereafter terminated and of no further force or effect, and the Company and the Investors hereby agree to be bound by the provisions hereof as the sole agreement of the Company and the Investors with respect to registration rights of the Company’s securities and certain other rights, as set forth herein.

     2. Registration Rights. The Company and the Investors covenant and agree as follows:

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          2.1 Definitions. For purposes of this Section 2:

               (a) “Affiliated Fund” means, with respect to a Holder that is a limited liability company or a limited liability partnership, a fund or entity managed by the same manager or managing member or general partner or management company or by an entity controlling, controlled by, or under common control with such manager or managing member or general partner or management company.

               (b) “Exchange Act” means the Securities Exchange Act of 1934, as amended (and any successor thereto) and the rules and regulations promulgated thereunder.

               (c) “Excluded Registration” means a registration statement relating solely to the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Securities Act, or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities which are also being registered.

               (d) “Form S-3” means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act that permits significant incorporation by reference of the Company’s subsequent public filings under the Exchange Act.

               (e) “Holder” means any Investor owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 2.12 of this Agreement.

               (f) “IPO” means a firm commitment underwritten public offering by the Company of shares of its Common Stock prior to or in connection with which all the then-outstanding shares of Preferred Stock are converted into shares of Common Stock pursuant to the Company’s Amended and Restated Certificate of Incorporation, as such Amended and Restated Certificate of Incorporation may be amended from time to time.

               (g) “Major Investor” means any Investor that holds at least 100,000 shares of the Preferred Stock or the Common Stock issued upon conversion thereof (subject to adjustment for stock splits, stock dividends, combinations, reclassifications or the like with respect to such shares). A Major Investor includes any general partners, managing members and affiliates of a Major Investor, including Affiliated Funds.

               (h) “Register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document.

               (i) “Registrable Securities” means (i)  shares of Common Stock issuable or issued upon conversion of the Series A Preferred, (ii) shares of Common Stock issuable or issued upon conversion of the Series B Preferred, (iii) shares of Common Stock issuable or issued upon conversion of the Series C-1 Preferred (including shares of Series C-1 Preferred issuable upon the exercise of warrants to purchase shares of Series C-1 Preferred), (iv)

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shares of Common Stock issuable or issued upon conversion of the Series D Preferred (including shares of Series D Preferred issuable upon the exercise of warrants to purchase shares of Series D Preferred), (v) shares of Common Stock issuable or issued upon conversion of the Series E Preferred (including shares of Series E Preferred issuable upon the exercise of warrants to purchase Series E Preferred), (vi) shares of Common Stock issued or issuable upon the exercise of (x) warrants to purchase an aggregate of 2,694,571 shares of Common Stock issued in a bridge financing transaction completed in June 2004 and (y) warrants to purchase an aggregate of 842,969 shares of Common Stock issued in the Company’s Series D Preferred Stock financing completed in May through June 2005, held by the Holders and any assignee thereof in accordance with Section 2.12 of this Agreement and any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i) through (vi); excluding, however, in all cases any Registrable Securities sold in a transaction in which the rights under this Agreement are not assigned, or any shares for which registration rights have terminated pursuant to Section 2.15 of this Agreement.

               (j) The number of shares of “Registrable Securities then outstanding” shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities.

               (k) “SEC” means the Securities and Exchange Commission.

               (l) “Securities Act” means the Securities Act of 1933, as amended, (and any successor thereto) and the rules and regulations promulgated thereunder.

          2.2 Request for Registration.

               (a) If the Company shall receive at any time after the earlier of (i) January 1, 2008, or (ii) 180 days after the effective date of registration statement pertaining to an IPO, a written request from the Holders of a majority of the Registrable Securities then outstanding, voting together as a single class on an as-converted to Common Stock basis (the “Initiating Holders”), that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $25,000,000, then the Company shall, within 20 days after receiving such request, give written notice of such request to all Holders and shall, subject to the limitations of subsection 2.2(b), use all commercially reasonable efforts to cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered within 20 days after the mailing of such notice by the Company.

               (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request and the Company shall include such information in the written notice referred to in subsection 2.2(a). The underwriter will be selected by the Company, which underwriter shall be reasonably acceptable to a majority in interest of the Holders whose Registrable Securities are to be included in the underwriting. In such event, the right of any Holder to include Registrable Securities in such registration shall be conditioned upon such

4

Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. The Company and all Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Company in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all participating Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each participating Holder. In no event shall any Registrable Securities be excluded from such underwriting unless all other securities are first excluded from such offering. Any Registrable Securities excluded from or withdrawn from such underwriting shall be withdrawn from registration.

               (c) Notwithstanding the foregoing, if the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company (the “Board of Directors”) it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right or the similar right set forth in Section 2.4(b)(iii) more than once in any 12-month period, and provided, further, that the Company shall not register any securities for the account of itself or any other stockholder during such 120-day period (other than in an IPO or an Excluded Registration).

               (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 2.2:

                    (i) After the Company has effected two (2) registrations pursuant to this Section 2.2 and such registrations have been declared or ordered effective, provided, however, that such registrations have been declared or ordered effective and that either (A) the conditions of Section 2.5(a) have been satisfied or (B) the registration statements remain effective and there are no stop orders in effect to such registration statements;

                    (ii) During the period starting with the date 90 days prior to the Company’s good faith estimate of the date of filing of, and ending on a date 180 days after the effective date of, a registration subject to Section 2.3 hereof, unless such offering is not the initial public offering of the Company’s securities, in which case, ending on a date 90 days after the effective date of such registration subject to Section 2.3 hereof; provided that the Company is actively employing in good faith all commercially reasonable efforts to cause such registration statement to become effective; or

                    (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 2.4 below.

5

          2.3 Company Registration.

               (a) If (but without any obligation to do so) at any time after the earlier of (i) January 1, 2008 or (ii) 180 days after the effective date of the registration statement pertaining to an IPO, the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities solely for cash (other than an Excluded Registration or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company in accordance with Section 4.5, the Company shall, subject to the provisions of Section 2.8, use all commercially reasonable efforts to cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered if any stock of the Company is registered.

               (b) The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses of such registration shall be borne by the Company, in accordance with Section 2.7 hereof.

          2.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of not less than 30% of the Registrable Securities then outstanding, voting together as a single class on an as-converted to Common Stock basis, a written request or requests that the Company effect a registration on Form S-3 with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will:

               (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

               (b) use all commercially reasonable efforts to effect, as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder’s or Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 2.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $1,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed, in the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 2.4; provided, however, that the Company shall not utilize this right or the similar right set forth in

6

Section 2.2(c) more than once in any 12-month period; (iv) if the Company has, within the 12-month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 2.4; (v) in any jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already qualified to do business or subject to service of process in that jurisdiction; or (vi) during the period ending 180 days after the effective date of a registration statement subject to Section 2.3.

               (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 2.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 2.2 or 2.3, respectively.

          2.5 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

               (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days, or until the distribution described in such registration statement is completed, if earlier.

               (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for up to 120 days, or until the distribution described in such registration statement is completed, if earlier.

               (c) Promptly notify the Holders of the effectiveness of such registration statement, and furnish to the Holders such numbers of copies of a prospectus, including any supplement to the prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

               (d) Following the effective date of such registration statement, notify the Holders of any request by the SEC that the Company amend or supplement such registration statement, or the associated prospectus.

               (e) Use all commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdiction unless the Company is already qualified to do business or subject to service of process in that jurisdiction.

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               (f) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder and other security holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

               (g) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, such obligation to continue for 120 days or until the distribution described in such registration statement is completed, if earlier.

               (h) Cause all such Registrable Securities registered pursuant to this Section 2 to be listed on each national securities exchange or trading system on which similar securities issued by the Company are then listed.

               (i) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

               (j) Make generally available to its security holders, and to deliver to each Holder participating in the registration statement, an earnings statement of the Company that will satisfy the provisions of Section 11(a) of the Securities Act covering a period of 12 months beginning after the effective date of such registration statement as soon as reasonably practicable after the termination of such 12-month period.

          2.6 Information From Holders. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding such Holder, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder’s Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.4 of this Agreement if, as a result of the application of the preceding sentence, or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the anticipated aggregate offering price required to originally trigger the Company’s obligation to initiate such registration as specified in subsection 2.2(a) or subsection 2.4(b)(ii), whichever is applicable.

          2.7 Expenses of Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 2.2, 2.3 and 2.4 including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company; provided, however, that the Company shall not be required to pay for any

8

expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 2.2 or one right to a Form S-3 registration under Section 2.4, as the case may be.

          2.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under Section 2.3 to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders). For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a venture capital fund, or a partnership or corporation, the Affiliated Funds, members, partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling stockholder,” and any pro-rata reduction with respect to such “selling stockholder” shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “selling stockholder,” as defined in this sentence.

          2.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

          2.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 2:

               (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or alleged untrue statement of a material

9

fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any Holder, underwriter or controlling person for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person.

               (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 2.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that in no event shall any indemnity under this subsection 2.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder.

               (c) Promptly after receipt by an indemnified party under this Section 2.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if

10

representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.10.

               (d) If the indemnification provided for in this Section 2.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; provided, that in no event shall any contribution by a Holder under this Subsection 2.10(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

               (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

               (f) The obligations of the Company and Holders under this Section 2.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 2, and otherwise.

          2.11 Reports Under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

               (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after 90 days after the effective date of an IPO so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act;

               (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to

11

utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective;

               (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

               (d) furnish to any Holder upon request, so long as the Holder owns any Registrable Securities, (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after 90 days after the effective date of an IPO), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form.

          2.12 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee (a) of at least 25,000 shares of such securities (subject to adjustment for stock splits, stock dividends, reclassification or the like with respect to such shares) (or if the transferring Holder owns less than 25,000 shares of such securities, then all Registrable Securities held by the transferring Holder), (b) that is a subsidiary, parent, partner, limited partner, retired partner, member, retired member or stockholder of a Holder, (c) that is an Affiliated Fund, (d) who is a Holder’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (such a relation, a Holder’s “Immediate Family Member”, which term shall include adoptive relationships), or (e) that is a trust for the benefit of an individual Holder or such Holder’s Immediate Family Member, provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if the transferee agrees in writing to be bound by this Agreement and immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of (x) a partnership who are partners or retired partners of such partnership or (y) a limited liability company who are members or retired members of such limited liability company (including Immediate Family Members of such partners or members who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership or limited liability company; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 2.

          2.13 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders

12

of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include any of such securities in any registration filed under Section 2.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 2.2(a) or within 120 days of the effective date of any registration effected pursuant to Section 2.2.

          2.14 Lock-Up Agreement.

               (a) Lock-Up Period; Agreement. In connection with the initial public offering of the Company’s securities and upon request of the Company or the underwriters managing such offering of the Company’s securities, each Holder shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company, however or whenever acquired (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days, but subject to such extension or extensions as may be required by the underwriters in order to publish research reports while complying with the Rule 2711 of the National Association of Securities Dealers, Inc.) from the effective date of such registration as may be requested by the Company or such managing underwriters, and shall execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company’s initial public offering.

               (b) Limitations. The obligations described in Section 2.14(a) shall apply only if all officers and directors of the Company and all greater than 5% stockholders enter into similar agreements, and shall not apply to a registration relating solely to employee benefit plans, or to a registration relating solely to a transaction pursuant to Rule 145 under the Securities Act.

               (c) Stop-Transfer Instructions. In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of each Holder (and the securities of every other person subject to the restrictions in Section 2.14(a)).

               (d) Transferees Bound. Each Holder agrees that prior to the Company’s initial public offering it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 2.14.

               (e) Each Holder agrees that a legend reading substantially as follows shall be placed on all certificates representing all Registrable Securities of each Holder (and the shares or securities of every other person subject to the restriction contained in this Section 2.14):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF UP TO 180 DAYS AFTER THE EFFECTIVE DATE OF THE ISSUER’S REGISTRATION STATEMENT

13

FILED UNDER THE ACT, AS AMENDED, AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL HOLDER OF THESE SECURITIES, A COPY OF WHICH MAY BE OBTAINED AT THE ISSUER’S PRINCIPAL OFFICE. SUCH LOCK-UP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.

          2.15 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 2 after the earlier of (a) five (5) years following the consummation of an IPO, (b) with respect to any Holder, at such time after the IPO as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares during a three-month period without registration, or (c) upon termination of the Agreement, as provided in Section 4.2.

     3. Covenants of the Company.

          3.1 Delivery of Financial Statements. The Company shall deliver to each Major Investor (other than a Major Investor reasonably deemed by the Company to be a competitor of the Company):

               (a) as soon as practicable, but in any event within 120 days after the end of each fiscal year of the Company (or such longer period of time as may be required by the Company’s independent public accountants), an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company;

               (b) as soon as practicable, but in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter;

               (c) within 30 days of the end of each month, an unaudited income statement and a statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail;

               (d) as soon as practicable, but in any event prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, and, as soon as prepared, any other updated or revised budgets for such fiscal year prepared by the Company; and

               (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 3.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying on behalf of the Company that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition

14

of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board of Directors or a committee thereof determines that it is in the best interest of the Company to do so.

          3.2 Inspection. The Company shall permit each Major Investor (except for a Major Investor reasonably deemed by the Company to be a competitor of the Company), at such Major Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information.

          3.3 Termination of Covenants. The covenants set forth in Sections 3.1 and 3.2 shall terminate as to each Holder and be of no further force or effect (a) immediately prior to the consummation of an IPO, (b) when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act or (c) upon termination of this Agreement, as provided in Section 4.2, whichever is the earliest to occur.

     4. Miscellaneous.

          4.1 Waiver of Registration Rights. Effective and contingent upon execution of this Agreement by the Company and the holders of at least a majority of the “Registrable Securities,” as that term is defined in each of the Prior Agreements, any and all rights of the holders of Registrable Securities under the Prior Agreements to register and sell their Registrable Securities or any other securities of the Company held by such holders as part of or in connection with the proposed initial public offering of the Company’s Common Stock pursuant to that certain Registration Statement on Form S-1 (File No. 333-134086), filed with the Securities and Exchange Commission on May 12, 2006, are hereby waived.

          4.2 Termination. This Agreement shall terminate, and have no further force and effect, (a) upon the closing of a Sale of the Company (as defined below) or (b) upon the written agreement of the Company and the holders of a majority of the Registrable Securities then outstanding, voting together as a single class on an as-converted to Common Stock basis. For purposes of this Section 4.2, a “Sale of the Company” shall include a sale, lease, or other disposition of all or substantially all of the Company’s assets or business or the Company’s merger into or consolidation with any other corporation or other entity, or any other corporate reorganization, in which the holders of the Company’s outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction, provided that a Sale of the Company shall not include a merger effected exclusively for the purpose of changing the domicile of the Company or a sale of shares by the Company for primarily equity financing purposes.

          4.3 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written

15

or oral agreements relating to the subject matter hereof existing between the parties hereto, including without limitation, the Prior Agreements, are expressly terminated and canceled.

          4.4 Successors and Assigns. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties (including transferees of any Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

          4.5 Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of the Company and the Investors holding a majority of the Registrable Securities then outstanding. Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company for the sole purpose of including additional purchasers of Preferred Stock as “Investors” and “Holders.” Any amendment or waiver effected in accordance with this paragraph shall be binding upon each party to the Agreement, whether or not such party has signed such amendment or waiver, each future holder of all such Registrable Securities, and the Company.

          4.6 Notices. Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by facsimile, or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party’s address or facsimile number as set forth on Exhibit A hereto or as subsequently modified by written notice.

          4.7 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement, and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

          4.8 Governing Law. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws.

          4.9 Counterparts. This Agreement may be executed in two or more counterparts, including facsimiles, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

          4.10 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

          4.11 Aggregation of Stock. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

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[Signature Pages Follow]

17

     IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Investors’ Rights Agreement as of the day and year first above written.

	Artes Medical, Inc.
	By:	/s/ Stefan M. Lemperle, M.D.
		Stefan M. Lemperle, M.D.
		Chief Executive Officer
INVESTOR:	By:
	Name:
	Title:
		(if applicable)

[COUNTERPART SIGNATURE PAGE TO
AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT]

Schedule A

PARTIES TO
AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

111 Development Corp.
A&S Levy Family Holdings, LLLP — Arthur & Susan Levy TTEEs
A.G. Edwards & Sons, Inc. C/F James G. Morrissey Ira
Aadil Zaman
Aaron Wesslink
Abdul W. Kazi
Adam Rappoport
Adi Corporation
Adi Ruegg
Afshar Ghotli Family Trust
Agricultural Benefits
Ahmad Ghaffari
Ahmad Zarei
Aimee D. Ellingsen & Charles H. Krekelberg, Husband & Wife, as Joint Tenants
Alan Abrams
Alan J. Young
Alan Joseph
Alan Loghman
Alan M. Shafer
Alavi Intervivos Trust
Albert J. Sabini IRA
Albert J. Schmid Family Limited
Alex Lethen
Alex Simms
Alexander Petrovic
Alexandra Gessler
Alfred Bernegger
Alfred H. Fischer
Alfred T. Peteroy
Ali Pourhosseini
Ali Reza Soltan
Alireza Haeri
Aman U. Syed
Amir Jamali
Anand R. and Sucheta Baichwal
Andrea Book Riggs
Andreas Engel
Andreas Klainguti
Andreas Lemperle

Andreas Mauser
Andrew & Aura Jackson JTWROS
Andrew and Laura Fraser
Andrew H. Sabreen Revocable Trust
Andrew Heinle
Andrew J. Conrad, Ph.D.
Andrew Meltzer
Angelo J. Carrera
Angelyn Scarvaci Revocable Trust
Anita B. Suson Children’s 1999 Trust
Ann T. Thomas Separate Property Trust
Anthony Fiorello
Anthony M. Lacenere
Anthony Vassallo and Mary Ellen Vassallo
Anthony Vassallo SEP IRA
Anthony Vitale
Anton Meile
AquaFauna Bio-Marine Inc. Profit Sharing Plan
Arda Yalvac
Ardeschir Pourfard
Arjang Miremadi
Arne Zimmerman
Arthur Caputo
Ashland Partners
Ashnik Management
Astrid Ruegg
Astrid Schmidt
Axel Lang
Babak Aghamohammadi
Bahr Family Limited Partnership, The
Baldassare Nastasi
Baltimore Business Leaders, LLC
Bank Wegelin & Co.
Barbara Adelglass
Barbara K. Bloom, Trustee, Arthur M. Bloom & Barbara K. Bloom Family Trust U.T.D. 9/21/84
Barclay M. Armitage Trust
Barry & Laura Silberman
Barry J. Galt
Barry J. Lind Revocable Trust
Barry J. West
Beck und Schick
Ben Yoon
Benjamin Kopf III
Benjamin Raab Trust
Bernadette Marxer

Bernard & Carey Simkin
Bernard & Rene Breier
Biagio & Assunta Didino JTWROS
Billy J. Sayers
Bloching/Moll u.la.
Block Family Trust
Block Family Trust — Carleton & Barbara Block TTEEs
Bobby H. Bryan SEP IRA
Bonnie Callan
Brad Cuvelier
Bradley Sallwasser
Brenda G. Mapp
Brent J. Farrell
Bret A. Young
Brett Snyder, Dr.
Britt Krebs
Bruce E. Bacon
Bruce W. Fecht
Bruno Helbling
Bruno Weber, Prof.
C. David & Patrice Schenkel JTWROS
C. Dennis Bucko
Cabin Trust Dated June 13, 1997, The
Calman J. Zamoiski, Jr.
Camille Lieners
Canderm Pharma
Carl F. Berner, MD
Carl J. Sagasser Living Trust
Carmen Oesterle
Charles Beardsley
Charles E. Helsley
Charles E. Helsley IRA
Charles M. Ewell
Charles M. Vanderford & Ginger L. Vanderford
Charles P. Wilkins
Charles Schumann
Charles Vaske
Charlie Harb
Chris Jones
Chris M. Cioffi
Christer Hedstrom
Christian Coluccio
Christian F. Coluccio SEP IRA
Christian Krebs
Christian Wolf

Christine Campagna Rev. Trust
Christine Hughes
Christoph Helg
Christoph Scholze
Christopher A. Jones
Christopher Barczewski
Christopher Dale
Christopher Holbech & Gregg Rudenberg
Christopher J. Gahman
Christopher J. Reinhard
Christopher Krebs
Christopher M. Jasak
Christopher Reinhard
Cicero Finance Inc.
Cirrus Motion Media
Citigroup Global Markets, Inc. as IRA Custodian FBO Daymon Kenyon
City National Bank, TTEE PCHS 401k Plan FBO Michael Kinkelaar
Claudia C. Rouhana
Claus Klohk
Clemens Laternser
Cole & Associates
Comerica Bank
Cory Slovik
Craig R. Whited
Creative Microspheres
Crown Metal Mfg. Co.
Crown Metal Profit Sharing Plan
Cyril Thomas
D.G. Ruby
Dan & Brenda Davidson JTWROS
Dan Edgarton
Dandy Lee
Daniel & Deborah Glazer JTWROS
Daniel A. Johnson
Daniel C. Berl
Daniel Davis
Daniel I. & Sally E. Waki
Daniel Lee
Daniel Lord
Daniel M. & Mary Ellen Coombs
Darell F. Norris
Darrel Brodke
Darshan & Harprit Dhiman
Dave McCoy
Dave Vroubel

Dave Wicker
David & Jean Bernstein
David & Juliana Lipschultz
David & Rhoda Narins
David A. K. Duncan
David A. Wilson
David A. Wilson SEP IRA
David B. Baird, III
David Berman
David Edfors
David H. Slater and Marla Slater JTWROS
David J. Raab
David K. Basile
David Keefe
David L. Begent
David L. Richardson
David Louis Begent
David P. & Denise M. Booth
David Quelle
David R. Preston
David R. Preston & Associates, A.P.C.
David Raimo
David Shively
David Vitale
David W. Brooks
David W. Brooks and Janet M. DiPrinzio
David W. Brooks IRA 8011-7923 UTA Charles Schwab & Co., Inc. Cust
David W. Drezner
Dayle E. O’Connor
Daymon Kenyon
Dean Snyder
Dennis Booth
Dennis Fortin
Dennis J. Hurwitz, MD
Dennis M Nigro, MD
Derby Family Living Trust
Derek S. Cowling
Derek Samuel
Derezin Breier & Delson Profit Sharing Plan Trust B
Diana Laird
Dieter Simonson
Dirk Jakob
DJB Holdings, LLC
DL Capital Group, LLC
Dominic Coluccio

Donald A. Glassberg
Donald J. Ponec TTEE Ponec Trust
Donald Taddoni
Donald Zimmerman, Wesley Pickard & Terrence Colvin
Donald Zone and Mary Louise Zone JTWROS
Dora Roellin
Dorin Radu
Douglas Saunders IRA
Dr. Hannes Schierle, Prof.
Durango Spine LLLP
Dwight H. DeSantis Trust Dated 1/1/04
E.M.R.E., LLC
Eagle Trust
Edward C. Roohan
Edward Gabrielson IRA, Dr.
Edward K. McCullough
Edward K. Quinby
Elizabeth C. Baldwin
Elizabeth Sandor
Ellen E. Larson and Floyd G. Larson as Community Property
Ellen Farrell
Emanuel & Rose Diteresi
Emile & Ursula Misiraca
Enaiatolah Eftekhary
Epsten Family Trust U.T.D. 7-25-90, Mary H. Epsten, Trustee
Eric F. L. Romilly
Eric Lyon
Eric Lyon SEP IRA
Eric Scott & Robin A. Turner
Ernesto Marquez
Ernst Meier
Eugene Mark Shusterman, M.D.
Evonne & Michele Stellato
Fabio Migliaccio
Felicitas Hourand-Weber
First Roseland Pension & Profit Sharing Plan
Floyd & Ellen Larson
Frank A. Hofstetter
Frank Codispoti Revocable Trust
Frank P. Russo and Joann C. Russo Trustees of the F & J Russo Family Trust U/D/T
Dated August 3, 2000
Frank Perretti
Frank R. & Donna R. Deis
Frank S. Teixeira
Franz Pierre

Fred B. & Marjory B. Goldman TIE
Frederick R. McConnaughey
Frederick Sandvick
Gabor Rubanyi
Gabriele Nicolo
Gail Gobbato Salvatierra
Galileo Tignini
Garry Ard
Gary D. Heihn
Gary Fischer
Gary Handleman & Donna Lobos
Gary Kenneth Parsons
Gary Nicoletti
Gebhard Michael
Georg Gmur, Dr.
George Colella
George J. Schmitt
George Manos
Gerald E. Gillett Trust
Gerald R. Haas
Gerard J. Zeppieri
Gerhard Quelle
Gero G. Papst
Gilbert A. Flores Management Trust, The
Gilbert M. Flores
Giovanni Minuz
Gity Afshar
Glenn Hechler
Gordon G. Kaplan
GPM Globo Portfolio Management AG
Grant B. Keefer
Gregg Rudenberg
Gregg Zeoli
Gregg Zeoli SEP IRA
Gregory Anderson
Gregory Kirk Ragland
Gregory Schneider
Gregory Schneider Inc Super Simplified 401k FBO Gregory Schneider
Gregory W. Schneider
GSW Holdings, LLC
Gwen A. Huntley
H. Michael Roark, MD
Hajo Feldmann
Hallock Family Trust, U/D/T, November 23, , 2004, The
Hamid R. Quraishi

Hamid Sadeghi
Han Lei Wan, MD
Hanne Raymond
Hannes Schierle
Hans Geser
Hans H. Sammer
Hans Peter Zweifel
Hans-Peter Thoma, Dr.
Harbor View Investments, LTD.
Harish H. Shah
Harry Booth
Harry Forman
Harry G. Cooper Trust
Harry L. and Diane Smith
Harvey Abrams, MD
Haven Mfg. Co.
Hector A. Montiel
Heidi Muller-Schild
Heinz Bernegger
Heinz Boksberger
Heinz Kitt
Henrik Vester Christensen Holdings APS
Henry H. Bahr QTIP Trust, The
Henry N. Millner and Rachael Jeck, as Trustees of the Millner/Jeck Trust Agreement,
dated August 3, 2005
Henry Sandbach
Henry Teichholz & Julie Teichholz
Henry W. Trulson or Karen A. Trulson
Homayoun Pourshirazi, Dr.
Horst & Sylviane van der Linden
Horst Van Der Linden
Hossein Sattari
Howard & Melanie Kollinger JTWROS
Howard Bergtraum
Huxley Richardson
Ian L. Kessler
IC-1, LLC
iNetworks, LLC
International Electronic Business Inc.
Investors Club, L.L.C.
Ira B. Blank
Ira Spodek
Irina Serpoukhouvitina
Isaac Moreno
J & C Resources LLC

J S Cole
J. Scott Phillips IRA
Jack Bruscianelli
Jackson Investment Group LLC
James A. Gerali Revocable Trust Dated 3/17/89 amended 9/14/98
James A. Lesley & Judy B. Lesley JTWROS
James and Judi Nonn
James Buckman
James C. Holmes
James E. Stonhaus or Janis S. Stonhaus
James Garrett Schwendig
James H. Stonhaus
James Hendren
James M. & Sophia L. Schmidt
James Metelski
James Morrissey
Jamil H. Khan
Jamshid Hamidi
Janet Silveira
Janice Dickinson
Jason D. Young
Jay S. Orringer and Jolynne V. Orringer
Jay Silberman & Judith Silberman JTWROS
Jeffrey A. Young
Jeffrey Adelglass M.D., P.A. Profit Sharing
Jeffrey C. Allard
Jeffrey C. Newman
Jeffrey C. Wang
Jeffrey Chandler
Jeffrey Sperber
Jeffrey T. Ramsey and Monique E. Ramsey Family Trust UTD 12/31/1996
Jehangir Arjoman Kermani
Jennifer & Matthew S. Olesen, Husband & Wife, as Joint Tenants
Jennifer R. Bancroft
Jens Becker
Jerald A. Blumberg
Jessie J. Knight, Jr
Jim Muir
Jitin Dhiman
JoAnn Daszkowski
Joel & Beverly Seligson
Joel Littlefield
Joerg Obwegeser, Dr.
Johan E Brahme, MD Inc. Defined Benefit Plan
Johann Vollmost

John & Martha Reilly
John A. Abraham
John A. Zeeb
John Ahern
John and Carolyn Davis JTWROS
John and Maria P. Russo Trustees of the J & M Russo Family Trust U/T/D Dated August 3, 2000
John Angelos
John C. Giordano, Jr. & Andrea J. Giordano
John D. Felton
John H. Joseph Revocable Living Trust
John J. Horn
John M. Wander
John Olbrich
John Pierre Ayala
John Risley & Cindy Risley
John Scheidt
John Schleyer
John Schmidt
John Schrage
John Thomas Holly SEP IRA
John Zeeb
Jone Hsia
Joon Rhee
Josef Muller-Schild
Josef Thalmann
Joseph & Tracy Rudman
Joseph A. Nebel, Jr.
Joseph A. Nebel, Sr.
Joseph B. Panella IRA
Joseph Cavegn
Joseph Family Living Trust
Joseph M. Cicini
Joseph Pitta
Joseph Sorbara
Joseph V. Fisher
Joseph W. Glancy
Judson LeGrand
Juerg F. Tschopp
Jui-Shen Hsu
Julian Stephen Schmidt
Jurgen Frei
Justin Kaplan
Kamran Hamidi
Karen M. Doyle
Karen Smith

Karl E. Lundberg
Karl Gmur and Vreni Gmur
Karl+Vreni Gmur
Karla R. Kelly, A ProfessionalLaw Corporation
Karl-Christoph Steiner
Katherine Lynn Ammann
Kathleen & Richard Bryson
Kay Seibert
Keith J. Rowe
Keith Nebel
Keller Anton, Dr.
Kelly A. Bownes
Kelly-Grant Living Trust U/A Dtd 12/12/96
Kelsie Derkatz
Ken & Karen Lehman
Ken Satterlee
Kenneth L. & Sharon W. Kincel
Kenneth Steel
Kenton L. Eiffert IRA
Kevin Clarkin
Kevin Green
Kevin Sheldon IRA
Kevin Spizizen Inherited IRA
Kevin T. Nini
Khan Enterprises
Khanh D. Tran
Kiun Chu
Knowles Family Trust
Knut Krecker
Kris Bjornson
Krispin Rosner
Kristine Jacques
Kupfer Family Trust dated March 6, 1993
Kurt Sturzenegger
La Femme Investments, Inc.
Lane Deyoe
Larry Bishop
Laura A. Olesen
Laurence D. Bloom
Lawrence E. Twork
Lawrence P. Giardina IRA
Lawrence Silver
Leandra A. Hiyane
Lee D. Clark
Lee Family Trust, The

Lee Roy Pearson, III
Legg Mason Wood Walker, Incorporated
Leipe & Sshulz u.a. GBR mbH
Leo Satriawan
Leonard DeOliveira
Leonard Giampaolo and James Lau
Leonard S. Yaffe
Lewis Levy and Barbara Ilene Levy
Lichter Venture Group Defined Benefit Plan Trust
Lisa Ann Nicole
Lisa Bea Alton Anderson
Lisa Marie Ellingsen
Living Trust of Dale Kann
Lois Joyce Richmond
Lon E. Otremba
Lone Jack Ranch, LP
Long Island Auto Realty
Lori H. Saltz
Louis A. Shpritz
Louis Angelos
Louis Beacham
Louis M. Giardina Roth IRA
Luis A. Queral , Dr.
Luther Daniel Mears and Susan Fielder Mears
Lynnette Meltz
M & M Investment
M. Lou Marsh
Magnus Coxner
Mahendra R. Sanapati
Malcolm Tovey
Manchester Financial Group, L.P.
Manual Norman Leonard
Marc Goldman
Marcel Wermuth
Margrith Oehri
Margrith Thoma-Sutter
Maria A. Allnutt
Mario Gioia
Mark A. Ratteree
Mark Brenner
Mark G. Rubin
Mark Goldman
Mark Goldwasser
Mark Gonwa, MD
Mark Nebel

Mark Niederost
Mark Ransom
Markus Meyer, M.D.
Markus Schaub
Marlene J. Winker Trust — James & Marlene Winker Trustees
Marshall Family Charitable Unitrust
Marshall R. Chesrown
Marshall Trabout, Dr.
Martha Keller
Martha Medich
Martin L. Karlov
Martin Moehr
Martina Wolber
Martine Timmermans
Mary H. Epsten
Mary N. Wilson IRA
Marylou Shanahan
Mashallah Afshar
Mathias Widmer
Matt Portes
Matthew Bernstein
Matthew Mega
Matthew Silberman
Matthias Benken
Matthias Schulz
Maureen Chilelli
Maureen Crowe Productions FBO Maureen Crowe
Maurice Panichi & Canzio Joe Panichi TIC
Mehrdad Majlessi
Melissa Medich
Mendel N. Nudelman
Merrel Olesen MD
Michael Andrew Grosner
Michael Atallah
Michael Bogue
Michael Cardinale & Joseph Agosta
Michael F. Glazer and Ellen R. Glazer JTWROS
Michael Filingeri
Michael Gebhard
Michael Guffanti
Michael H. & Victoria L. McGeath
Michael Hancock
Michael Hourand, Dr.
Michael J. Haley
Michael L. Simms

Michael Mega
Michael P. Silva
Michael Sauerbrier, Prof.
Michael T. Loffredo
Michael W. Hicks
Michele B. Ellingsen
Michele Bonvillain Ellingsen, Ellingsen Revocable Declaration of Trust dated 12/3/04
Mike Burkoff
Millard P. Thaler & Zeena I. Ubogy
Milton Cohen & Steven R. Cohen Trustees under the Milton Cohen Trust Agreement
dated November 10, 2005
Minipuri G. Ramesh Singh
Mira Habel
Mirza Alladina Medical, Ltd
Mission Consultant, Inc.
Mitchell & Ilene Slovik
Mitchell A. Fried
Moazzem H. Chowdhury
Mohsen Shahbani And Deborah K. Shahbani
Mones International, Inc.
Morgan J. C. Scudi
Morris Moses
MSB Family Trust
Murray Berman
Myron H. and Mercedes L. Budnick
Naser Ostad
Nasri Investment, LLC
Nathalie Ransom
Nathaniel Silon Revocable Living Trust
National Securities Corporation
Neil & Estelle Marcus
Nelson Penarreta & Patricia Davila JTWROS
Neville Alleyne, MD
NGN BioMed Opportunity I GmbH & Co. Beteiligungs KG
NGN Biomed Opportunity I, L.P.
Nhu Y. Huynh
Nicholas Abbate
Nicholas C. Scott
Nicholas Erik Sieveking, MD
Nike Partners, LP
Nikhil & Sheila Sheth
Niklas Neumann
Nitin Sharma
Noah Drezner
Nolan E. Johnson

Opal Investments Management, Inc.
Optimum Health Services
Ostanik Family Trust Initially Created 3/6/03
Pamela Esposito
Pao-Ying & Chen-Huang
Partnership”
Parviz Roubeni & Rad Roubeni JTWROS
Patricia Charman
Patricia Klier
Patricia L. Novak
Patrick Bownes
Patrick Sheridan IRA Rollover
Patrick T. & Patricia M. Wooten
Paul & Ann Thomas Community Property Trust
Paul A. Felleti
Paul Becker
Paul Berlin
Paul D. Sherr, P.C. Defined Benefit Pension Plan
Paul Porter
Paul Schneider
Paul Treger
Paul Zlotnik
Paula McKinney
Perfectum Recruiting Oy
Pete & Patricia Dlugosh
Peter and Georgia Angelos
Peter B. Lambert
Peter Carton
Peter Debany
Peter F. Smith
Peter Horbury
Peter J. Lawrence
Peter M. Tutrani IRA
Peter Moore
Peter O. Raudaskoski
Phillip P. Edlin
Phillip R. Adams
Phillip Sgobba
Plastic Surgery Medical Clinic of San Diego
Prasad V. Gade
Productos Ecological De Mexico
Prof. Dr. Hannes Schierle
Proprete Investissement, Inc.
Proteus Global Ventures, LP
Quentin Rosas

R. Christopher Barczewski
R. Merrel Olesen, M.D.
R. Merrel Olesen, M.D., APC, MPPP
Rainer Burkhardt
Rainer Marxer
Rainer Mattes
Raj Wickramasekaran
Rakesh Aggarwal
Ralph Gitz
Ramin Ghassemi & Nina Mojaver
Randal Howard
Randall Moreadith
Raptor Fund, a Revocable Separate Property Trust
Ray Fadich
Raymond A. Bartolacci, III
Raymond Bartolacci, Jr.
Rees Orland
Rene Kreis
Respolar Oy
Rhoda Narins, MD
Richard & Betsy Fitzpatrick Family Trust
Richard & Deborah Fildes
Richard & Judy Fitzgerald JTWROS, Dr.
Richard Cardinale
Richard Clack
Richard E. Feinberg & Diane Gotkin
Richard Ernest
Richard M. Bodor, M.D.
Richard Salomone
Richard W. Cunningham
Riyadh Taila
Robert & Louis Giardina JTWROS
Robert Anderson
Robert Belfi Trust
Robert Brandt
Robert Caduff
Robert Dagosta
Robert Devere
Robert E. Duke
Robert E. Irelan
Robert Giardina and Eric Bonanno
Robert J. Des Marais
Robert J. Lange
Robert J. Mirabile
Robert Kearney, MD

Robert LoRusso
Robert Marvin
Robert McEntire
Robert Mega
Robert Petrozzo
Robert Schaefer
Robert Steel
Roberta Wieman
ROBHO Properties Inc.
Rodney Moser
Roger J. & M. Jenai Sullivan Wall
Roger Monteforte

Rohan Dhiman
Rolf Schierl
Rolf Steiner
Ron A. & Janet E. Rasch
Ronald & Mary Doubt
Ronald E. White
Ronald H. Medak
Ronald Harvard Medak
Ross Person
Rudolf Doessegger
Rullan Family Trust
Rupert Hourand, Dr.
Russell Cody
Russell S. Gold
Russell S. Gold Ph.D. Profit Sharing Plan
Rusti Bartell-Weiss
Ruth A Fair Trust
Ruth A. Stolzenberg
Sabine Geser
Saied & Pamela Motevasselani
Sal Furnari
Sammie R. & Carol L. Ford
Sandeep Gupta
Sandford Wilk
Sandra Bennemann
Sandra Tyrholm Trust
Sanfurd G. Bluestein
Sassan Alavi
Satbir Singh
Schneider Family Trust Dtd 9-1-83
Scot B. Jones
Scott Apperson, Richard Bodor & Meyer Tenenhaus
Scott Evan Olesen Irrevocable 2005 Trust

Scott Frey
Sean J. Suydam
Sean Loghman
Sebastian D’amico
Seymour Lippman IRA
Shahab Hillyer & Siamak Kalhor
Shari Joyce
Sharon Crowder
Shawn & Noushin Bagheri
Shawn Bagheri
Sheldon & Marjorie Derezin
Shelley J. Tauber
Shephard Bentley
Shuja Ahmed & Anthin Zito
Siamak Aghamohammadi
Sidney & Helene Silberman
Simin Siddiq, Dr.
Sorrento Drive Enterprises Inc.
South Bay Skin & Cancer Pension Plan For Dr. Peter Rullan
Spartan Marketing Ltd.
SSE Taylor Partners, LLC
St. Croix Capital Corporation Pension Plan
Stanley & Leigh Jensen
Stanley & Mary Coniglio
Stanley F. Roth, M.D.
Steen Allan Christensen
Stefan Brunner
Stefan Lemperle
Stefan Widensohler
Stephanie Carter
Stephen A. Geppi & Melinda C. Geppi
Stephen and Martha Kitchens
Stephen and Sharon Burke
Stephen Jones
Stevan F. Schweighardt
Steve & Mandy Romanelli
Steve Celotto
Steven Cohen, MD
Steven Markowitz
Steven Parkes
Stout, Uxa, Buyan & Mullins, LLP
STR Capital Securities Inc.
Stuart A. Teper
Stuart A. Young
Susan A. Thalken

Susan Ann Westre
Susan L. Wedell
Sutro V, LLC
Suzanne C. Bodor, M.D.
Suzette T. Seigel
Syed Fazal And Sumrana S. Ahmed
Tariq Muhammad
Taylor Family Trust, The
Terence Rhone
Terri C. Swanston IRA
Terry Sullivan Ira
Theo Juetz
Theodore L. Folkerth MD
Thomas & Jill Dizio
Thomas Baumann
Thomas C. Humes
Thomas C. Reiner
Thomas Christian
Thomas H. Cruikshank
Thomas Jeffery Kelley
Thomas L. Jones
Thomas Nutter & Shervin Yazdan
Thomas R. Farrell, MD
Thomas R. Vecchione
Thomas Tellez
Thomas W. Haydon
Thomas Weppelmann
Thunderbird Trust
Tim Callan
Tim Parkes
Timothy G. Canty Sr., Md Defined Benefit Pension Plan 1-1-84
Timothy J. Turner
Timothy Joseph Defined Pension Plan
Todd M. Peterson
Todriefield Ltd.
Tom Clotfelter
Tom Holly
Tom Slazinski
Total Maintenance Solutions Inc.
Tracy Fitzer
Tracy Howell
Transpro Property & Casualty Insurance Corp.
Trevor Callan
Tsewang Nyendak
Turner & Rosemary Daniels

Ubs (Luxembourg) S.A.
Urs — Peter Inderbitzin
Urs W Schmid
Urs-Peter Inderbitzin
Vera G. Gittes Revocable Trust
Vernon W. Schoemaker
Victor Hochberg
Victor Prieto Ira
Vincent Chierra
Vincent Latour
Vincent Vitale
Vita Pure
Wade Harb
Wade Harb & Elham S. Harb Jtwros
Walter And Lynda Cekala
Walter Carney
Walter E. & Tamara L. Novick
Walter H. Hickel
Walter Ruegg
Walter Wichern, Dr.
Warner C. Lusardi Family Trust Dated June 11, 1993
WB Partners
Webb Family Trust, U/A 9/20/99
Wells Family Trust
Wendelin Acker
WFS Consulting
William & Susan Boardman As Tenants By The Entirety
William A. Simms
William Burnett
William C. Stonhaus or Karen Stonhaus
William Howe
William J. Dixon
William Kirkpatrick
William M. Flynn, M.D.
William Mega
William P. Monahan
William Raventos
William S. Leavy
William S. Worrell
William Seare
William Wustenberg, DVM
Wolfgang Jakob
Wolfram Schmid
Woo, Jae Hoon
World Marketing Corp Profit Sharing Plan

Yong Ok Yi
Yvonne & Ole C. Olesen, Husband & Wife, as Joint Tenants
Zane Thomas Courbay
Zohreh Alaghemand

EX-4.19

EXHIBIT 4.19

Execution Version

INVESTOR RIGHTS AGREEMENT

     This INVESTOR RIGHTS AGREEMENT (as the same may be amended, supplemented or otherwise modified from time to time, this “Agreement”) is made as of February 12, 2008, between Artes Medical, Inc., a Delaware corporation (the “Company”) and Cowen Healthcare Royalty Partners, L.P., a Delaware limited partnership (together with its affiliates, “CHRP”).

RECITALS

     WHEREAS, pursuant to the terms of that certain Revenue Interest Financing and Warrant Purchase Agreement (as the same may be amended, supplemented or otherwise modified from time to time, the “Revenue Agreement”) dated as of January 28, 2008, CHRP is acquiring a warrant (as the same may be amended, supplemented or otherwise modified from time to time, the “Second Warrant”) dated of even date herewith, exercisable for three hundred seventy five thousand (375,000) shares of common stock, $0.001 par value per share, of the Company (the “Common Stock”) at an exercise price per share and subject to adjustment as set forth in the Second Warrant;

     WHEREAS, pursuant to the terms of that certain Note and Warrant Purchase Agreement (as the same may be amended, supplemented or otherwise modified from time to time, the “Note and Warrant Purchase Agreement”) dated of even date with the Revenue Agreement, CHRP is acquiring a warrant (as the same may be amended, supplemented or otherwise modified from time to time, the “First Warrant”; together with the Second Warrant, the “Warrants”) dated of even date herewith, exercisable for one million three hundred thousand (1,300,000) shares of Common Stock at an exercise price per share and subject to adjustment as set forth in the First Warrant;

     WHEREAS, the Warrants each contemplate this Agreement being executed by the parties hereto as of the date hereof;

     WHEREAS, the Company is a party to an Amended and Restated Investors’ Rights Agreement, dated June 23, 2006 (the “Existing Agreement”), with the investors listed on Schedule A thereto, in which the investors have certain registration rights and the Company has certain obligations to such investors;

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Definitions. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the following meanings:

     “Affiliate” shall mean any Person that controls, is controlled by, or is under common control with another Person. For purposes of this definition, “control” shall mean (i) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (ii) in the case of non-corporate

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entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities.

     “Agreement” has the meaning set forth in the first paragraph of this Agreement.

     “Board” has the meaning set forth in Section 6.1.

     “Business Day” shall mean any day other than a Saturday, Sunday or U.S. federal holiday or a day on which banking institutions located in New York, New York are authorized or obligated to be closed.

     “CHRP” has the meaning set forth in the first paragraph of this Agreement.

     “CHRP Designees” has the meaning set forth in Section 6.1.

     “CHRP Employee Designee” has the meaning set forth in Section 6.1.

     “CHRP Industry Designee” has the meaning set forth in Section 6.1.

     “Common Stock” has the meaning set forth in the recitals of this Agreement.

     “Company” has the meaning set forth in the first paragraph of this Agreement.

     “Confidentiality Agreement” has the meaning set forth in Section 7.5.

     “Continuously Effective” with respect to the Resale Registration Statement means that such registration statement shall not cease to be effective and available for Transfers of Registrable Securities except as permitted by Sections 2.3, 2.4(b), or 2.4(e).

     “Director Qualifications” has the meaning set forth in Section 6.3.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at that time.

     “Existing Agreement” has the meaning set forth in the recitals of this Agreement.

     “FINRA” means the Financial Industry Regulatory Authority (f/k/a the National Association of Securities Dealers) and any successor entity.

     “First Warrant” has the meaning set forth in the recitals of this Agreement.

     “Holder” means with respect to any Registrable Securities, CHRP, unless and until CHRP Transfers such Registrable Securities to new Holders in accordance with Section 7.4.

     “Losses” has the meaning set forth in Section 5(a).

     “Note” has the meaning set forth in the Note and Warrant Purchase Agreement.

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     “Note and Warrant Purchase Agreement” has the meaning set forth in the recitals of this Agreement.

     “Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or other agency or political subdivision thereof.

     “Prospectus” means the prospectus included in the Resale Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus.

     “Register, Registered and Registration” refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering by the SEC of effectiveness of such registration statement or document.

     “Registrable Securities” means (a) any Common Stock issuable or issued upon any exercise of the Warrants and (b) any Common Stock issued or issuable with respect to any of the securities referred to in clause (a) by way of an event triggering any adjustment in the number of shares of Common Stock into which the Warrant is exercisable. Except for purposes of Section 2.1(d)(iv), Registrable Securities shall be deemed to be outstanding and in existence, whenever such Person has the right to acquire such Registrable Securities upon exercise of the Warrants, whether or not such exercise has actually been effected, and such Person shall be entitled to exercise the rights of a Holder of such Registrable Securities hereunder. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they (x) have been registered and Transferred pursuant to the Securities Act, (y) have been Transferred pursuant to Rule 144 or any similar rule promulgated by the SEC pursuant to the Securities Act permitting the resale of restricted securities without the necessity of a registration statement under the Securities Act or (z) have been Transferred to a Person, who by virtue of Section 7.4, is not entitled to the rights provided by this Agreement.

     “Registration Default” has the meaning set forth in Section 2.2.

     “Registration Expenses” has the meaning set forth in Section 4.1.

     “Resale Effective Deadline” has the meaning set forth in Section 2.1(b).

     “Resale Filing Deadline” has the meaning set forth in Section 2.1(a).

     “Resale Registration Statement” has the meaning set forth in Section 2.1(a).

     “Revenue Agreement” has the meaning set forth in the recitals of this Agreement.

     “SEC” means the Securities and Exchange Commission and includes any governmental authority or agency succeeding to the functions thereof.

     “Second Warrant” has the meaning set forth in the recitals of this Agreement.

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     “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at that time.

     “Transfer” means and includes the act of selling, giving, transferring, creating a trust (voting or otherwise), assigning or otherwise disposing of (other than pledging, hypothecating or otherwise transferring as security) (and correlative words shall have correlative meanings); provided, however, that any transfer or other disposition upon foreclosure or other exercise of remedies of a secured creditor after an event of default under or with respect to a pledge, hypothecation or other transfer as security shall constitute a “Transfer”; provided, further, however, no “Transfer” shall be deemed to have occurred if CHRP continues to be an Affiliate of the Holder of the Registrable Securities after such transfer or other distribution.

     “Underwritten Registration” means a registration in which securities of the Company are sold to an underwriter for reoffering to the public.

     “Violation” has the meaning set forth in Section 5(a).

     “Warrants” has the meaning set forth in the recitals of this Agreement.

2. Resale Registration Statement.

     2.1 Obligations of the Company. The Company shall (subject to Section 2.3) use commercially reasonable efforts to:

          (a) cause to be filed with the SEC as soon as practicable, but in no event later than April 30, 2008 (the “Resale Filing Deadline”), a registration statement pursuant to Rule 415 under the Securities Act (the “Resale Registration Statement”), which Resale Registration Statement shall provide for resales and Transfers of all Registrable Securities by the Holders as permitted by such Rule 415;

          (b) cause the Resale Registration Statement to be declared effective by the SEC at the earliest practicable time (and in any event before any registration under Section 2.2 of the Existing Agreement becomes effective), but in no event later than the earlier to occur of (i) if the SEC notifies the Company that it does not intend to review the Resale Registration Statement, ten (10) days after the Company receives such notice from the SEC; (ii) if the SEC fails to notify the Company that it intends to review the Resale Registration Statement within the time period permitted by SEC rule for the SEC to provide such notice, ten (10) days after the expiration of the time period permitted by SEC rule for the SEC to review such Resale Registration Statement; or (iii) if the SEC notifies the Company that it intends to review the Resale Registration Statement, one-hundred twenty (120) days after Resale Filing Deadline (or if such day is not a Business Day, the next succeeding Business Day, the “Resale Effective Deadline”);

          (c) in connection with the foregoing, file all pre-effective amendments to the Resale Registration Statement as may be necessary in order to cause such Resale Registration Statement to become effective and if applicable, a post-effective amendment to the Resale Registration Statement pursuant to Rule 430A under the Securities Act; and

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          (d) cause the Resale Registration Statement to remain Continuously Effective, supplemented and amended as required by the provisions of Section 2.4 to the extent necessary to ensure that it is available for resales and Transfers of Registrable Securities by the Holders, and to ensure that it conforms with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the SEC as announced from time to time, for a period beginning on the Resale Effective Deadline and continuing through the earliest to occur of (i) the date none of the shares of Common Stock issuable upon exercise of the Warrants qualify as Registrable Securities, (ii) the sixth (6th) anniversary of the date hereof, (iii) the date on which all of the Registrable Securities may be sold in a single transaction by the Holder to the public pursuant to Rule 144 or any similar rule promulgated by the SEC pursuant to the Securities Act permitting the resale of restricted securities without the necessity of a registration statement under the Securities Act, (iv) the date upon which CHRP has Transferred all of the Registrable Securities or (v) upon the termination of this Agreement.

     2.2 Registration Default. If (i) the Resale Registration Statement required by this Agreement is not filed with the SEC on or prior to the Resale Filing Deadline; (ii) the Resale Registration Statement has not been declared effective by the SEC on or prior to the Resale Effective Deadline; or (iii) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be Continuously Effective without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself immediately declared effective (each such event referred to in clauses (i) through (iii), a “Registration Default”), then the interest rate borne by the Note shall be increased to *** percent (^***%) per annum immediately for all periods where there is one or more uncured Registration Defaults.

     2.3 The Company shall be entitled to (i) postpone the effectiveness of the Resale Registration Statement filed pursuant to this Agreement and (ii) suspend the use of any Prospectus included in the Resale Registration Statement, in the event (a) of the issuance by the SEC of any stop order suspending the effectiveness of the Resale Registration Statement or the initiation of any proceedings for that purpose; (b) upon the occurrence of an event set forth in Section 2.4(b) or Section 2.4(e); or (c) the Company’s chief executive officer delivers to the Holders an executed certificate stating that in the good faith judgment of the Board it would be materially detrimental to the Company and its stockholders either for such Resale Registration Statement to become effective or for Transfers to be made thereunder (including, without limitation, due to the inadvisability of filing a required prospectus supplement or post-effective amendment), because such action would materially interfere with, or require premature disclosure of, any bona fide plan or proposal by the Company to engage in any material financing, acquisition, disposition, reorganization, merger or tender offer or other significant transaction. Notwithstanding anything to the contrary, the Company shall not exercise its rights under this Section 2.3 more than once in any twelve (12) month period, nor for a period of more than sixty (60) days. The Holder hereby acknowledges that any notice given by the Company pursuant to this Section 2.3 shall constitute material non-public information.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     2.4 Registration Procedures. In connection with the Company’s obligations arising under this Agreement regarding the Resale Registration Statement (and any other Prospectus required by this Agreement to permit the resale and Transfer of Registrable Securities), the Company will (subject to Section 2.3 and, where applicable, subject to the Resale Registration Statement having been declared effective) use commercially reasonable efforts to:

          (a) effect such registration to permit the sale of the Registrable Securities being sold in accordance with the intended method or methods of distribution selected by the Holders of the Registrable Securities and permitted by Rule 415, and keep the Resale Registration Statement Continuously Effective for all periods required by this Agreement;

          (b) upon the occurrence of any event that would cause the Resale Registration Statement or any Prospectus filed in connection therewith (i) to contain a material misstatement or omission or (ii) not to be effective and usable for resale and Transfer of Registrable Securities during any period required by this Agreement, the Company shall file promptly an appropriate amendment to the Resale Registration Statement or a prospectus supplement, in the case of clause (i), correcting any such misstatement or omission, and, in the case of either clause (i) or (ii), if a post-effective amendment is utilized, cause such amendment to be declared effective and the Resale Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter;

          (c) prepare and file with the SEC such amendments and post-effective amendments to the Resale Registration Statement as may be necessary to keep the Resale Registration Statement effective for the applicable period set forth in Section 2.1;

          (d) cause the Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Securities Act in a timely manner; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the Resale Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in the Resale Registration Statement or supplement to the Prospectus;

          (e) advise the Holders promptly and, if requested by such Persons, to confirm such advice in writing, (i) when the Prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to the Resale Registration Statement or any post-effective amendment thereto, when the same has become effective; (ii) of any request by the SEC for amendments to the Resale Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Resale Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Registrable Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes; (iv) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Resale Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Resale Registration Statement or the Prospectus in order to make the statements therein not misleading.

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If at any time the SEC shall issue any stop order suspending the effectiveness of the Resale Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Registrable Securities under state securities or blue sky laws, the Company shall obtain the withdrawal or lifting of such order as soon as practicable;

          (f) furnish without charge to each of the Holders, and each of the underwriter(s) if any, before filing with the SEC, copies of the Resale Registration Statement or any Prospectus included therein or any amendments or supplements to the Resale Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of the Resale Registration Statement), which documents will be subject to the review and comment of such Holders and underwriter(s) in connection with such sale, if any, for a period of at least three (3) Business Days, and the Company will not file the Resale Registration Statement or Prospectus or any amendment or supplement to the Resale Registration Statement or Prospectus (including all such documents incorporated by reference) to which a Holder covered by such registration statement or the underwriter(s), if any, shall reasonably object in writing within three (3) Business Days after the receipt thereof (such objection to be deemed timely made upon confirmation of telecopy transmission within such period), unless the Company receives advice from legal counsel that the delay required by such review period would be detrimental to the Company. For purposes of this Section 2.4(f), the objection of a Holder or underwriter, if any, shall be deemed to be reasonable if the Resale Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission;

          (g) make available any document that is incorporated by reference into the Resale Registration Statement or Prospectus, provide copies of such document to the Holders, and to the underwriter(s), if any, and make the Company’s representatives available for discussion of such document and other customary due diligence matters;

          (h) make available at reasonable times for inspection by the Holders or underwriter(s), if any, participating in any disposition pursuant to the Resale Registration Statement and any attorney or accountant retained by the Holders or underwriter(s), if any, all financial and other records, pertinent corporate documents and properties of the Company and cause the Company’s officers, directors and employees to supply all information reasonably requested by the Holders, underwriter(s), if any, or their attorneys or accountants in connection with the Resale Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness and to participate in meetings with investors to the extent requested by the underwriter(s), if any; provided that in each such case the requested information must be in existence and available to the Company and the Company shall not be required to incur out of pocket expenses;

          (i) if requested by a Holder or the underwriter(s), if any, to promptly incorporate in the Resale Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as the Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the “Plan of Distribution” of the Registrable Securities, information with respect to the Registrable Securities being sold, the purchase price being paid therefor and any other terms of

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the offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment;

          (j) furnish to each Holder and each of the underwriter(s), if any, upon request, without charge, at least one copy of the Resale Registration Statement, as first filed with the SEC, and of each amendment thereto, including financial statements and schedules, all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference);

          (k) deliver to each Holder and each of the underwriters, if any, upon request, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Holder reasonably may request;

          (l) enter into such customary agreements (including a customary underwriting agreement), and make such customary representations and warranties, and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Registrable Securities pursuant to the Resale Registration Statement contemplated by this Agreement, all to such extent as may be reasonably requested by any Holder or underwriter, if any, in connection with any resale or Transfer pursuant to the Resale Registration Statement; and if and only if the registration is an Underwritten Registration, the Company shall:

               (i) furnish to each Holder, and each underwriter, in such substance and scope as they may reasonably request and as are customarily made by issuers to underwriters in primary underwritten offerings, upon the initial effective date of the Resale Registration Statement:

                    (1) a certificate, dated the date of the date of effectiveness of the Resale Registration Statement signed by (y) the President or any Vice President and (z) a principal financial or accounting officer of the Company confirming, as of the date thereof, such matters (including, without limitation representations and warranties) as the Holders and underwriters may reasonably request;

                    (2) an opinion, dated the date of effectiveness of the Resale Registration Statement, of counsel for the Company, covering such matters as the Holders and the underwriters may reasonably request, and in any event including a statement to the effect that such counsel have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the underwriter(s), and counsel to the underwriter(s), if any, at which the contents of the Resale Registration Statement and the related Prospectus and related matters were discussed and, on the basis of the foregoing, no facts have come to such counsel’s attention that would lead such counsel to believe that (i) the Resale Registration Statement, at the time of the Resale Registration Statement or any post effective amendment thereto became effective, or (ii) that the Prospectus contained in the Resale Registration Statement as of its date, contained or contains an untrue statement of a material fact or omitted or

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omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and

                    (3) a customary comfort letter, dated the date of effectiveness of the Resale Registration Statement, from the Company’s independent accountants, in the customary form and covering matters of the type customarily requested to be covered in comfort letters by underwriters in connection with primary underwritten offerings, and covering or affirming the matters set forth in any comfort letters delivered pursuant to the Resale Registration Statement;

               (ii) set forth in full the indemnification provisions and procedures of Section 5 with respect to all parties to be indemnified pursuant to said Section; and

               (iii) deliver such other documents and certificates as may be reasonably requested by such parties to evidence compliance with Section 2.4(l)(i) and with any customary conditions contained in the underwriting agreement entered into by the Company pursuant to this Section 2.4(l).

     If at any time the representations and warranties of the Company contemplated in Section 2.4(l)(i) cease to be true and correct, the Company shall so advise the Holders and the underwriter(s), promptly and, if requested by such Persons, shall confirm such advice in writing;

          (m) prior to any public offering of Registrable Securities, cooperate with the Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Registrable Securities under the state securities or blue sky laws of such jurisdictions as the Holders or underwriter(s), if any, may reasonably request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Resale Registration Statement; provided, however, that the Company shall be required to register or qualify as a foreign corporation where it is not then so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Resale Registration Statement, in any jurisdiction where it is not then so subject and provided, further, that if the Common Stock is not then a “covered security” as defined in Section 18 of the Securities Act, then the Company shall not be required to register and qualify the Registrable Securities under the state securities or blue sky laws in more than ten (10) states;

          (n) cooperate with the Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing the Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the Holders or the underwriter(s), if any, may request at least two (2) Business Days prior to any sale of Registrable Securities made by such Holders or underwriter(s), if any; provided, the Holders provide the Company with the necessary information to prepare such certificates at least four (4) Business Days prior to the applicable sale of Registrable Securities;

          (o) if any fact or event contemplated by Section 2.4(e)(iv) shall exist or have occurred, prepare a supplement or post-effective amendment to the Resale Registration

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Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading;

          (p) cooperate and assist in any filings required to be made with FINRA and in the performance of any due diligence investigation by any underwriter (including any “qualified independent underwriter”) that is required to be retained in accordance with the rules and regulations of FINRA;

          (q) otherwise comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) for the twelve-month period (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering or (ii) if not sold to underwriters in such an offering, beginning with the first month of the Company’s first fiscal quarter commencing after the effective date of the Resale Registration Statement;

          (r) cause all securities covered by the Resale Registration Statement to be listed on each securities exchange or automated quotation system on which the Common Stock issued by the Company is then listed if requested by any Holder or the underwriter(s), if any; and

          (s) provide promptly to each Holder upon request each document filed with the SEC pursuant to the requirements of Section 13 and Section 15 of the Exchange Act.

3. Holder Obligations. Each Holder agrees to, and in addition it shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement with respect to the Registrable Securities of the Holders, that each Holder shall:

          (a) Promptly furnish to the Company such information regarding the Holder, the number of the Registrable Securities owned by it, the number of Registrable Securities to be registered and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities of the Holders, and cooperate fully with the Company in preparing the Resale Registration Statement and any related Prospectus.

          (b) If the Company has delivered a Prospectus to the Holder and after having done so the Prospectus is amended or supplemented to comply with the requirements of the Securities Act, at the written request of the Company, the Holder shall immediately cease making offers or Registrable Securities and, upon receipt of the amended or supplemented Prospectus from the Company, the Holder shall use only such amended or supplemented Prospectus in making offers of the Registrable Securities.

          (c) During such time as the Holder may be engaged in a distribution of Registrable Securities, the Holder shall comply with Regulation M promulgated under the Exchange Act and pursuant thereto it shall, among other things, (i) not engage in any stabilization activity in connection with the securities of the Company in contravention of such regulation or (ii) distribute Registrable Securities under the Resale Registration Statement other than in the manner described in the Resale Registration Statement.

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          (d) If the Company has delivered to the Holder written notice in accordance with Section 2.3, then the Holder shall immediately cease making offers or Transfers of Registrable Securities until the Company shall have given the Holder written notice that the Holder may once again commence making offers or Transfers of Registrable Securities under the current (or amended or supplemented) Prospectus.

4. Registration Expenses.

     4.1 Company Expenses. Subject to Section 4.2, all expenses incident to the Company’s performance of or compliance with this Agreement, including all registration and filing fees, fees of any transfer agent and registrar, fees and expenses of compliance with securities or blue sky laws, printing expenses, fees and disbursements of counsel for the Company and its independent certified public accountants, the Company’s internal expenses and the expenses and fees for listing the securities to be registered on each securities exchange or quotation system on which similar securities issued by the Company are then listed or quoted (all such expenses being herein called “Registration Expenses”) shall be borne by the Company.

     4.2 Holder Expenses. In connection with the registration contemplated hereunder, the Company shall reimburse the Holders included in a registration for the reasonable fees and disbursements of one counsel, in an amount not to exceed $50,000 in the aggregate. The Holders, and not the Company, shall be responsible for all fees and expenses of underwriters (including discounts and commissions attributable to the Registrable Securities included in such registration).

5. Indemnification; Contribution. If any Registrable Securities are included in a registration statement under this Agreement:

          (a) To the extent permitted by applicable law, the Company shall indemnify and hold harmless each Holder, each Person, if any, who controls such Holder within the meaning of the Securities Act, and each officer, director, partner and employee of such Holder and such controlling Person, against any and all losses, claims, damages, liabilities and expenses (joint or several), including reasonable attorney’s fees and disbursements and reasonable expenses of investigation (collectively, “Losses”), incurred by such Person pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, but only insofar as such Losses arise out of or are based upon any of the following statements or omissions (collectively, a “Violation”):

     (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement, including any preliminary Prospectus or final Prospectus contained therein, or any amendments or supplements thereto; or

     (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

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provided, however, that the indemnification required by this Section 5(a) shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such Loss to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of a Holder or any underwriter expressly for use in connection with such registration; and provided, further, that any indemnification required by this Section 5(a) shall not apply to the extent that any such Loss is based on or arises out of an untrue statement or alleged untrue statement of a material fact, or an omission or alleged omission to state a material fact, included in or omitted from any preliminary prospectus if the final prospectus shall correct such untrue statement or alleged untrue statement, or such omission or alleged omission, and a copy of the final prospectus has not been sent or given by the Holder or any underwriter to the Person alleging damage at or prior to the confirmation of sale to such Person; and provided, further, that this indemnity shall not apply to the extent that any such Loss is based on an offer or Transfer of Registrable Securities during any period which the Company has notified the Holder that such offers and Transfers must cease under the Agreement, including under Section 2.3, Section 2.4(b) or Section 2.4(e).

          (b) To the extent permitted by applicable law, the Holders (severally and not jointly) shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Resale Registration Statement, each Person, if any, who controls the Company within the meaning of the Securities Act, and each officer, director, partner, and employee of such controlling Person, against any and all Losses incurred by such Person pursuant to any actual or threatened action, suit, proceeding or investigation, or to which any of the foregoing Persons may otherwise become subject under the Securities Act, the Exchange Act or other federal or state laws, but only insofar as such Losses arise out of or are based upon any Violation, in each case to the extent that such Violation arises out of or is based upon information furnished in writing by or on behalf of a Holder expressly for use in connection with such registration, or upon the Holder’s failure to properly and timely deliver an “official” Prospectus, or upon the Holder’s use of a written or oral prospectus other than the “official” Prospectus; provided, however, that any indemnification required by this Section 5(b) shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Holders (which consent shall not be unreasonably withheld, conditioned or delayed) and in no event shall the amount of any indemnity obligation under this Section 5(b) exceed the gross proceeds from the applicable offering received by the Holders.

          (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, suit, proceeding, investigation or threat thereof made in writing for which such indemnified party may make a claim under this Section 5, such indemnified party shall deliver to the indemnifying party a written notice thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and disbursements and expenses (in each case, to the extent reasonable) to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified

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party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time following the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5 to the extent of such prejudice but shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than pursuant to this Section 5. Any such indemnified party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expenses of such indemnified party unless (i) the indemnifying party has agreed to pay such fees and expenses or (ii) the indemnifying party shall have failed to promptly assume the defense of such action, claim or proceeding or (iii) the named parties to any such action, claim or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it that are different from or in addition to those available to the indemnifying party and that the assertion of such defenses would create a conflict of interest such that counsel employed by the indemnifying party could not faithfully represent the indemnified party (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action, claim or proceeding on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action, claim or proceeding or separate but substantially similar or related actions, claims or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such indemnified parties, unless in the reasonable judgment of such indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action, claim or proceeding, in which event the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel or counsels).

          (d) If the indemnification required by this Section 5 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any Losses referred to in this Section 5:

     (i) the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any Violation has been committed by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such Violation. The amount paid or payable by a party as a result of the Losses referred to above shall be deemed to include, subject to the limitations set forth in Sections 5(a), 5(b) and 5(c), any legal or other fees or

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expenses reasonably incurred by such party in connection with any investigation or proceeding;

     (ii) the parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in Section 5(d)(i). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

          (e) The obligations of the Company and the Holders under this Section 5 shall survive the completion of any offering of Registrable Securities pursuant to the registration statement under this Agreement, and otherwise.

6. Board Representation.

     6.1 Effective as of and contingent upon the Closing, the Company shall cause Todd Davis or another employee of CHRP reasonably acceptable to the Company to be elected as a member of the Board of Directors of the Company (the “Board”), to fill a vacancy in the Board’s director class (Class I) with a term ending on May 30, 2010 (the “CHRP Employee Designee”). The Company shall cause an individual designated by CHRP, who (a) shall have relevant industry experience in the Company’s industry, (b) shall not be an employee of CHRP, and (c) shall be acceptable to a majority of the then serving directors on the Board, to be elected as a member of the Board within nine (9) months of the Closing Date, to fill a vacancy in the Board’s director class (Class II) with a term ending on May 30, 2011 (the “CHRP Industry Designee” and collectively with the “CHRP Employee Designee”, the “CHRP Designees”). CHRP shall be entitled to lead the search effort for the CHRP Industry Designee, which may include the engagement of an executive recruiter and other related expenses which commercially reasonable expenses shall be borne by the Company.

     6.2 After the date hereof, until the earlier to occur of (i) the end of the Term (as defined in the Revenue Agreement), (ii) the date the Applicable Percentage (as defined in the Revenue Agreement) converts to ^***% pursuant to the terms of the Revenue Agreement, or (iii) a Change of Control (as defined in the Revenue Agreement), if CHRP so elects and subject to Section 6.3, the Company will use commercially reasonable efforts to cause the CHRP Designees to be included in the slate of nominees recommended by the Board to the Company’s stockholders for election as directors, including at each annual or special meeting of stockholders of the Company at which directors are elected and including by voting any proxies it holds and using its best efforts to cause any officers of the Company who hold proxies to vote such proxies, except, in either case, as otherwise directed by the stockholder who submitted such proxy, in favor of the election of the CHRP Designees. Upon the occurrence of an event set forth in clauses (i) and (iii) of the immediately preceding sentence, CHRP shall cause the CHRP Employee Designee to submit his resignation from the Board, and upon the occurrence of an

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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event set forth in clause (ii) of the immediately preceding sentence the Company shall have the right to request CHRP to cause, and if the Company does so request then CHRP shall cause, the CHRP Employee Designee to submit his resignation from the Board. With respect to the foregoing, the Company shall (i) enter into Director Indemnification Agreements with each CHRP Designee in the same form as entered into with the Company’s other directors and executive officers; (ii) reimburse the CHRP Designees for all reasonable out-of-pocket costs and expenses incurred with respect to membership on (or observation of) the Board in accordance with the Company’s Board reimbursement policies; and (iii) otherwise compensate and indemnify the CHRP Designees in accordance with the Company’s policies for non-employee directors.

     6.3 The CHRP Designees will possess such qualifications and meet such standards as are applicable to all members of the Board (whether under law, rule or regulation or as established by the Board) (“Director Qualifications”) at the time for the nomination of the CHRP Designees to the Board. If the Nominating and Corporate Governance Committee of the Board at any time determines that a particular CHRP Designee does not have the Director Qualifications or that their fiduciary duties preclude them from nominating a CHRP Designee for election to the Board, then CHRP shall have a reasonable opportunity to designate a substitute CHRP Designee.

     6.4 After the date hereof, until the earlier to occur of (i) the end of the Term (as defined in the Revenue Agreement), (ii) the date the Applicable Percentage (as defined in the Revenue Agreement) converts to ^***% pursuant to the terms of the Revenue Agreement or (iii) a Change of Control (as defined in the Revenue Agreement), in the event there is no CHRP Employee Designee then serving as a director on the Board, CHRP shall be entitled to designate a representative to attend and participate in all meetings of the Board and committees thereof in a nonvoting observer capacity and, in this respect, the Company shall give such representative copies of all notices, financial statements, minutes, consents, and other materials (including, without limitation, access to such information, documents, records and reports as may be reasonably requested by the representative) that it provides to its directors at the same time and in the same manner as provided to such directors; provided CHRP will remain subject to the terms of the Confidentiality Agreement, and each observer shall execute an individual confidentiality agreement with the Company with substantially similar terms to the Confidentiality Agreement; provided, further, that the Company reserves the right to exclude such representative from access to any material or meeting or portion thereof relating directly to CHRP’s rights under the Transaction Documents.

7. Miscellaneous.

     7.1 Remedies. Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages are not an adequate remedy for any breach of the provisions of this Agreement and that any party may apply for specific performance and for

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement.

     7.2 Amendments and Waivers.

          (a) This Agreement shall not be amended, modified or supplemented except by written instrument signed by the Company and the holders of a majority of the Registrable Securities.

          (b) Any term or provision of this Agreement may be waived, or the time for performance extended, as authorized in writing by the party or parties entitled to the benefit thereof. No waiver of any term or condition of this Agreement shall operate as a waiver of any other breach of such term and condition or any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other provision hereof. No written waiver hereunder, unless it by its own terms explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provisions being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance with such provision.

     7.3 Further Assurances. Each of the parties hereto shall execute all such further instruments and documents and take all such further action as any other party hereto may reasonably require in order to effectuate the terms and purposes of this Agreement.

     7.4 Successors, Assigns and Subsequent Holders.

          (a) All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and the permitted assigns of the parties hereto.

          (b) The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned (but only with all related obligations) by any Holders, provided such assignee acquires at least 375,000 shares of Registrable Securities or the right to acquire 375,000 shares of Registrable Securities upon exercise of the Warrants.

          (c) No assignment of rights under this Agreement pursuant to this Section 7.4 shall be effective unless (i) the Company is, within ten (10) days after such assignment of rights under this Agreement, furnished with written notice of the name and address of the transferee and the securities with respect to which such registration rights are being assigned; and (ii) such transferee agrees in writing to be bound by and subject to the terms and conditions of this Agreement.

     7.5 Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter contained herein, and supersedes all prior agreements, negotiations, discussions and understandings among the parties hereto with respect to such subject matter, provided, however, the terms of that certain Confidentiality Agreement by and between the Company and CHRP dated as of August 24, 2007 (the “Confidentiality Agreement”) shall continue in effect. No representation, inducement, promise, understanding, condition or

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warranty not set forth herein (or in the Exhibits, Schedules or other Transaction Documents) has been made or relied upon by either party hereto. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder.

     7.6 Severability. Wherever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law and in such a way as to, as closely as possible, achieve the intended economic effect of such provision and this Agreement as a whole, but if any provision contained herein is, for any reason, held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such provision or any other provisions hereof, unless such a construction would be unreasonable.

     7.7 Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given (a) when delivered personally, (b) if transmitted by facsimile or email, when confirmation of transmission is received, (c) if sent by registered or certified mail, postage prepaid, return receipt requested, when received, or (d) if sent by reputable overnight courier service, the next Business Day; and shall be addressed as follows (or to such changed address as a party may give written notice of pursuant to this Section 7.7):

If to CHRP to:

Cowen Healthcare Royalty Partners, L.P.
c/o Cowen Healthcare Royalty GP, LLC
177 Broad Street
Suite 1101
Stamford, CT 06901
Attention: Clarke B. Futch
Facsimile No.: (646) 562-1293
Email: clarke.futch@cowen.com

with a copy to:

McDermott Will & Emery LLP
227 West Monroe Street
Chicago, IL 60606-5096
Attention: Timothy R.M. Bryant
Facsimile No.: (312) 984-7700
Email: tbryant@mwe.com

If to the Company to:

Artes Medical, Inc.
5870 Pacific Center Boulevard
San Diego, CA 92121
Attention: Karla R. Kelly, General Counsel

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Facsimile No.: (858) 875-5609
Email: kkelly@artesmedical.com

with a copy to:

Heller Ehrman LLP
4350 La Jolla Village Drive, 7th Floor
San Diego, CA 92122
Attention: Jeff Thacker
Facsimile No.: (858) 587-5941
Email: jthacker@hellerehrman.com

     7.8 Governing Law; Submission to Jurisdiction.

          (a) This Agreement shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the state of New York, without giving effect to the principles of conflicts of law thereof.

          (b) Any legal action or proceeding with respect to this Agreement or any other Transaction Document may be brought in any state or federal court of competent jurisdiction in the state, county and city of New York. By execution and delivery of this Agreement, each party hereto hereby irrevocably consents to and accepts, for itself and in respect of its property, generally and unconditionally the non-exclusive jurisdiction of such courts. Each party hereto hereby further irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of any Transaction Document.

          (c) Each party hereto hereby irrevocably consents to the service of process out of any of the courts referred to in subsection (b) above of this Section 7.8 in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address set forth in this Agreement. Each party hereto hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any suit, action or proceeding commenced hereunder or under any other Transaction Document that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of a party to serve process on the other party in any other manner permitted by law.

     7.9 Attorneys’ Fees. In the event of any action or suit based upon or arising out of any actual or alleged breach by the Company, on the one hand, or any Holder, on the other hand, of any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and expenses of such action or suit from the losing party, in addition to any other relief ordered by the court.

     7.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which will be considered an original instrument, but all of which together will be considered one and the same agreement, and will become binding when one or more counterparts have been signed by and delivered to each of the parties.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written.

ARTES MEDICAL, INC.
By:	/s/ Diane S. Goostree
	Name:	Diane S. Goostree
	Title:	President & CEO
COWEN HEALTHCARE ROYALTY PARTNERS, L.P.
By Cowen Healthcare Royalty GP, LLC       Its General Partner
By:	/s/ Todd C. Davis
	Name:	Todd C. Davis
	Title:

SIGNATURE PAGE TO
INVESTOR RIGHTS AGREEMENT

EX-4.20

EXHIBIT 4.20

Execution Version

     THIS SECURITY AND THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.

ARTES MEDICAL, INC.

COMMON STOCK PURCHASE WARRANT

To Purchase 1,300,000 Shares of Common Stock

     THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, Cowen Healthcare Royalty Partners, L.P. (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after February 11, 2009 (the “Initial Exercise Date”) and on or prior to the close of business on the fourth (4th) anniversary following the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Artes Medical, Inc., a Delaware corporation (the “Company”), up to 1,300,000 shares, subject to adjustment as set forth herein (the “Warrant Shares”) of Common Stock, par value $0.001 per share, of the Company (the “Common Stock”). The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $5.00 subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Note and Warrant Purchase Agreement (the “Note and Warrant Purchase Agreement”), dated January 28, 2008, between the Company and the Holder.

     1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company.

     2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant in accordance with the terms of this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all

taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company shall at all times reserve and keep available for issue upon the exercise of this Warrant such number of its authorized but unissued Common Stock as will be sufficient to permit the exercise in full of this Warrant.

     3. Exercise of Warrant.

          (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) to the attention of the Chief Financial Officer and upon payment of the Exercise Price of the shares thereby purchased the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Payment of the Exercise Price may be made at the option of the Holder by (i) by wire transfer or cashier’s check drawn on a United States bank of United States dollars or (ii) the surrender and cancellation of Warrant Shares issuable upon such exercise of this Warrant (i.e. on a “cashless exercise” basis), in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

	Y (A - B)
X =	A

     Where:

          X = The net number of shares of Common Stock to be issued to the Holder pursuant to the election to exercise;

          Y = The gross number of shares of Common Stock in respect of which the election to exercise is made;

          A = The average of the Market Price of one share of the Common Stock for the ten (10) Trading Days immediately prior to the date of exercise; and

          B = The Exercise Price.

“Market Price” shall mean the closing sale price of the Company’s Common Stock as reported on the Nasdaq Stock Market, or if not then traded on the Nasdaq Stock Market, such closing sale or bid price as reported on any exchange over which the Company’s Common Stock may then be traded, or if not then traded over any exchange, then the market price of the Company’s Common Stock shall be the fair market value of the Company’s Common Stock as determined in good faith by the Board of Directors of the Company. Certificates for shares purchased hereunder shall be delivered to the Holder (at an address in the United States specified by the Holder) within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid or the Company shall instruct its transfer agent to register the shares purchased hereunder in book entry form within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates (or book entry shares) shall be deemed to have

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been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price, delivery of the required documentation and all taxes required to be paid by the Holder, if any, pursuant to Section 5 hereof prior to the issuance of such shares, have been paid. For purposes of this Warrant, a “Trading Day” shall mean any day on which the national securities exchange or the national market system of the NASD are open for trading.

          (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

          (c) The Holder understands that, until such time as the Registration Statement has been declared effective or the Warrant Shares may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, the certificates representing any Warrants Shares issued upon exercise of this Warrant will bear a restrictive legend in substantially the following form:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.”

     For purposes of clarity, Warrants Shares issued upon exercise of this Warrant shall bear the restrictive legend provided in this Section 3(c) until the Holder is ready to sell or otherwise transfer such shares under Registration Statement.

          (d) If the Company shall fail for any reason or for no reason to issue to the Holder (at an address in the United States specified by the Holder) within five (5) Trading Days after the date the Warrant is validly exercised by payment to the Company of the Exercise Price, delivery of the required documentation and payment of all taxes required to be paid by the Holder, if any, pursuant to Section 5 hereof (a “Valid Exercise”), a certificate for the number of Warrant Shares to which the Holder is entitled and register such Warrant Shares on

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the Company’s share register or instruct its transfer agent to register in book entry form the number of Warrant Shares to which the Holder is entitled or to credit the Holder’s balance account with the Depository Trust Company (“DTC”) for such number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise of this Warrant, then, in addition to all other remedies available to the Holder, the Company shall pay in cash to the Holder on each day after such third (3rd) Trading Day that the issuance of such shares of Common Stock is not timely effected an amount equal to 2.0% of the product of (A) the number of Warrant Shares not issued to the Holder on a timely basis and to which the Holder is entitled and (B) the closing sale price of the Common Stock on the Trading Day immediately preceding the last possible date which the Company could have issued such Warrant Shares to the Holder without violating this Section 3(e) hereof (the “Delivery Date Price”); provided, however, that in no event shall the Company be obligated to pay damages pursuant to this sentence in an aggregate amount that exceeds 100% of the Delivery Date Price per Warrant Share. In addition to the foregoing, if within five (5) Trading Days after the date of a Valid Exercise the Company shall fail to issue and deliver a certificate to the Holder (at an address in the United States specified by the Holder) and register such Warrant Shares on the Company’s share register, or instruct its transfer agent to register in book entry form the number of Warrant Shares to which the Holder is entitled or credit the Holder’s balance account with DTC for the number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise hereunder, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Warrant Shares issuable upon such exercise that the Holder anticipated receiving from the Company, then the Company shall, within five (5) Trading Days after the Holder’s request promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased over the product of (A) such number of shares of Common Stock, times (B) the Delivery Date Price.

     4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Market Price of one share of the Common Stock for the ten (10) Trading Days immediately prior to the date of exercise of this Warrant.

     5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names (provided the Holder has complied with the restrictions on transfer set forth herein) as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

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     6. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

     7. Transfer, Division and Combination.

          (a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

          (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a) hereof, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

          (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

          (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

          (e) Prior to, and as a condition of, any transfer of this Warrant, the Holder or transferee of this Warrant, as the case may be must (i) furnish to the Company a written opinion of counsel (which opinion shall be reasonably acceptable to the Company and in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the Company and (iii) qualify as an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act.

     8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

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     9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

     10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

     11. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

     12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case of (i) any capital reorganization or reclassification, (ii) any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, (iii) any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or (iv) any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company) (each, a “Fundamental Transaction”), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such Fundamental Transaction had this Warrant been exercised immediately prior to the effective date of such Fundamental

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Transaction and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in Section 11 hereof with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in Section 11 hereof shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Section 12 shall similarly apply to successive Fundamental Transactions. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant to be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such Fundamental Transaction and of said provisions so proposed to be made, shall be mailed to the Holder of this Warrant not less than twenty (20) days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes.

     13. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

     14. Notice of Distribution. If the Board of Directors of the Company shall declare any dividend or other distribution with respect to its Common Stock other than a cash distribution out of earned surplus, the Company shall mail notice thereof to the Holder of this Warrant not less than ten (10) days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. Each such written notice shall be sufficiently given if addressed to the Holder at the last address of the Holder appearing on the books of the Company and delivered in accordance with Section 17(d) hereof.

     15. Investors Rights Agreement. The Common Stock issuable upon exercise of this Warrant shall constitute Registrable Securities (as such term is defined in the Investors Rights Agreement of even date herewith between the Holder and the Company (the “Investors Rights Agreement”)). The original Holder of this Warrant, and any valid transferees thereof pursuant to the Investors Rights Agreement, shall be entitled to all of the benefits afforded to a holder of any Registrable Securities under the Investors Rights Agreement and such holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Investors Rights Agreement applicable to the holder as a holder of Registrable Securities.

     16. Miscellaneous.

          (a) Jurisdiction. This Warrant shall constitute a contract under the laws of the State of Delaware.

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          (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

          (c) Nonwaiver. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date.

          (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Note and Warrant Purchase Agreement; provided, that upon any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information.

          (e) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

          (f) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of the Holder.

          (g) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

          (h) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

          (i) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

* * *

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated: February 12, 2008

ARTES MEDICAL, INC.
By:	/s/ Diane S. Goostree
	Name:	Diane S. Goostree
	Title:	President & CEO

SIGNATURE PAGE TO
COMMON STOCK PURCHASE WARRANT UNDER THE
NOTE AND WARRANT PURCHASE AGREEMENT

NOTICE OF EXERCISE

To: Artes Medical, Inc.

     1. The undersigned hereby elects to purchase                      Warrant Shares of Artes Medical, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price for such Warrant Shares in full, together with all applicable transfer taxes, if any. Payment shall take the form of lawful money of the United States.

     2. The undersigned hereby elects to exercise the attached Warrant into Warrant Shares of Artes Medical, Inc. through “cashless exercise” in the manner specified in the Warrant. This exercise is made with respect to                      of the Warrant Shares covered by the Warrant.

     3. Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following:

     4. Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[PURCHASER]
By:
	Name:
	Title:
Date:

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute
this form and supply required information.
Do not use this form to exercise the Warrant.)

     FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to ___________________________________________________ whose address is ______________________________________________________________________________________.

______________________________________________________________________________________

	Dated: _______________, ______
Holder’s Signature:	______________________________
Holder’s Address:	______________________________
	______________________________

Signature Guaranteed: ____________________________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-4.21

EXHIBIT 4.21

Execution Version

THIS SECURITY AND THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.

ARTES MEDICAL, INC.

COMMON STOCK PURCHASE WARRANT

To Purchase 375,000 Shares of Common Stock

     THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, Cowen Healthcare Royalty Partners, L.P. (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after February 11, 2008 (the “Initial Exercise Date”) and on or prior to the close of business on the fifth (5th) anniversary following the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Artes Medical, Inc., a Delaware corporation (the “Company”), up to 375,000 shares, subject to adjustment as set forth herein (the “Warrant Shares”) of Common Stock, par value $0.001 per share, of the Company (the “Common Stock”). The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $3.125, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Revenue Interest Financing and Warrant Purchase Agreement (the “Revenue Agreement”), dated January 28, 2008, between the Company and the Holder.

     1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company.

     2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant in accordance with the terms of this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all

taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company shall at all times reserve and keep available for issue upon the exercise of this Warrant such number of its authorized but unissued Common Stock as will be sufficient to permit the exercise in full of this Warrant.

     3. Exercise of Warrant.

          (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) to the attention of the Chief Financial Officer and upon payment of the Exercise Price of the shares thereby purchased the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Payment of the Exercise Price may be made at the option of the Holder by (i) by wire transfer or cashier’s check drawn on a United States bank of United States dollars or (ii) the surrender and cancellation of Warrant Shares issuable upon such exercise of this Warrant (i.e. on a “cashless exercise” basis), in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

	Y (A - B)
X =	A

     Where:

          X = The net number of shares of Common Stock to be issued to the Holder pursuant to the election to exercise;

          Y = The gross number of shares of Common Stock in respect of which the election to exercise is made;

          A = The average of the Market Price of one share of the Common Stock for the ten (10) Trading Days immediately prior to the date of exercise; and

          B = The Exercise Price.

“Market Price” shall mean the closing sale price of the Company’s Common Stock as reported on the Nasdaq Stock Market, or if not then traded on the Nasdaq Stock Market, such closing sale or bid price as reported on any exchange over which the Company’s Common Stock may then be traded, or if not then traded over any exchange, then the market price of the Company’s Common Stock shall be the fair market value of the Company’s Common Stock as determined in good faith by the Board of Directors of the Company. Certificates for shares purchased hereunder shall be delivered to the Holder (at an address in the United States specified by the Holder) within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid or the Company shall instruct its transfer agent to register the shares purchased hereunder in book entry form within five (5) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been

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exercised and such certificate or certificates (or book entry shares) shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price, delivery of the required documentation and all taxes required to be paid by the Holder, if any, pursuant to Section 5 hereof prior to the issuance of such shares, have been paid. For purposes of this Warrant, a “Trading Day” shall mean any day on which the national securities exchange or the national market system of the NASD are open for trading.

          (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

          (c) The Holder understands that, until such time as the Registration Statement has been declared effective or the Warrant Shares may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, the certificates representing any Warrants Shares issued upon exercise of this Warrant will bear a restrictive legend in substantially the following form:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.”

          (d) If the Company shall fail for any reason or for no reason to issue to the Holder (at an address in the United States specified by the Holder) within five (5) Trading Days after the date the Warrant is validly exercised by payment to the Company of the Exercise Price, delivery of the required documentation and payment of all taxes required to be paid by the Holder, if any, pursuant to Section 5 hereof (a “Valid Exercise”), a certificate for the number of Warrant Shares to which the Holder is entitled and register such Warrant Shares on the Company’s share register or instruct its transfer agent to register in book entry form the number of Warrant Shares to which the Holder is entitled or to credit the Holder’s balance account with the Depository Trust Company (“DTC”) for such number of Warrant Shares to

-3-

which the Holder is entitled upon the Holder’s exercise of this Warrant, then, in addition to all other remedies available to the Holder, the Company shall pay in cash to the Holder on each day after such third (3rd) Trading Day that the issuance of such shares of Common Stock is not timely effected an amount equal to 2.0% of the product of (A) the number of Warrant Shares not issued to the Holder on a timely basis and to which the Holder is entitled and (B) the closing sale price of the Common Stock on the Trading Day immediately preceding the last possible date which the Company could have issued such Warrant Shares to the Holder without violating this Section 3(e) hereof (the “Delivery Date Price”); provided, however, that in no event shall the Company be obligated to pay damages pursuant to this sentence in an aggregate amount that exceeds 100% of the Delivery Date Price per Warrant Share. In addition to the foregoing, if within five (5) Trading Days after the date of a Valid Exercise the Company shall fail to issue and deliver a certificate to the Holder (at an address in the United States specified by the Holder) and register such Warrant Shares on the Company’s share register, or instruct its transfer agent to register in book entry form the number of Warrant Shares to which the Holder is entitled or credit the Holder’s balance account with DTC for the number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise hereunder, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Warrant Shares issuable upon such exercise that the Holder anticipated receiving from the Company, then the Company shall, within five (5) Trading Days after the Holder’s request promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased over the product of (A) such number of shares of Common Stock, times (B) the Delivery Date Price.

     4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Market Price of one share of the Common Stock for the ten (10) Trading Days immediately prior to the date of exercise of this Warrant.

     5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names (provided the Holder has complied with the restrictions on transfer set forth herein) as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

     6. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

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     7. Transfer, Division and Combination.

          (a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

          (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a) hereof, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

          (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

          (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

          (e) Prior to, and as a condition of, any transfer of this Warrant, the Holder or transferee of this Warrant, as the case may be must (i) furnish to the Company a written opinion of counsel (which opinion shall be reasonably acceptable to the Company and in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the Company and (iii) qualify as an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act.

     8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

     9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,

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destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

     10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

     11. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

     12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case of (i) any capital reorganization or reclassification, (ii) any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, (iii) any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or (iv) any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company) (each, a “Fundamental Transaction”), the Holder of this Warrant shall have the right thereafter to receive on the exercise of this Warrant the kind and amount of securities, cash or other property which the Holder would have owned or have been entitled to receive immediately after such Fundamental Transaction had this Warrant been exercised immediately prior to the effective date of such Fundamental Transaction and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in Section 11 hereof with respect to the rights and

-6-

interests thereafter of the Holder of this Warrant to the end that the provisions set forth in Section 11 hereof shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Section 12 shall similarly apply to successive Fundamental Transactions. The Company shall require the issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant to be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such Fundamental Transaction and of said provisions so proposed to be made, shall be mailed to the Holder of this Warrant not less than twenty (20) days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes.

     13. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

     14. Notice of Distribution. If the Board of Directors of the Company shall declare any dividend or other distribution with respect to its Common Stock other than a cash distribution out of earned surplus, the Company shall mail notice thereof to the Holder of this Warrant not less than ten (10) days prior to the record date fixed for determining stockholders entitled to participate in such dividend or other distribution. Each such written notice shall be sufficiently given if addressed to the Holder at the last address of the Holder appearing on the books of the Company and delivered in accordance with Section 17(d) hereof.

     15. Investors Rights Agreement. The Common Stock issuable upon exercise of this Warrant shall constitute Registrable Securities (as such term is defined in the Investors Rights Agreement of even date herewith between the Holder and the Company (the “Investors Rights Agreement”)). The original Holder of this Warrant, and any valid transferees thereof pursuant to the Investors Rights Agreement, shall be entitled to all of the benefits afforded to a holder of any Registrable Securities under the Investors Rights Agreement and such holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Investors Rights Agreement applicable to the holder as a holder of Registrable Securities.

     16. Miscellaneous.

          (a) Jurisdiction. This Warrant shall constitute a contract under the laws of the State of Delaware.

          (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

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          (c) Nonwaiver. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date.

          (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Revenue Agreement; provided, that upon any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information.

          (e) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

          (f) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of the Holder.

          (g) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

          (h) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

          (i) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

*   *   *

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated: February 12, 2008

ARTES MEDICAL, INC.
By:	/s/ Diane S. Goostree
	Name:	Diane S. Goostree
	Title:	President & CEO

SIGNATURE PAGE TO
COMMON STOCK PURCHASE WARRANT UNDER THE
REVENUE AGREEMENT

NOTICE OF EXERCISE

To: Artes Medical, Inc.

     1. The undersigned hereby elects to purchase                      Warrant Shares of Artes Medical, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price for such Warrant Shares in full, together with all applicable transfer taxes, if any. Payment shall take the form of lawful money of the United States.

     2. The undersigned hereby elects to exercise the attached Warrant into Warrant Shares of Artes Medical, Inc. through “cashless exercise” in the manner specified in the Warrant. This exercise is made with respect to                      of the Warrant Shares covered by the Warrant.

     3. Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following:

     4. Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[PURCHASER]
By:
	Name:
	Title:
	Dated:

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute
this form and supply required information.
Do not use this form to exercise the Warrant.)

     FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to ________________________________________________ whose address is _______________________________________________________________.

_______________________________________________________________

Dated: ____________________, ______________

	Holder’s Signature:
	Holder’s Address:
Signature Guaranteed:

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-10.43

EXHIBIT 10.43

Execution Version

REVENUE INTEREST FINANCING AND WARRANT PURCHASE AGREEMENT

Dated as of January 28, 2008

between

ARTES MEDICAL, INC.,

and

COWEN HEALTHCARE ROYALTY PARTNERS, L.P.

Table of Contents

		Page
ARTICLE I DEFINITIONS			1
Section 1.01	Definitions		1
ARTICLE II ASSIGNMENT OF REVENUE INTEREST AND WARRANT			14
Section 2.01	Assignment		14
Section 2.02	Payments by the Company		14
Section 2.03	Assignment Advance		15
Section 2.04	No Assumed Obligations		15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY			15
Section 3.01	Organization		16
Section 3.02	Corporate Authorization		16
Section 3.03	Governmental Authorization		16
Section 3.04	Ownership		16
Section 3.05	Subsidiaries and Capitalization		17
Section 3.06	Financial Statements		18
Section 3.07	No Undisclosed Liabilities		18
Section 3.08	Litigation		18
Section 3.09	Compliance with Laws		18
Section 3.10	Conflicts		19
Section 3.11	Subordination		19
Section 3.12	Intellectual Property		19
Section 3.13	Regulatory Approval		23
Section 3.14	Material Contracts		24
Section 3.15	Place of Business		24
Section 3.16	Broker’s Fees		24
Section 3.17	Insurance		24
Section 3.18	Solvency		24
Section 3.19	Other Information		25
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CHRP			25
Section 4.01	Organization		25
Section 4.02	Authorization		25

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Table of Contents
(continued)

		Page
Section 4.03	Broker’s Fees		25
Section 4.04	Conflicts		25
ARTICLE V COVENANTS			26
Section 5.01	Consents and Waivers		26
Section 5.02	Access; Information		26
Section 5.03	Material Contracts		27
Section 5.04	Confidentiality; Public Announcement		27
Section 5.05	Security Agreement		28
Section 5.06	Further Assurance		28
Section 5.07	Put Option; Step-Down Option		29
Section 5.08	Remittance to and from the Collection Accounts		30
Section 5.09	License Agreements		32
Section 5.10	Intellectual Property		32
Section 5.11	Negative Covenants		33
Section 5.12	Future Agreements		33
Section 5.13	Insurance		33
Section 5.14	Notice		34
Section 5.15	Use of Proceeds		34
ARTICLE VI THE CLOSING; CONDITIONS TO CLOSING			35
Section 6.01	Closing		35
Section 6.02	Conditions Applicable to CHRP		35
Section 6.03	Conditions Applicable to the Company		37
ARTICLE VII TERMINATION			37
Section 7.01	Termination Date		37
Section 7.02	Effect of Termination		37
ARTICLE VIII MISCELLANEOUS			38
Section 8.01	Survival		38
Section 8.02	Future Equity Offerings		38
Section 8.03	Notices		38
Section 8.04	Successors and Assigns		39

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Table of Contents
(continued)

		Page
Section 8.05	Indemnification		40
Section 8.06	Independent Nature of Relationship		41
Section 8.07	Tax		41
Section 8.08	Entire Agreement		42
Section 8.09	Amendments; No Waivers		42
Section 8.10	Interpretation		42
Section 8.11	Headings and Captions		43
Section 8.12	Counterparts; Effectiveness		43
Section 8.13	Severability		43
Section 8.14	Expenses; Attorneys Fees		43
Section 8.15	Governing Law; Jurisdiction		43
Section 8.16	Waiver of Jury Trial		44

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EXHIBITS

Exhibit A	—	Form of Assignment of Revenue Interest
Exhibit B(1)	—	Form of Comerica Deposit Agreement
Exhibit B(2)		Form of JPMorgan Deposit Agreement
Exhibit C	—	Form of Investor Rights Agreement
Exhibit D	—	Form of Note and Warrant Purchase Agreement
Exhibit E	—	Form of Revenue Interest Security Agreement
Exhibit F	—	Form of Second Warrant
Exhibit G	—	Legal Opinion of Heller Ehrman LLP (transaction opinion)
Exhibit H	—	Legal Opinion of Heller Ehrman LLP (IP opinion)

-iv-

REVENUE INTEREST FINANCING AND WARRANT PURCHASE AGREEMENT

     This REVENUE INTEREST FINANCING AND WARRANT PURCHASE AGREEMENT (as amended, supplemented or otherwise modified from time to time, this “Agreement”) is made and entered into as of January 28, 2008 by and between Artes Medical, Inc., a Delaware corporation, (the “Company”), and Cowen Healthcare Royalty Partners, L.P., a Delaware limited partnership (“CHRP”).

     WHEREAS, the Company wishes to assign, convey and transfer to CHRP, and CHRP wishes to accept the assignment, conveyance, and transfer from the Company, the Revenue Interest (as hereinafter defined), upon and subject to the terms and conditions hereinafter set forth; and

     WHEREAS, as further inducement to enter into this Agreement, the Company wishes to issue to CHRP, and CHRP wishes to accept from the Company, the Second Warrant (as hereinafter defined).

     NOW, THEREFORE, in consideration of the mutual covenants, agreements representations and warranties set forth herein, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.01 Definitions.

     The following terms, as used herein, shall have the following meanings:

     “Additional Included Products” shall mean, as of any date of determination, from October 1, 2007 through and until the end of the Term,

     (a) prior to the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 exceed ^*** Percent (***%) of the aggregate amount paid by CHRP under Section 2.03, any products not internally developed (including in-licensed or purchased) by the Company or its Affiliates that are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or dermatologic procedures or any other non-disease-modifying cosmetic, aesthetic or dermatologic application including scar repair, non-surgical chin and nose augmentation, facial trauma repair (e.g. orbital tissue bulking) and treatment of HIV lipoatrophy, but, for the avoidance of doubt, excluding non-aesthetic, non-cosmetic and non-dermatologic applications, such as for the treatment of GERD, urinary incontinence, spinal disease/injury, sleep apnea or any other non-cosmetic, non-aesthetic and non-dermatologic use that would require a Regulatory Approval Application in the Territory assuming that such applications are differentiated in terms of brand, formulation, dosing, etc. to the extent that the products relating to such

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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applications are not substituted for or do not cannibalize the cosmetic, aesthetic and dermatologic applications; and

     (b) from and after the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 are at least *** Percent (^***%) of the aggregate amount paid by CHRP under Section 2.03, any products not internally developed (including in-licensed or purchased) by the Company or its Affiliates that are primarily used for or have an FDA-approved indication as a dermal or soft tissue filler with: (i) an FDA-approved claim or data based on clinical trial results published in the IFU or package insert, demonstrating semi-permanence (defined as efficacy equal to or greater than 18 months), or (ii) manufactured with an industry recognized non-resorbable component (e.g. PMMA), or (iii) a resorbable component that is generally recognized by experts in the industry as providing wrinkle correction or dermal or soft tissue filling for at least 18 months, but, for the avoidance of doubt, excluding non-aesthetic, non-cosmetic and non-dermatologic applications as described in clause (a) above.

     “Additional Intellectual Property” shall mean all proprietary information; trade secrets; know-how; confidential information; inventions (whether patentable or unpatentable and whether or not reduced to practice or claimed in a pending patent application) and improvements thereto; Patents; registered or unregistered trademarks, trade names, service marks, including all goodwill associated therewith; registered and unregistered copyrights and all applications thereof; in each case that are owned, controlled by, issued to, licensed to, licensed by or hereafter acquired by or licensed by the Company or its Subsidiaries, but excluding the Intellectual Property.

     “Affiliate” shall mean any Person that controls, is controlled by, or is under common control with another Person. For purposes of this definition, “control” shall mean (i) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (ii) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities.

     “Agreement” shall have the meaning set forth in the first paragraph hereof.

     “Applicable Percentage” shall mean, as of any date of determination, from October 1, 2007 through and until the end of the Term,

     (a) prior to the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 exceed *** Percent (***%) of the aggregate amount paid by CHRP under Section 2.03, the following:

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     (i) with respect to Net Product Sales in the Territory of up to and including *** dollars ($ ^*** ), *** percent (***%); and

     (iii) with respect to Net Product Sales in the Territory in excess of *** dollars ($***), *** percent (***%);

     and

     (b) from and after the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 are at least *** Percent (***%) of the aggregate amount paid by CHRP under Section 2.03, *** percent (***%) of Net Product Sales in the Territory.

     “Assignment of Revenue Interest” shall mean the Assignment of Revenue Interest pursuant to which the Company shall assign, convey and transfer to CHRP all of its rights and interests in and to the Revenue Interest, which Assignment of Revenue Interest shall be substantially in the form of Exhibit A.

     “Audit Costs” shall mean, with respect to any audit of the books and records of the Company and its Subsidiaries with respect to amounts payable or paid under this Agreement, the out-of-pocket cost of such audit payable to third parties, including all fees, costs and expenses incurred in connection therewith.

     “Bankruptcy Event” shall mean the occurrence of any of the following:

          (i) the Company or any Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, relief of debtors or the like, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its respective debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any portion of its assets, or the Company or any Subsidiary shall make a general assignment for the benefit of its respective creditors;

          (ii) there shall be commenced against the Company or any Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which remains undismissed, undischarged or unbonded for a period of ninety (90) Business Days;

          (iii) there shall be commenced against the Company or any Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against (A) all or substantially all of its assets and/or (B) the Included Products or any substantial portion of the Intellectual Property, which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within ninety (90) Business Days from the entry thereof;

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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          (iv) the Company shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above;

          (v) the Company shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its respective debts as they become due; or

          (vi) the Company shall be in a financial condition at any time on or after January 1, 2011 when the Company is not a “going concern,” such that the sum of its debts is greater than the fair market value of its property at such time.

     “Business Day” shall mean any day other than a Saturday, a Sunday, any day which is a legal holiday under the laws of the State of New York, or any day on which banking institutions located in the State of New York are required by law or other governmental action to close.

     “Change of Control” shall mean:

          (i) the acquisition by any Person or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) of beneficial ownership of any capital stock of the Company, if after such acquisition, such Person or group would be the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors;

          (ii) the approval by the Company’s stockholders of a merger or consolidation of the Company, with any other Person, other than a merger or consolidation which would result in the Company’s voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the Company’s voting securities or such surviving entity’s voting securities outstanding immediately after such merger or consolidation;

          (iii) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any of its Subsidiaries of all or substantially all the assets of the Company and its Subsidiaries taken as a whole (including, without limitation, the Included Products) or the sale or disposition (whether by merger or otherwise) of one or more Subsidiaries of the Company if substantially all of the assets of the Company and its Subsidiaries taken as a whole are held by such Subsidiary or Subsidiaries (including, without limitation, the Included Products), except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned Subsidiary of the Company; or

          (iv) the sale, lease, license, transfer or assignment (or any attempt to do any of the foregoing) of all or any material portion of the Intellectual Property or Regulatory Approvals for the Territory other than to a wholly owned Subsidiary of the Company,

provided, however, that a transaction or series of transactions approved by the Company’s board of directors in which the Company issues its equity securities and/or rights to acquire its equity securities to raise funds in support of its operations, shall not be deemed to be a Change of

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Control to the extent all equity securities and/or rights to acquire equity securities issued pursuant to this sentence, when taken in the aggregate, represent less than (i) forty-nine percent (49%) of the Company’s then outstanding securities (determined on a fully-diluted, as if exercised, basis) entitled to vote generally in the election of directors if all investors are financial investors, or (ii) twenty percent (20%) of the Company’s then outstanding securities (determined on a fully-diluted, as if exercised, basis) entitled to vote generally in the election of directors if one or more investors is a non-financial investor.

     “CHRP” shall have the meaning set forth in the first paragraph hereof.

     “CHRP Concentration Account” shall mean a segregated account in the name of CHRP established for the benefit of CHRP and maintained at the Deposit Bank pursuant to the terms of the JPMorgan Deposit Agreement and this Agreement. The CHRP Concentration Account shall be the account into which the funds held in the Joint Concentration Account which are payable to CHRP pursuant to this Agreement are swept by the Deposit Bank in accordance with the terms of this Agreement and the JPMorgan Deposit Agreement.

     “CHRP Indemnified Party” shall have the meaning set forth in Section 8.05.

     “Closing” shall have the meaning set forth in Section 6.01.

     “Closing Date” shall mean the date following the date hereof on which CHRP fulfills its funding obligations pursuant to Section 6.03(d).

     “Collateral” shall mean the property included in the definition of “Collateral” in the Revenue Interest Security Agreement.

     “Collection Accounts” shall mean collectively, that certain lockbox account, that certain credit card account # ^***      and that certain deposit account # ***, each maintained at the Collection Bank pursuant to the Comerica Deposit Agreement and this Agreement. Such lockbox and credit card accounts shall be the accounts into which all payments made in respect of the sales of the Included Products and the Additional Included Products are to be remitted. Such deposit account shall be the account into which all amounts in such lockbox and credit card accounts shall be swept on a daily basis.

     “Collection Bank” shall mean Comerica Bank.

     “Comerica Deposit Agreement” shall mean the Comerica Deposit and Account Control Agreement entered into by the Collection Bank, the Company and CHRP, substantially in the form of Exhibit B(1), pursuant to which, (i) the Collection Accounts will be maintained, (ii) “control”, within the meaning of the UCC, shall be established in favor of CHRP with respect to the Collection Accounts, and (iii) funds will flow from the Collection Accounts to the Joint Concentration Account.

     “Company” shall have the meaning set forth in the first paragraph hereof.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     “Company Concentration Account” shall mean a segregated account in the name of the Company established and maintained at the Collection Bank pursuant to the terms of the Comerica Deposit Agreement and this Agreement. The Company Concentration Account shall be the account into which the funds remaining in the Joint Concentration Account after payment therefrom of the amounts payable to CHRP pursuant to this Agreement are swept in accordance with the terms of this Agreement and the JPMorgan Deposit Agreement.

     “Company Indemnified Party” shall have the meaning set forth in Section 8.05.

     “Confidential Information” shall mean, as it relates to the Company and its Affiliates and the Included Products, the Additional Included Products, the Intellectual Property, the Additional Intellectual Property, confidential business information, financial data and other like information (including ideas, research and development, know-how, formulas, schematics, compositions, technical data, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form), client lists and tangible or intangible proprietary information or material, or such other information that either party identifies to the other as confidential or the nature of which or the circumstances of the disclosure of which would reasonably indicate that such information is confidential. Notwithstanding the foregoing definition, Confidential Information shall not include information that (i) is already in the public domain at the time the information is disclosed, (ii) thereafter becomes lawfully obtainable from other sources, (iii) is disclosed in any document filed with any Governmental Authority or (iv) is disclosed under securities laws, rules and regulations applicable to the Company or CHRP, as the case may be, or pursuant to the rules and regulations of any securities exchange or trading system on which securities of the Company may be listed for trading.

     “Daily Amount” shall have the meaning set forth in Section 2.02(a)(ii).

     “Deposit Bank” shall mean JPMorgan Chase Bank, N.A. or such other bank or financial institution approved by each of CHRP and the Company and a party to any successor agreement to the JPMorgan Deposit Agreement.

     “Dispute” shall have the meaning set forth in Section 3.12(k).

     “Excluded Liabilities” shall have the meaning set forth in Section 2.04.

     “FDA” shall mean the United States Food and Drug Administration or any successor federal agency thereto.

     “FDA Approval” shall mean approval by the FDA of the formulation, manufacture, marketing, sale and distribution of the Included Products in the Territory.

     “Financial Statements” shall mean the audited consolidated balance sheets of the Company and its Subsidiaries at December 31, 2006, 2005 and 2004, and the related audited consolidated statements of operations, stockholders’ equity and cash flows of the Company and its Subsidiaries for the fiscal years ended December 31, 2006, 2005 and 2004, and the unaudited consolidated balance sheet of the Company and its Subsidiaries at September 30, 2007 and the related unaudited consolidated statements of operations, stockholders’ equity and cash flows of

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the Company and its Subsidiaries for the fiscal quarter ended September 30, 2007 and the accompanying footnotes thereto.

     “Fiscal Quarter” shall mean a calendar quarter.

     “Fiscal Year” shall mean a calendar year.

     “GAAP” shall mean generally accepted accounting principles in the United States in effect from time to time.

     “Governmental Authority” shall mean any government, court, regulatory or administrative agency or commission, or other governmental authority, agency or instrumentality, whether foreign, federal, state or local (domestic or foreign), including the Patent Office, the FDA, the United States National Institutes of Health, or any other government authority in any country.

     “Included Products” shall mean, as of any date of determination, from October 1, 2007 through and until the end of the Term,

          (a) prior to the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 exceed    ***    Percent (^***%) of the aggregate amount paid by CHRP under Section 2.03, ArteFill^®, and any improvements to ArteFill^® (including new formulations thereof and combination products thereto), and any internally developed products that are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or dermatologic procedures or any other non-disease-modifying cosmetic, aesthetic or dermatologic application, including scar repair, non-surgical chin and nose augmentation, facial trauma repair (e.g. orbital tissue bulking) and treatment of HIV lipoatrophy, but, for the avoidance of doubt, excluding non-aesthetic, non-cosmetic and non-dermatologic applications, such as for the treatment of GERD, urinary incontinence, spinal disease/injury, sleep apnea or any other non-cosmetic, non-aesthetic and non-dermatologic use that would require a Regulatory Approval Application in the Territory assuming that such applications are differentiated in terms of brand, formulation, dosing, etc. to the extent that the products relating to such applications are not substituted for or do not cannibalize the cosmetic, aesthetic and dermatologic applications; and

          (b) from and after the date that the payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 exceed    ***    Percent (***%) of the aggregate amount paid by CHRP under Section 2.03, ArteFill^®, and any improvements to ArteFill^® (including new formulations thereof and combination products thereto), and any internally developed products that are primarily used for or have an FDA-approved indication as a dermal or soft tissue filler with: (i) an FDA-approved claim or data based on clinical trial results published in the IFU or package insert, demonstrating semi-

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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permanence (defined as efficacy equal to or greater than 18 months), or (ii) manufactured with an industry recognized non-resorbable component (e.g. PMMA), or (iii) a resorbable component that is generally recognized by experts in the industry as providing wrinkle correction or dermal or soft tissue filling for at least 18 months, but, for the avoidance of doubt, excluding non-aesthetic, non-cosmetic and non-dermatologic applications as described in clause (a) above.

     “Included Product Payments” with respect to the Included Products and the Additional Included Products means, for any period of determination, the sum of the following for such period: (i) the amounts actually received by the Company or any of its Affiliates to a Third Party with respect to the sale of Included Products and the Additional Included Products by the Company or any of its Affiliates in the Territory, (ii) the amounts actually received by the Company or any of its Affiliates from a Third Party retained by the Company to distribute or sell the Included Products and/or the Additional Included Products in the Territory (including any amounts actually received by the Company or its Affiliates under License Agreements), and (iii) collections in respect of write-offs or allowances for bad debts in respect of items described in the preceding clauses (i) and (ii). For the avoidance of doubt and without limitation of the foregoing, Included Product Payments shall include (A) all amounts actually received by the Company or any of its Affiliates from a Third Party in connection with any marketing, royalty or manufacturing arrangement with respect to the Included Products or the Additional Included Products in the Territory and (B) all amounts received in respect of any settlements, licenses or cross-licenses of the Intellectual Property. For further avoidance of doubt, Included Product Payments shall not include amounts paid by BioForm Medical Inc. to the Company through the date of this Agreement pursuant to the Settlement and License Agreement, dated October 31, 2005, and the Second License Agreement, dated September 21, 2007.

     “Intellectual Property” shall mean all proprietary information; trade secrets; know-how; confidential information; inventions (whether patentable or unpatentable and whether or not reduced to practice or claimed in a pending patent application) and improvements thereto; Patents; registered or unregistered trademarks, trade names, service marks, including all goodwill associated therewith; registered and unregistered copyrights and all applications thereof; in each case that are owned, controlled by, issued to, licensed to, licensed by or hereafter acquired by or licensed by the Company or its Subsidiaries, in each case relating to, embodied by, covering or involving the Use of the Included Products or the Additional Included Products in the Territory.

     “Investor Rights Agreement” shall mean the Investor Rights Agreement between CHRP and the Company substantially in the form of Exhibit C.

     “Joint Concentration Account” shall mean a segregated account in the name of the Company, subject to a control agreement in favor of CHRP, established for the benefit of the Company and CHRP and maintained at the Deposit Bank pursuant to the terms of the JPMorgan Deposit Agreement and this Agreement. The Joint Concentration Account shall be the account into which Collection Bank sweeps the funds held in the deposit account described in the definition of “Collection Accounts”.

     “JPMorgan Deposit Agreement” shall mean the Deposit and Account Control Agreement entered into by a Deposit Bank, the Company and CHRP, substantially in the form of Exhibit B(2), pursuant to which, (i) the Joint Concentration Account and the CHRP Concentration Account shall be established, (ii) “control”, within the meaning of the UCC, shall be established

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in favor of CHRP with respect to the Joint Concentration Account, and (iii) funds will flow from the Collection Accounts into the Joint Concentration Account and from the Joint Concentration Account into the CHRP Concentration Account and the Company Concentration Account.

     “Knowledge” shall mean the actual knowledge of an officer of the Company relating to a particular matter. Notwithstanding the foregoing, an officer of the Company or any Affiliate thereof charged with responsibility for the aspect of the business relevant or related to the matter at issue shall be deemed to have knowledge of a particular matter if, in the prudent exercise of his or her duties and responsibilities in the ordinary course of business, such officer should have known of such matter.

     “License Agreement” shall mean any existing or future license, development, commercialization, co-promotion, collaboration, distribution, manufacturing, marketing or partnering agreement entered into by the Company or any of its Affiliates relating to the Included Product in the Territory and/or under the Intellectual Property.

     “Licensees” shall mean, collectively, the licensees, sublicensees or distributors under the License Agreements; each a “Licensee”.

     “Liens” shall mean any lien, hypothecation, charge, instrument, license, preference, priority, security agreement, security interest, interest, mortgage, option, privilege, pledge, liability, covenant, order, tax, right of recovery, trust or deemed trust (whether contractual, statutory or otherwise arising) or any encumbrance, right or claim of any other person of any kind whatsoever whether choate or inchoate, filed or unfiled, noticed or unnoticed, recorded or unrecorded, contingent or non-contingent, material or non-material, known or unknown.

     “Losses” shall mean collectively, any and all claims, damages, losses, judgments, liabilities, costs and expenses (including reasonable expenses of investigation and reasonable attorneys’ fees and expenses in connection with any action, suit or proceeding).

     “Material Adverse Change” shall mean, with respect to the Company, a material adverse change in the business, operations, assets, or financial condition of the Company and its Subsidiaries taken as a whole.

     “Material Adverse Effect” shall mean (i) the effect of a Material Adverse Change, (ii) a material adverse effect on the validity or enforceability of any of the Transaction Documents, (iii) a material adverse effect on the right of the Company to perform any of its obligations under any of the Transaction Documents, (iv) a material adverse effect on the rights or remedies of CHRP under any of the Transaction Documents, (v) a material adverse effect on the right of CHRP to receive the Revenue Interest, the First Warrant, the Second Warrant or any payment due to CHRP arising under any Transaction Document, (vi) a material adverse effect on the ability of the Company to Use the Included Product in the Territory, or (vii) a right to terminate or receive damages inuring to the benefit of a Third Party arising with respect to any Material Contract; provided, however, that “Material Adverse Effect” shall exclude any effect resulting from (a) changes to general economic conditions or any condition affecting the cosmetic and plastic surgery markets generally, (b) war, hostilities, military actions or acts of terrorism, (c) any decision by the FDA on the Company’s application to change the label for ArteFill^® related to the five-year efficacy labeling or to the removal of the skin testing requirement, (d) the announcement of this Agreement or the pendency or consummation of the transactions

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contemplated by the Transaction Documents, (e) any action taken by the Company or its Subsidiaries that is required by the Transaction Documents, or the failure by the Company or its Subsidiaries to take any action that is prohibited by the Transaction Documents, or (f) changes in the price of (or trading volume in) the Company’s stock, in and of itself (it being understood that the underlying cause of, and the facts, circumstances and/or occurrences giving rise to or contributing to any changes in the price of (or trading volume in) the Company’s stock shall, to the same extent as if this definition of Material Adverse Effect were written without this clause (f), constitute a Material Adverse Effect and/or be taken into account in determining whether there has been, is or would be a Material Adverse Effect).

     “Material Contract” shall mean the contracts, agreements or other arrangements listed on Schedule 3.14 hereto to which either the Company or any of its Subsidiaries is a party or any of the Company’s or its Subsidiaries’ respective assets or properties are bound or committed (other than the Transaction Documents) related to the Use of any Included Product or the Intellectual Property (including each License Agreement).

     “Net Product Sales” with respect to the Included Products and the Additional Included Products shall mean, for any period of determination, the net product sales in the Territory for such period of determination as prepared by the Company in accordance with GAAP and as reported in the Company’s financial statements contained in the Company’s quarterly or annual reports for such period of determination. In calculating Net Product Sales, any transfer from the Company to an Affiliate shall be disregarded and the calculation shall instead be based on the first transfer to a Third Party.

     “Note and Warrant Purchase Agreement” shall mean the Note and Warrant Purchase Agreement between CHRP and the Company substantially in the form of Exhibit D.

     “Note Security Agreement” shall mean the Note Security Agreement by and between the Company and CHRP executed pursuant to the Note and Warrant Purchase Agreement.

     “Obligations” shall mean any and all obligations of the Company and its Subsidiaries under the Transaction Documents.

     “Patent Office” shall mean the respective patent office, including the United States Patent and Trademark Office and any comparable foreign patent office, for any Patents.

     “Patents” shall mean all patents, patent rights, patent applications, patent disclosures and invention disclosures issued or filed, together with all reissues, divisions, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof relating to the Included Products or the Additional Included Products, their respective composition of matter, formulation, or methods of manufacture or use thereof that are issued or filed as of the date hereof as identified in Schedule 3.12(a)(i) and Schedule 3.12(a)(ii) or filed during the Term, which are owned, controlled by, issued to, licensed to or licensed by the Company or any of its Affiliates.

     “Permitted Liens” shall have the meaning provided therefor in the Note and Warrant Purchase Agreement.

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     “Person” shall mean an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, but not including a government or political subdivision or any agency or instrumentality of such government or political subdivision.

     “Put Option” shall have the meaning set forth in Section 5.07(a).

     “Put Option Closing Date” shall have the meaning set forth in Section 5.07(a).

     “Put Option Event” shall mean any one of the following events:

          (i) any Change of Control;

          (ii) any Bankruptcy Event; or

          (iii) any breach of any representation, warranty or certification made by the Company or its Subsidiaries in any of the Transaction Documents or certificates given by the Company in writing pursuant hereto or thereto which breach results in a Material Adverse Effect and which breach is not cured by the Company within ten (10) days after the Company receives notice thereof or any officer of the Company becomes aware thereof; provided, however, that if the breach cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by the Company be cured within such ten (10) day period, and such breach is likely to be cured within a reasonable time, then the Company shall have an additional reasonable period (which shall not in any case exceed ten (10) days) to attempt to cure such breach; or

          (iv) any breach of or default under any material covenant or agreement by the Company under any Transaction Document which breach or default results in a Material Adverse Effect and which breach or default is not cured by the Company within ten (10) days after the Company receives notice thereof or any officer of the Company becomes aware thereof; provided, however, that if the breach or default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by the Company be cured within such ten (10) day period, and such breach or default is likely to be cured within a reasonable time, then the Company shall have an additional reasonable period (which shall not in any case exceed ten (10) days) to attempt to cure such breach or default; provided, however, that the Company shall not be entitled to a cure period under this clause (iv) if the breach or default giving rise to the Put Option Event is the Company’s breach or default of its obligations under Sections 2.02, 5.07(c) or 5.08.

     “Put Price” shall mean an amount that is the greater of:

     (a) an amount that would generate an internal rate of return (utilizing the same methodology utilized by the IRR function in Microsoft Excel) to CHRP of *** percent (^***%) on all payments made by CHRP pursuant to Section 2.03 as of the date of exercise of the Put Option, taking into account the amount and timing of all payments made by the Company to and received and retained by

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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CHRP pursuant to Sections 2.02 and 5.08, prior to and as of the date of payment of the Put Price, and

     (b) an amount equal to     ***     percent (***%) of all payments made by CHRP pursuant to Section 2.03 as of such date, less an amount equal to the aggregate of all payments made by the Company and received and retained by CHRP (i.e. not refunded by CHRP) pursuant to Sections 2.02 and 5.08, prior to and as of the date of payment of the Put Price; provided, however that if the Put Option Event precipitating the exercise of the Put Option results, in whole or part, from the Company’s breach of its obligations arising under Section 5.08, the JPMorgan Deposit Agreement or the Comerica Deposit Agreement, then the Put Option Price shall be calculated on the basis that the percentages in these clause (a) and (b) shall have equaled     ***     Percent (***%) and     ***     Percent (***%), respectively.

     “Quarterly Report” shall mean, with respect to the relevant Fiscal Quarter of the Company, (i) a report showing all payments made by the Company to CHRP under this Agreement during such quarter and showing in detail the basis for the calculation of such payments, (ii) a reconciliation of such report referred to in clause (i) above to all information and data deliverable to the Company, CHRP or their Affiliates by the parties to any License Agreement, together with relevant supporting documentation and (iii) such additional information as CHRP may reasonably request.

     “Regulatory Agency” shall mean a Governmental Authority with responsibility for the approval of the marketing and sale of pharmaceuticals in the United States or other regulation of pharmaceuticals.

     “Regulatory Approval Application” shall mean an application for Regulatory Approval required before commercial sale or use of any Included Product as a drug or device in a regulatory jurisdiction, including with respect to an NDA, PMA, supplemental NDA, 510(k), BLA, or any prior approval supplement or amendment thereto submitted to the FDA.

     “Regulatory Approval” shall mean all approvals (including, without limitation, where applicable, pricing and reimbursement approval and schedule classifications), product and/or establishment licenses, registrations or authorizations of any Governmental Authority of a Regulatory Approval Application necessary for the manufacture, use, storage, import, export, transport, offer for sale, or sales of the Included Products in a regulatory jurisdiction.

     “Revenue Interest” shall mean CHRP’s right to receive amounts equal to the Applicable Percentage of the Net Product Sales pursuant to the terms and conditions of this Agreement.

     “Revenue Interest Security Agreement” shall mean the Revenue Interest Security Agreement by and between the Company and CHRP providing for, among other things, the grant by the Company in favor of CHRP of a valid continuing, perfected lien on and security interest in the Revenue Interest and the other Collateral described therein, which Security Agreement shall be substantially in the form of Exhibit E.

     “Revenue Rights” shall mean (A) with respect to any License Agreement, all of the Company’s and its Subsidiaries’ rights under such License Agreement, including, without

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limitation, rights to receive payments in respect of sales of the Included Products in the Territory and (B) otherwise, all of the Company’s and its Subsidiaries’ rights, however derived, to receive payments in respect of sales of the Included Products in the Territory.

     “Second Warrant” shall mean the Common Stock Purchase Warrant substantially in the form of Exhibit F.

     “Step-Down Option” shall have the meaning set forth in Section 5.07(c).

     “Step-Down Option Closing Date” shall have the meaning set forth in Section 5.07(c).

     “Step-Down Price” shall mean an amount equal to *** Percent (^***%) of all payments made by CHRP pursuant to Section 2.03 as of such date, less an amount equal to the aggregate of all payments made by the Company and received and retained by CHRP (i.e. not refunded by CHRP) pursuant to Sections 2.02 and 5.08, prior to and as of Step-Down Option Closing Date.

     “Subsidiary” or “Subsidiaries” shall mean with respect to any Person (i) any corporation of which the outstanding capital stock having at least a majority of votes entitled to be cast in the election of directors under ordinary circumstances shall at the time owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person.

     “Subsidiary Note Security Agreement” shall mean the Subsidiary Note Security Agreement by and between the Company’s domestic Subsidiary and CHRP executed pursuant to the Note and Warrant Purchase Agreement.

     “Term” shall mean the period from and including the date hereof through and including December 31, 2017, unless earlier terminated upon CHRP’s exercise of its Put Option pursuant to Section 5.07 or otherwise in accordance with the terms of this Agreement.

     “Territory” shall mean the United States.

     “Third Party” shall mean any Person other than the Company or CHRP or their respective Affiliates.

     “Transaction Document” shall mean each of this Agreement, the Assignment of Revenue Interest, the Comerica Deposit Agreement, the JPMorgan Deposit Agreement, the Investor Rights Agreement, the Note and Warrant Purchase Agreement, the Revenue Interest Security Agreement, the Second Warrant (together with all schedules, exhibits, amendments and other documents entered into in connection hereto and thereto).

     “Transfer” or “Transferred” shall mean any sale, conveyance, assignment, disposition, pledge, hypothecation or transfer.

     “True-Up Statement” shall have the meaning set forth in Section 5.08(e)(i).

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     “UCC” shall mean the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.

     “United States” shall mean the United States of America.

     “Use” shall include the use, manufacture, marketing, sale, offer for sale, importation, distribution or commercialization.

     “Year-to-Date Net Product Sales” shall have the meaning set forth in Section 5.08(e)(i).

ARTICLE II

ASSIGNMENT OF REVENUE INTEREST AND WARRANT

     Section 2.01 Assignment.

     Upon the terms and subject to the conditions set forth in this Agreement, the Company agrees to assign, transfer and convey to CHRP, and CHRP agrees to accept the assignment, transfer and conveyance from the Company, free and clear of all Liens (except Permitted Liens and the security interests created in favor of CHRP pursuant to the Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and any other Transaction Document) and subject to the conditions set forth in Article VI, all of the Company’s rights and interests in and to the Revenue Interest and the Second Warrant on the Closing Date. CHRP’s ownership interest in the Revenue Interest and the Second Warrant so assigned shall vest immediately upon the Company’s receipt of the advance of payment for such Revenue Interest and Second Warrant pursuant to Section 2.03(a)(i).

     Section 2.02 Payments by the Company.

     (a) Payments in Respect of the Revenue Interest and the Second Warrant.

          (i) CHRP shall be entitled to receive the Applicable Percentage in respect of Net Product Sales generated from October 1, 2007 through and until the end of the Term. In accordance with the terms of Section 5.08, (A) commencing on the date hereof, the Applicable Percentage in respect of Included Product Payments shall be swept from the Joint Concentration Account into the CHRP Concentration Account on a daily basis (the “Daily Amount”) and (B) at the end of each Fiscal Quarter, the parties shall true-up the Company’s payments in respect of such Fiscal Quarter as provided in Section 5.08(e).

          (ii) In addition to the payments of the Applicable Percentage, the Company shall be obligated in all cases to pay CHRP, and CHRP shall be entitled to receive the following additional payments:

               (A) an amount equal to Seven Million Five Hundred Thousand Dollars ($7,500,000), payable no later than January 31, 2012, plus

               (B) an amount equal to Seven Million Five Hundred Thousand Dollars ($7,500,000), payable no later than January 31, 2013.

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     (b) Payment Procedure. Other than payments made pursuant to the Comerica Deposit Agreement and the JPMorgan Deposit Agreement, any payments to be made by the Company to CHRP hereunder or under any other Transaction Document shall be made by wire transfer of immediately available funds.

     Section 2.03 Assignment Advance.

     (a) Consideration. In full consideration for the assignment by the Company of the Revenue Interest and the Second Warrant, and subject to the terms and conditions set forth herein, CHRP shall advance to the Company:

          (i) fifteen million dollars ($15,000,000) at the time of Closing, and

          (ii) an additional one million dollars ($1,000,000) if the Company achieves Net Product Sales of at least          ***          dollars ($^***) in Fiscal Year 2008, which payment shall be made within sixty (60) days of the date the Company files its Form 10-K with respect to Fiscal Year 2008 with the Securities and Exchange Commission.

For clarity, the Company shall not be entitled to any payment, and CHRP shall have no obligations under this Section 2.03(a)(ii) if the Company does not achieve Net Product Sales of at least          ***     ($***) in Fiscal Year 2008.

     (b) Payment Procedure. The payments to be made by CHRP under this Section 2.03 shall be paid by wire transfer of immediately available funds to the account(s) designated by the Company.

     Section 2.04 No Assumed Obligations.

     Notwithstanding any provision in this Agreement or any other writing to the contrary, CHRP is accepting the assignment of only the Revenue Interest and the Second Warrant, and is not assuming any liability or obligation of the Company or any of its Affiliates of whatever nature, whether presently in existence or arising or asserted hereafter, whether under any Transaction Document or otherwise. All such liabilities and obligations shall be retained by and remain obligations and liabilities of the Company or its Affiliates (the “Excluded Liabilities”).

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     Each representation and warranty set forth below is qualified by the exceptions or disclosures set forth in the disclosure schedule attached hereto (with specific reference to the section of this Agreement to which the information stated in such disclosure relates) (the “Disclosure Schedule”); provided, however, if any section of the Disclosure Schedule discloses information with sufficient detail and in a way as to make its relevance to the disclosure required on another section of the Disclosure Schedule readily apparent on its face, then the applicable

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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information will be deemed to have been disclosed in that other section of the Disclosure Schedule, notwithstanding the omission of a cross-reference in or to that other section. As of the Closing (except to the extent that any such representation or warranty is made as of a specific date, in which case such representation or warranty shall apply only as of such specified date), and subject to the Disclosure Schedule, the Company represents and warrants to CHRP as follows:

     Section 3.01 Organization.

     Each of the Company and it Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its state of organization, and has all corporate powers and all licenses, authorizations, consents and approvals required to carry on its business as now conducted and as proposed to be conducted in connection with the transactions contemplated by the Transaction Documents. Except as set forth on Schedule 3.01, each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which the failure to do so would have a Material Adverse Effect.

     Section 3.02 Corporate Authorization.

     Each of the Company and its Subsidiaries has all necessary power and authority to enter into, execute and deliver the Transaction Documents and to perform all of the obligations to be performed by it hereunder and thereunder and to consummate the transactions contemplated hereunder and thereunder. The Transaction Documents have been duly authorized, executed and delivered by each of the Company and its Subsidiaries, as applicable, and each Transaction Document constitutes the valid and binding obligation of such the Company and its Subsidiaries, as applicable, enforceable against it in accordance with their respective terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or general equitable principles.

     Section 3.03 Governmental Authorization.

     The execution and delivery by the Company and its Subsidiaries of the Transaction Documents, and the performance by them of their obligations hereunder and thereunder, does not require any notice to, action or consent by, or in respect of, or filing with, any Governmental Authority, except for the filing of financing statements under the UCC, any required filings under federal and state securities laws and any required filings with FINRA and the Nasdaq Stock Market.

     Section 3.04 Ownership.

     (a) Except as set forth on Schedule 3.04(a), the Company owns, or holds a valid license under, all of the Intellectual Property and the Regulatory Approvals with respect to the Use of the Included Products in the Territory free and clear of all Liens, except for the Permitted Liens, and no license or covenant not to sue under any Intellectual Property or Regulatory Approvals has been granted to any Third Party.

     (b) Except as set forth on Schedule 3.04(b), the Company owns, or holds a valid license under, all of the Additional Intellectual Property free and clear of all Liens, except for the

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Permitted Liens, and no license or covenant not to sue under any Additional Intellectual Property has been granted to any Third Party.

     (c) Except as set forth on Schedule 3.04(a), the Company, immediately prior to the assignment of the Revenue Interest, owns, and is the sole holder of, all the Revenue Rights; and the Company owns, and is the sole holder of, and/or has and holds a valid, enforceable and subsisting license to, all of those other assets that are required to produce or receive any payments from any Licensee or payor under and pursuant to, and subject to the terms of any License Agreement, in each case free and clear of any and all Liens, except for the Permitted Liens and those Liens created in favor of CHRP pursuant to Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and any other Transaction Document. The Company has not Transferred or agreed to Transfer any portion of the Revenue Rights other than as contemplated by this Agreement. Except as set forth on Schedule 3.04(a), the Company has the full right to transfer, convey and assign to CHRP all of its rights and interests in and to the Revenue Interest pursuant to this Agreement without any requirement to obtain the consent of any Person. By the delivery to CHRP of the executed Assignment of Revenue Interest, the Company shall transfer, convey and assign to CHRP all of its rights and interests in and to the Revenue Interest, free and clear of any Liens, except for the Permitted Liens and those Liens created in favor of CHRP pursuant to the Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and any other Transaction Document. At the Closing, and upon the delivery of the Assignment of Revenue Interest to CHRP by the Company, CHRP shall have acquired good and valid rights and interests of the Company in and to the Revenue Interest, free and clear of any and all Liens, except for the Permitted Liens and those Liens created in favor of CHRP pursuant to the Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and any other Transaction Document.

     Section 3.05 Subsidiaries and Capitalization.

     (a) Except as set forth on Schedule 3.05(a), the Company has no Subsidiaries and owns no equity interests or debt interests of any other Person.

     (b) Except as set forth on Schedule 3.05(b), there are no options, warrants, convertible instruments or other rights held by any Person to acquire any equity interest (or interest convertible or exchangeable for any equity interest) in the Company. The authorized capital stock of the Company consists of (i) 200,000,000 shares of Common Stock, par value $0.001 per share, of which 16,514,163 shares are issued and outstanding as of the date hereof, and of which an additional 5,562,219 shares have been reserved for issuance upon exercise or conversion of outstanding securities; and (ii) 10,000,000 shares of undesignated preferred stock, none of which are issued and outstanding or reserved for issuance upon exercise or conversion of securities.

     (c) The shares of Common Stock issuable upon exercise of the Second Warrant will, when issued, in accordance with the exercise provisions of the Second Warrant, be duly and validly issued, fully paid, non assessable and free and clear of all Liens, except any Liens created by or through you.

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     Section 3.06 Financial Statements.

     The Financial Statements are complete and accurate in all material respects, were prepared in conformity with GAAP and present fairly in all material respects the financial position and the financial results of the Company and its Subsidiaries as of the dates and for the periods covered thereby.

     Section 3.07 No Undisclosed Liabilities.

     Except for those liabilities (i) specifically identified on the face of the Financial Statements, (ii) incurred by the Company and its Subsidiaries in the ordinary course of business since September 30, 2007, (iii) in connection with the Obligations under the Transaction Documents, (iv) disclosed in this Agreement (including those disclosed in Schedule 3.07), and (v) liabilities under the agreements listed as Exhibits in the Company’s filings on Form 10-K (for the 12 month period ended December 31, 2006), Form 10-Q (for the quarterly period ended March 31, 2007), Form 10-Q (for the quarterly period ended June 30, 2007), Form 10-Q (for the quarterly period ended September 30, 2007), Form 8-K (filed on April 27, 2007) and Form 8-K (filed on September 21, 2007) filed with the SEC, there are no material liabilities of the Company and its Subsidiaries taken as a whole or individually, of any kind whatsoever, whether accrued, contingent, absolute, determined or determinable.

     Section 3.08 Litigation.

     Except as set forth on Schedule 3.08, there is no (i) action, suit, arbitration proceeding, claim, investigation or other proceeding pending or, to the Knowledge of the Company, threatened against the Company or its Subsidiaries, or their licensees or sublicensees or (ii) any governmental inquiry pending or, to the Knowledge of the Company, threatened against the Company or its Subsidiaries, or their licensees or sublicensees, in each case with respect to clauses (i) and (ii) above, which, if adversely determined, would question the validity of, or could adversely affect the transactions contemplated by any of the Transaction Documents or could reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 3.08, there is no action, suit, claim, proceeding or investigation pending or, to the Knowledge of the Company, threatened against the Company, its Subsidiaries, or their licensees or sublicensees, or any other Person relating to the Included Products, the Intellectual Property, the Additional Intellectual Property, the Regulatory Approvals, the Revenue Rights or the Revenue Interest.

     Section 3.09 Compliance with Laws.

     Except as set forth on Schedule 3.09, none of the Company and its Subsidiaries (i) is in violation of, has not violated, or to the Knowledge of the Company, is not under investigation with respect to, and (ii) has not been threatened to be charged with or been given notice of any violation of any law, rule, ordinance or regulation of, or any judgment, order, writ, decree, permit or license entered by any Governmental Authority applicable to the Company, the Revenue Interest or the Revenue Rights which could reasonably be expected to have a Material Adverse Effect.

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     Section 3.10 Conflicts.

     (a) Except as set forth in Schedule 3.10, neither the execution and delivery of any of the Transaction Documents nor the performance or consummation of the transactions contemplated hereby and thereby will: (i) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any material respects any provisions of: (A) any law, rule, ordinance or regulation of any Governmental Authority, or any judgment, order, writ, decree, permit or license of any Governmental Authority, to which the Company or any of its Subsidiaries or any of their respective assets or properties may be subject or bound; or (B) any contract, agreement, commitment or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound or committed; (ii) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, any provisions of the certificate of incorporation or by-laws (or other organizational or constitutional documents) of the Company or any of its Subsidiaries; (iii) except for the filing of the UCC-1 financing statements required hereunder, filings with federal and state authorities regarding the issuance of the Note and the Second Warrant and filings with the United States Patent and Trademark Office, require any notification to, filing with, or consent of, any Person or Governmental Authority; (iv) give rise to any right of termination, cancellation or acceleration of any material right or obligation of the Company or any of its Subsidiaries or any other Person or to a loss of any material benefit relating to the Revenue Rights or the Revenue Interest; or (v) result in the creation or imposition of any Lien on (A) the assets or properties of the Company or any of its Subsidiaries or (B) the Revenue Interest, the Revenue Rights, or any other Collateral, other than, with respect to clause (v) above, pursuant to the Revenue Interest Security Agreement, the Note Security Agreement and the Subsidiary Note Security Agreement.

     (b) None of the Company and its Subsidiaries has granted, nor does there exist, any Lien (other than Permitted Liens) on the Revenue Rights, the Revenue Interest or any other Collateral other than pursuant to Revenue Interest Security Agreement, the Note Security Agreement and the Subsidiary Note Security Agreement.

     Section 3.11 Subordination.

     The claims and rights of CHRP created by any Transaction Document in and to the Revenue Interest, the Revenue Rights and any other Collateral are not and shall not be subordinated to any creditor of the Company or its Subsidiaries or any other Person.

     Section 3.12 Intellectual Property.

     (a) Schedule 3.12(a)(i) sets forth an accurate, true and complete list (by category and family) of all (1) Patents and utility models, (2) trade names, common law trademarks, common law service marks, registered trademarks, registered service marks, and applications for trademark registration or service mark registration, (3) registered and unregistered copyrights and (4) domain name registrations and websites, in each case with respect to clauses (1), (2), (3) and (4) above in this subsection (a) that are necessary or used to make, have made, use, sell, have sold, offer for sale, import, develop, promote, market, distribute, manufacture, commercialize or otherwise exploit the Included Products in the Territory by the Company, its Affiliates, manufacturers, distributors or Licensees, as applicable. Schedule 3.12(a)(ii) sets forth an

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accurate, true and complete list (by category and family) of all of the Company’s Additional Intellectual Property. For each item of Intellectual Property and Additional Intellectual Property listed on either Schedule 3.12(a)(i) or Schedule 3.12(a)(ii), the Company has identified (i) the owner, (ii) the countries in which such listed item is patented or registered or in which an application for Patent or registration is pending, (iii) the application number, (iv) the Patent or registration number, (v) the expiration date, as applicable, including any applicable term extensions or supplemental protection certificates, if applicable, (vi) the earliest relied upon priority filing date used to calculate the expiration date, and (vii) the due date(s) for any applicable maintenance, annuity or renewal fee. Except as disclosed therein, each item of Intellectual Property (other than the Patent applications) listed on Schedule 3.12(a)(i) is valid, enforceable and subsisting and no listed Intellectual Property has lapsed, expired, been cancelled or become abandoned. The Patent applications listed in Schedule 3.12(a)(i) have been and continue to be prosecuted by competent Patent counsel in a diligent manner. Each of the Patents and Patent applications listed in Schedule 3.12(a)(i) correctly identifies each and every inventor of the claims thereof as determined in accordance with the laws of the jurisdiction in which such Patent is issued or such Patent application is pending. Except as set forth in Schedules 3.04(a) and 3.04(b), each Person who has or has had any rights in or to the Intellectual Property listed on Schedule 3.12(a)(i) that are owned by, or licensed to, the Company or one of its Subsidiaries, including, each inventor named on the Patents and Patent applications listed in Schedule 3.12(a)(i), has executed an agreement assigning his, her or its entire right, title and interest in and to such Intellectual Property, and the inventions embodied, described and/or claimed therein, to the purported owner and no such Person has any contractual or other obligation that would preclude or conflict with any such assignment or otherwise conflict with the obligations of such Person to the applicable owner of each listed Intellectual Property.

     (b) Schedule 3.12(b) sets forth an accurate, true and complete list of all agreements, whether oral or written, express or implied, including, without limitation, assignments, licenses, options, franchise, distribution, marketing and manufacturing agreements, sponsorships, project agreements, collaboration agreements, joint development agreements, agreements not to enforce, consents, settlements, assignments, Liens or mortgages, and any amendments(s) renewal(s), novation(s) and termination(s) pertaining thereto, in each case pursuant to which the Company has the legal right to exploit Intellectual Property that is not currently owned by the Company. There are no unpaid fees or royalties under any agreement listed on Schedule 3.12(b) that have become due, or are expected to become overdue, as of the Closing Date.

     (c) Each agreement listed in Schedule 3.12(b) is legal, valid, binding, enforceable, and in full force and effect. None of the Company or its Subsidiaries is in breach of such listed agreements and, no circumstances or grounds exist that would give rise to a claim of breach or right of rescission, termination, revision, or amendment of any of the agreements specified in Schedule 3.12(b), including, without limitation, the execution, delivery and performance of this Agreement and the other Transaction Documents.

     (d) Except for Intellectual Property licensed to the Company or one of its Subsidiaries pursuant to any agreement listed on Schedule 3.12(b) and Intellectual Property owned by the Company or its Subsidiaries, no other Intellectual Property is necessary or desirable to make, have made, offer to sell, sell, have sold, use, import, make public, reproduce, transmit, extract, distribute, commercialize or market the Included Products in the Territory. The Company and its Subsidiaries has the full, legal right to make, have made, use, sell, have sold, offer for sale, import, develop, distribute, manufacture, commercialize, market or otherwise exploit the

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Included Products in the Territory, without infringing any intellectual property right that is owned by another Person or a Third Party.

     (e) Except as set forth on Schedule 3.12(e), the Company and its Subsidiaries possess sole, exclusive, valid, marketable and unencumbered title to the Intellectual Property for which one of them is listed as the owner on Schedule 3.12(a)(i), and is or these predecessors are a party to the agreements listed on Schedule 3.12(b); all assignments from each inventor, as the case may be, to the Company or one of its Subsidiaries or to a predecessor in interest of the Company, have been executed and recorded for each of the Patents listed on Schedule 3.12(a)(i); there are no Liens (other than Permitted Liens) on or to any Intellectual Property listed on Schedule 3.12(a)(i) that it owns or agreements listed on Schedule 3.12(b).

     (f) The Company or one of its Subsidiaries has the full right, power and authority to grant all of the rights and interests granted to CHRP in this Agreement and to its Licensees under any existing License Agreement.

     (g) There are no unpaid maintenance, annuity or renewal fees currently overdue for any of the Intellectual Property listed on Schedule 3.12(a)(i), nor have any applications or registrations therefor lapsed or become abandoned, been cancelled or expired.

     (h) Each owner and inventor of each Patent and the Company or one of its Subsidiaries (to the extent that the Company or one of its Subsidiaries is an applicant or is otherwise involved in the Patent prosecution of any Patent) have complied in all material respects with all applicable duties of candor and good faith in dealing with any Patent Office, including the duty to disclose to any applicable Patent Office all information known to be material to patentability.

     (i) No payments by the Company or any of its Subsidiaries are, or at any time in the future expected to, become due to any other Person in respect of the Use of the Included Products in the Territory or the Intellectual Property.

     (j) Except as set forth on Schedule 3.12(j), none of the Company, its Subsidiaries or any other Person has undertaken or omitted to undertake any acts, and no circumstance or grounds exist, that would invalidate, reduce or eliminate, in whole or in part, the enforceability or scope of (i) any Intellectual Property or, in the case of Intellectual Property owned or licensed by the Company or its Subsidiaries, the Company’s or its Subsidiaries’ entitlement to exclusively exploit such Intellectual Property, or (ii) the Company’s or its Subsidiaries’ right to enjoy payments made in respect of sales of the Included Products in the Territory or other revenues from any Intellectual Property.

     (k) Except as set forth on Schedule 3.12(k), there is, and has been, no pending, decided or settled opposition, interference proceeding, reexamination proceeding, cancellation proceeding, injunction, claim, lawsuit, proceeding, hearing, investigation, complaint, arbitration, mediation, demand, International Trade Commission investigation, decree, or any other dispute, disagreement, or claim (individually referred to hereinafter as a “Dispute”), nor has any such Dispute been threatened challenging the legality, validity, enforceability or ownership of any Intellectual Property or which would give rise to a credit against the revenues or royalties due to the Company or one of its Subsidiaries for the manufacture, sale offer for sale, use, importation or exportation of the Included Products in the Territory or the exploitation of the licensed

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Intellectual Property in the Territory and no circumstances or grounds exist that would give rise to such a Dispute. Except as set forth on Schedule 3.12(k), there are no Disputes by any Person or Third Party against the Company or its Subsidiaries, their Licensees or their licensors, and neither the Company nor any of its Subsidiaries has received any written notice or claim of any such Dispute, and, there exists no circumstances or grounds upon which any such claim could be asserted, as pertaining to the Use of the Included Products in the Territory. Except as set forth on Schedule 3.12(k), none of the Company, its Subsidiaries or their licensors has sent any notice of any such Dispute to a Third Party, and there exists no circumstance or grounds upon which the Company, its Subsidiaries or their licensors could assert any such claim, as pertaining to the Use of the Included Products in the Territory. Except as set forth on Schedule 3.12(k), no Intellectual Property or Included Product is subject to any outstanding injunction, judgment, order, decree, ruling charge, settlement or other disposition of Dispute, and the Company and its Subsidiaries have fully complied with, paid and otherwise satisfied all such obligations.

     (l) There is no pending or threatened action, suit, or proceeding, or any investigation or claim by any Governmental Authority in the Territory to which the Company or its Subsidiaries are a party (1) that would be the subject of a claim for indemnification by any Person or Third Party under any agreement, or (2) that the marketing, sale or distribution of the Included Products in the Territory by the Company, its Subsidiaries or their Licensees pursuant to the related License Agreement, as applicable, does or will infringe on any patent or other intellectual property rights of any other Person, and there is no basis for any such action, suit, proceeding, investigation or claim of the type described in clause (1) or (2) above. To the Company’s Knowledge, there are no pending published or unpublished United States, international or foreign patent applications owned by any other Person, which, if issued, would limit or prohibit, in any material respect, the use of the Included Products in the Territory or the licensed Intellectual Property relating to the Included Products in the Territory.

     (m) Except as set forth on Schedule 3.12(m), the Company and its Subsidiaries have taken, and will continue to take, all commercially reasonable measures and precautions necessary to protect and maintain (1) the confidentiality of all Intellectual Property (except such Intellectual Property whose value would be unimpaired by public disclosure) that it owns and (2) the value of all Intellectual Property and assets related to the Use of the Included Products in the Territory.

     (n) No material trade secret of the Company and its Subsidiaries has been published or disclosed to any Person except pursuant to a written agreement requiring such Person to keep such trade secret confidential.

     (o) To the Company’s Knowledge, there are no pending United States or foreign patent applications which, if granted, would limit or prohibit the ability of the Company or its Subsidiaries to make, have made, use, sell, offer for sale or import the Included Products in the Territory for the purposes currently contemplated by the Company and its Subsidiaries under this Agreement.

     (p) The Company and its Subsidiaries have previously provided to CHRP, pursuant to a Joint Defense/Common Interest Agreement, copies of all written opinions of counsel with respect to any Third Party intellectual property rights relating to the Included Products, including all freedom-to-operate, product clearance or right-to-use opinions and assessments to the extent in the possession of, or otherwise obtained by, the Company and its Subsidiaries.

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     Section 3.13 Regulatory Approval.

     (a) The Company and its Subsidiaries have made available to CHRP all of the following documents that the Company and its Subsidiaries have received in any form from any contract party to any License Agreement:

          (i) all regulatory correspondence, written notes in respect of telephone communications, electronic communications, copies of all submissions to any active regulatory files regarding preclinical, clinical, manufacturing, adverse events, any notices and forms received by a contract party from appropriate Regulatory Agencies relating to compliance, developmental (including safety, efficacy and potency), marketing, promotion or manufacturing activities concerning the Intellectual Property or the Use of the Included Products in the Territory;

          (ii) correspondence or reports from both internal corporate employees and non-governmental consultants relating to any of the regulatory and/or product liability exposures, marketing and reimbursement strategies, manufacturing (i.e., annual audit reports), preclinical and clinical data issues concerning the Included Products in the Territory; and

          (iii) any information or communication that would indicate that any Regulatory Agency (A) is not likely to approve any application with respect to the Included Products, (B) is likely to revise or revoke any current approval granted by any Regulatory Agency with respect to the Included Products, or (C) is likely to pursue compliance actions against the Company, its Subsidiaries or any contract party relating to a License Agreement.

     (b) Except as set forth on Schedule 3.13(b), the Company and its Subsidiaries are in material compliance with, and have materially complied with, all applicable federal, state, local and foreign laws, rules, regulations, standards, orders and decrees governing its business, including all regulations promulgated by each Regulatory Agency in the Territory, the failure of compliance with which could reasonably be expected to result in a Material Adverse Effect; the Company and its Subsidiaries have not received any notice citing action or inaction by any of them that would constitute any material non-compliance with any applicable federal, state, local and foreign laws, rules, regulations, or standards, which could reasonably be expected to result in a Material Adverse Effect; and to the Company’s Knowledge, no prospective change in any applicable federal, state, local or foreign laws, rules, regulations or standards has been adopted which, when made effective, could reasonably be expected to result in a Material Adverse Effect.

     (c) The studies, tests and preclinical and clinical trials conducted relating to the Included Products by or on behalf of the Company or its Subsidiaries were and, if still pending, are being conducted in all material respects in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional and scientific standards; the descriptions of the results of such studies, tests and trials provided to CHRP are accurate in all material respects; and the Company and its Subsidiaries have not received any notices or correspondence from any Regulatory Agency or comparable authority requiring the termination, suspension, or material modification or clinical hold of any such studies, tests or preclinical or clinical trials conducted by or on behalf of the Company or its Subsidiaries, which termination, suspension, material modification or clinical hold could reasonably be expected to result in a Material Adverse Effect.

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     Section 3.14 Material Contracts.

     Neither the Company nor any of its Subsidiaries is in breach of or in default under any Material Contract related to the Included Products, which default, individually or in the aggregate, would result in a Material Adverse Effect. To the Knowledge of the Company, nothing has occurred and no condition exists that would permit any other party thereto to terminate any Material Contract related to the Included Products. Neither the Company nor any of its Subsidiaries has received any notice or, to the Knowledge of the Company, any threat of termination of any such Material Contract. To the Knowledge of the Company, no other party to a Material Contract is in breach of or in default under such Material Contract. All Material Contracts are valid and binding on the Company and its Subsidiaries and, to the Knowledge of the Company, on each other party thereto, and are in full force and effect. Schedule 3.14 is a complete list of all contracts, agreements or other arrangements to which either the Company or any of its Subsidiaries is a party or any of the Company’s or its Subsidiaries’ respective assets or properties are bound or committed (other than the Transaction Documents) related to any Included Product or the Intellectual Property (including each License Agreement) and for which a breach or violation by the Company could reasonably be expected to result in a Material Adverse Effect.

     Section 3.15 Place of Business.

     The Company’s principal place of business and chief executive office are set forth on Schedule 3.15.

     Section 3.16 Broker’s Fees.

     The Company and its Subsidiaries have not taken any action that would entitle any Person to any commission or broker’s fee in connection with the transactions contemplated by the Transaction Documents.

     Section 3.17 Insurance.

     There are in full force and effect insurance policies maintained by the Company and its Subsidiaries with an insurance company rated not less than “A-” by A.M. Best Company, Inc., with coverages and in amounts customary for companies of comparable size and condition similarly situated in the same industry as the Company and its Subsidiaries, including product liability insurance, directors and officers insurance and insurance against liability, subject only to such exclusions and deductible items as are usual and customary in insurance policies of such type. The Company and its Subsidiaries have named CHRP as an additional insured party with respect to its general liability and product liability insurance policies. A schedule of the Company’s and its Subsidiaries’ insurance policies is attached hereto as Schedule 3.17.

     Section 3.18 Solvency.

     None of the Company nor its Subsidiaries is “insolvent” as defined in any statute of the United States Bankruptcy Code or in the fraudulent conveyance, fraudulent transfer or similar statutes or laws of the States of New York or Delaware. Assuming consummation of the transactions contemplated by the Transaction Documents, the present fair saleable value of each

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of the Company and its Subsidiaries’ assets is greater than the amount required to pay its debts as they become due.

     Section 3.19 Other Information.

     No written statement, information, report or materials prepared by or on behalf of the Company or its Subsidiaries and furnished to CHRP by the Company or its Subsidiaries in connection with any Transaction Document or any transaction contemplated hereby or thereby, no written representation, warranty or statement made by the Company and its Subsidiaries in any Transaction Document, and no Schedule or Exhibit hereto, in each case taken in the aggregate, and as updated through the date of this Agreement, contains any untrue statement of a material fact or omits any statement of material fact necessary in order to make the statements made therein in light of the circumstances under which they were made not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF CHRP

     CHRP represents and warrants to the Company the following:

     Section 4.01 Organization.

     CHRP is a limited partnership duly formed and validly existing under the laws of the State of Delaware.

     Section 4.02 Authorization.

     CHRP has all necessary power and authority to enter into, execute and deliver the Transaction Documents and to perform all of the obligations to be performed by it hereunder and thereunder and to consummate the transactions contemplated hereunder and thereunder. The Transaction Documents have been duly authorized, executed and delivered by CHRP and each Transaction Document constitutes the valid and binding obligation of CHRP, enforceable against CHRP in accordance with their respective terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or general equitable principles.

     Section 4.03 Broker’s Fees.

     CHRP has not taken any action that would entitle any Person to any commission or broker’s fee in connection with the transactions contemplated by the Transaction Documents.

     Section 4.04 Conflicts.

     Neither the execution and delivery of this Agreement or any other Transaction Document nor the performance or consummation of the transactions contemplated hereby or thereby will: (i) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any material respects any provisions of: (A) any law, rule or regulation of any Governmental Authority, or any judgment, order, writ, decree, permit or license of any Governmental Authority, to which CHRP or any of its assets or properties may be subject or bound; or (B) any contract, agreement, commitment or instrument to which CHRP is a

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party or by which CHRP or any of its assets or properties is bound or committed; (ii) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, any provisions of the organizational or constitutional documents of CHRP; or (iii) require any notification to, filing with, or consent of, any Person or Governmental Authority.

ARTICLE V

COVENANTS

     During the Term, the following covenants shall apply:

     Section 5.01 Consents and Waivers.

     The Company shall use its best efforts to obtain and maintain any required consents, acknowledgements, certificates or waivers so that the transactions contemplated by this Agreement or any other Transaction Document may be consummated and shall not result in any default or breach or termination of any of the Material Contracts.

     Section 5.02 Access; Information.

     (a) Promptly after receipt by the Company of notice of any action, claim, investigation, proceeding (commenced or threatened), certificate, offer, proposal, material correspondence or other material written communication relating to the transactions contemplated by this Agreement, any other Transaction Document, the Revenue Rights or any Material Contract relating to the manufacture or distribution of the Included Products or the Additional Included Products in the Territory or to the sale or license of the Intellectual Property, then the Company shall inform CHRP of the receipt of such notice and the substance of such action, claim, investigation, proceeding, certificate, offer, proposal, correspondence or other written communication and, if in writing shall furnish CHRP with a copy of such notice and any related materials with respect to such action, claim, investigation, proceeding, certificate, offer, proposal, correspondence or other written communication.

     (b) The Company shall keep and maintain, or cause to be kept and maintained, at all times accurate and complete books and records. The Company shall keep and maintain, or cause to be kept and maintained, at all times full and accurate books of account and records adequate to correctly reflect all payments paid and/or payable with respect to Revenue Rights and the Revenue Interest and all deposits made into the applicable Collection Accounts.

     (c) CHRP and any of CHRP’s representatives shall have the right (at its cost), from time to time (but no more frequently than four (4) times per year), to visit the Company and its Subsidiaries’ offices and properties where the Company and its Subsidiaries keep and maintain its books and records relating or pertaining to the Revenue Rights, the Revenue Interest and the other Collateral for purposes of conducting an audit of such books and records, and to inspect, copy and audit such books and records, during normal business hours, and, upon five (5) Business Days’ written notice given by CHRP to the Company, the Company will provide CHRP and any of CHRP’s representatives reasonable access to such books and records, and shall permit CHRP and any of CHRP’s representatives to discuss the business, operations, properties and financial and other condition of the Company or any of its Affiliates including, but not

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limited to, matters relating or pertaining to the Revenue Rights, the Revenue Interest and the other Collateral with officers of such parties, and with their independent certified public accountants (to the extent such independent certified accountants agree to discuss such matters with CHRP).

     (d) In the event any audit of the books and records of the Company and its Subsidiaries relating to the Revenue Rights, Revenue Interest, and the other Collateral by CHRP and/or any of CHRP’s representatives reveals that the amounts paid to CHRP hereunder for the period of such audit have been understated by more than five percent (5%) of the amounts determined to be due for the period subject to such audit, then the Audit Costs in respect of such audit shall be borne by the Company; and in all other cases, such Audit Costs shall be borne by CHRP.

     (e) The Company shall, promptly after the end of each Fiscal Quarter (but in no event later than forty five (45) days following the end of such Fiscal Quarter), produce and deliver to CHRP a Quarterly Report for such quarter, together with a certificate of an executive officer of the Company, certifying that to the knowledge of such officer (i) such Quarterly Report is a true and complete copy (in all material respects) and (ii) any statements and any data and information therein prepared by the Company are true, correct and accurate in all material respects.

     Section 5.03 Material Contracts.

     The Company shall comply with all material terms and conditions of and fulfill all of its obligations under all the Material Contracts. Upon the occurrence of a material breach of any such Material Contract by any other party thereto, which is not cured as provided therein, the Company shall use commercially reasonable efforts to seek to enforce all of its rights and remedies thereunder. The Company shall not amend any Material Contract (other than consents or approvals given in the ordinary course of business) or issue any consents or other approvals under any such Material Contract without the prior written consent of CHRP, which consent shall not be unreasonably withheld, delayed or conditioned.

     Section 5.04 Confidentiality; Public Announcement.

     (a) All information furnished by CHRP to the Company or by the Company to CHRP, including the Confidential Information, in connection with this Agreement and any other Transaction Document and the transactions contemplated hereby and thereby, as well as the terms, conditions and provisions of this Agreement and any other Transaction Document, shall be kept confidential by the Company and CHRP, and shall be used by the Company and CHRP only in connection with this Agreement and any other Transaction Document and the transactions contemplated hereby and thereby. Notwithstanding the foregoing, the Company and CHRP may disclose such information to their partners, directors, employees, managers, officers, investors, potential investors, bankers, advisors, trustees and representatives, provided that such Persons shall be informed of the confidential nature of such information and shall be obligated in writing to keep such information confidential pursuant to the terms of this Section 5.04(a). The Company will consult with CHRP, and CHRP will consult the Company, on the form, content and timing of any such disclosures of Confidential Information related to the Transaction Documents including, without limitation, any disclosures made pursuant to applicable securities laws or made to investment or other analysts.

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     (b) Except as required by law or the rules and regulations of any securities exchange or trading system or the FDA or any Governmental Authority with similar regulatory authority, or except with the prior written consent of the other party (which consent shall not be unreasonably withheld, conditioned or delayed), no party shall issue any press release or make any other public disclosure with respect to the transactions contemplated by this Agreement or any other Transaction Document; provided, however, that wherever so permitted by relevant law or rule, the Company shall make available to CHRP prior to public release (and consider CHRP’s reasonable revisions thereto) any press releases required by law or the rules and regulations of any securities exchange or trading system or the FDA or any Governmental Authority with similar regulatory authority with respect to the transactions contemplated by this Agreement or any other Transaction Document; and provided further, that the Company and CHRP may jointly prepare a press release for dissemination promptly following the Closing Date. Notwithstanding anything to the contrary in this Section 5.04(b), the Company shall seek confidential treatment under applicable Securities and Exchange Commission rules, to avoid public disclosure of competitively sensitive provisions of the Revenue Interest (i.e., the Applicable Percentage, the multiple step down and the Put Price formula using internal rate of return and multiples, etc.), and to allow CHRP to review and provide input on all redacted drafts, descriptive summaries and transmittal letters prepared in connection with the Company’s obligations arising under this sentence prior to submission or filing with the Securities and Exchange Commission or otherwise.

     Section 5.05 Security Agreement.

     The Company shall, at all times until the Obligations are paid and performed in full, grant in favor of CHRP a valid, continuing, first perfected security interest in the Revenue Rights and the Revenue Interest relating to it and the other Collateral described in the Revenue Interest Security Agreement.

     Section 5.06 Further Assurance.

     (a) Subject to the terms and conditions of this Agreement, each of CHRP and the Company will use their commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable laws and regulations to consummate the transactions contemplated by this Agreement and any other Transaction Document. CHRP and the Company agree to execute and deliver such other documents, certificates, agreements and other writings (including any financing statement filings requested by CHRP) and to take such other actions as may be reasonably necessary in order to consummate or implement expeditiously the transactions contemplated by this Agreement and any other Transaction Document and to vest in CHRP good, valid and marketable rights and interests in and to the Revenue Interest free and clear of all Liens, except for the Permitted Liens and those Liens created in favor of CHRP pursuant to Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and any other Transaction Document.

     (b) CHRP and the Company shall execute and deliver such additional documents, certificates and instruments, and to perform such additional acts, as may be reasonably requested and necessary or appropriate to carry out and effectuate all of the provisions of this Agreement and any other Transaction Document and to consummate all of the transactions contemplated by this Agreement and any other Transaction Document.

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     (c) CHRP and the Company shall cooperate and provide assistance as reasonably requested by the other respective party in connection with any litigation, arbitration or other proceeding (whether threatened, existing, initiated, or contemplated prior to, on or after the date hereof) to which any party hereto or any of its officers, directors, shareholders, agents or employees is or may become a party or is or may become otherwise directly or indirectly affected or as to which any such Persons have a direct or indirect interests, in each case relating to this Agreement, any other Transaction Document, the Revenue Interest or any other Collateral, or the transactions described herein or therein.

     Section 5.07 Put Option; Step-Down Option.

     (a) In the event that a Put Option Event shall occur during the Term, CHRP shall have the right, but not the obligation (the “Put Option”), to require the Company to repurchase from CHRP the Revenue Interest at the Put Price in cash. In the event CHRP elects to exercise its Put Option, CHRP shall deliver written notice to the Company specifying the closing date (the “Put Option Closing Date”), which date shall (i) in the case of a Change of Control, be the date of consummation of such Change of Control, and (ii) otherwise, not be earlier than thirty (30) days after the breach or default giving rise to the Put Option Event or later than one hundred eighty (180) days after the Put Option Event. On the Put Option Closing Date, the Company shall repurchase from CHRP the Revenue Interest at the Put Price in cash, the payment of which shall be made by wire transfer of immediately available funds to the account designated by CHRP. Notwithstanding anything to the contrary contained herein, immediately upon the occurrence of a Bankruptcy Event, CHRP shall be deemed to have automatically and simultaneously elected to have the Company repurchase from CHRP the Revenue Interest for the Put Price in cash and the Put Price shall be immediately due and payable without any further action or notice by any party.

     (b) In connection with the consummation of a repurchase of the Revenue Interest pursuant to the Put Option, CHRP agrees that it will (i) promptly execute and deliver to the Company such UCC termination statements and other documents as may be necessary to release CHRP’s Lien on the Collateral and otherwise give effect to such repurchase and (ii) take such other actions or provide such other assistance as may be necessary to give effect to such repurchase.

     (c) The Company shall have the right, but not the obligation (the “Step-Down Option”), to prepay amounts to CHRP in respect of Sections 2.02 and 5.08 at the Step-Down Price in cash; provided, however, that, the Company shall remain obligated to pay CHRP *** percent (^***%) of all Net Product Sales from and after the Step-Down Closing Date through the end of the Term, which Net Product Sales shall be treated in accordance with clause (b) of the definition of Applicable Percentage. In the event the Company elects to exercise its Step-Down Option, the Company shall deliver written notice to the CHRP specifying the closing date (the “Step-Down Option Closing Date”), which date shall be no more than ten (10) Business Days after the date on which the Company delivers its written notice. On the Step-Down Option Closing Date, the Company shall prepay such amounts to CHRP at the Step-Down Price in cash,

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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the payment of which shall be made by wire transfer of immediately available funds to the account designated by CHRP.

     Section 5.08 Remittance to and from the Collection Accounts.

     (a) Within thirty (30) days of the Closing Date, the parties hereto shall enter into (i) the JPMorgan Deposit Agreement in form and substance reasonably satisfactory to the parties hereto and the Deposit Bank, which agreement will provide for, among other things, the establishment and maintenance of a Joint Concentration Account and a CHRP Concentration Account, and the establishment of “control” within the meaning of Article 9 of the UCC, with respect to the Joint Concentration Account, all in accordance with the terms herein and therein, and (ii) the Comerica Deposit Agreement in form and substance reasonably satisfactory to the parties hereto and the Collection Bank, which agreement will provide for, among other things, the maintenance of the Collection Accounts, the daily sweeping of all funds from the deposit account described in the definition of “Collection Accounts” to the Joint Concentration Account and the establishment of “control” within the meaning of Article 9 of the UCC, with respect to the Collection Accounts. Any CHRP Concentration Account shall be held solely for the benefit of CHRP, but shall be subject to the terms and conditions of this Agreement, the Revenue Interest Security Agreement, the Note Security Agreement, the Subsidiary Note Security Agreement and the other Transaction Documents. Funds deposited into the lockbox and credit accounts described in the definition of “Collection Accounts” shall be swept by the Collection Bank on a daily basis into the deposit account described in the definition of “Collection Accounts”; and subsequent thereto such funds shall be swept by the Collection Bank on a daily basis into the Joint Concentration Account; and subsequent thereto, the Daily Amount shall be swept by the Deposit Bank on a daily basis into the CHRP Concentration Account. CHRP shall have immediate and full access to any funds held in the CHRP Concentration Account and such funds shall not be subject to any conditions or restrictions whatsoever. After the Daily Amount is swept into the CHRP Concentration Account, the amounts remaining in the Joint Concentration Account shall then be swept by the Deposit Bank into the Company Concentration Account. The Company shall have immediate and full access to any funds held in the Company Concentration Account and such funds shall not be subject to any conditions or restrictions whatsoever other than those of the Deposit Bank and as provided in the Note Security Agreement and related documents; provided, however, that nothing herein shall (i) affect or reduce the Company’s obligations to pay in full all amounts due to CHRP under this Agreement, or (ii) in any manner limit the recourse of CHRP to the Collateral to satisfy the Company’s Obligations.

     (b) The Company shall pay for all fees, expenses and charges of the Deposit Bank and the Collection Bank other than fees relating to the CHRP Concentration Account.

     (c) The Company shall cause all its customers (including any licensees of the Intellectual Property) to remit all payments in respect of sales of Included Products and the Additional Included Products (or such licenses) directly to the Collection Accounts. Without limiting the foregoing, commencing on the Closing Date and thereafter, any and all payments in respect of sales of the Included Products and the Additional Included Products received by the Company or its Subsidiaries shall be deposited into the Joint Concentration Account within three (3) Business Days of the Company’s or its Subsidiaries’ receipt thereof.

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     (d) The Company shall not have any right to terminate the Collection Bank or Deposit Bank without CHRP’s prior written consent. Any such consent, which CHRP may grant or withhold in its sole and absolute discretion, shall be subject to the satisfaction of each of the following conditions to the satisfaction of CHRP:

          (i) the successor Collection Bank or Deposit Bank shall be acceptable to CHRP;

          (ii) CHRP, the Company and the successor Collection Bank or Deposit Bank shall have entered into deposit agreements substantially in the forms of the JPMorgan Deposit Agreement and Comerica Deposit Agreement, each initially entered into, as applicable;

          (iii) all funds and items in the accounts subject to the Comerica Deposit Agreement or JPMorgan Deposit Agreement to be terminated shall be transferred to the new accounts held at the successor Collection Bank or Deposit Bank, as applicable, prior to the termination of the then existing Collection Bank or Deposit Bank; and

          (iv) CHRP shall have received evidence that all of the applicable parties making payments in respect of sales of the Included Products and Additional Included Products have been instructed to remit all future payments in respect of sales of the Included Products and Additional Included Products to the new accounts held at the successor Collection Bank or Deposit Bank.

     (e) True-Up.

          (i) Following the end of each Fiscal Quarter, as soon as the Company shall have determined the Net Product Sales for such Fiscal Quarter and for each other Fiscal Quarter in the Fiscal Year in which the then most recently ended Fiscal Quarter occurred (the “Year-to-Date Net Product Sales”) and in any event no later than forty-five (45) days after the end of such Fiscal Quarter (unless such Fiscal Quarter is the last Fiscal Quarter of a Fiscal Year in which case no later than ninety (90) days after the end of such Fiscal Quarter), the Company shall present CHRP a certificate, in reasonable detail with supporting calculations and information, detailing the Year-to-Date Net Product Sales (the “True-Up Statement”); provided that if the Company is required to file Forms 10-Q and 10-K with the SEC, the time periods for delivery of the True-Up Statement shall be 15 days after the due dates for the Company’s filing of such forms with the SEC.

          (ii) If CHRP has received on or prior to the last day of the most recently ended Fiscal Quarter payments from the Company under Section 2.02 (other than payments under Section 2.02(a)(ii), provided, however, the Company’s payments under Section 2.02(a)(ii) shall be considered for purposes of determining the Applicable Percentage) or this Section 5.08 in respect of the Fiscal Year for which Year-to-Date Net Product Sales is calculated under clause (i) above which are in excess of the Applicable Percentage of Year-to-Date Net Product Sales, CHRP shall pay such excess to the Company within twenty (20) days of receipt by CHRP of the True-Up Statement. For the avoidance of doubt, the provisions of this Section 5.08(e)(ii) shall also apply, in any event, if and to the extent the payment received by CHRP pursuant to Section 2.02(a)(ii) results in aggregate payments received and retained (i.e., not refunded pursuant to the true-up in Section 5.08(e) by CHRP) by CHRP under Sections 2.02, 5.07(c) and 5.08 from October 1, 2007 through the end of the Fiscal Quarter in which payment is received by CHRP

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pursuant to Section 2.02(a)(ii), to exceed      ***      Percent (^***%) of the aggregate amount paid by CHRP under Section 2.03.

          (iii) If the Applicable Percentage of Year-to-Date Net Product Sales is in excess of the amounts CHRP has received on or prior to the last day of the most recently ended Fiscal Quarter in respect of the Fiscal Year for which Year-to-Date Net Product Sales is calculated under clause (i) above under Section 2.02 (other than payments under Section 2.02(a)(ii), provided, however, the Company’s payments under Section 2.02(a)(ii) shall be considered for purposes of determining the Applicable Percentage) or this Section 5.08, the Company shall pay such excess to CHRP within twenty (20) days of the receipt by CHRP of the True-Up Statement.

     Section 5.09 License Agreements.

     The Company shall use its commercially reasonable efforts to duly perform and observe all of its covenants and obligations under each License Agreement in all material respects. Upon the occurrence of a material breach of any of the License Agreements by any other party thereto, which is not cured as provided therein, the Company thereto shall use its commercially reasonable efforts to seek to enforce all of its and its Subsidiaries’ rights and remedies thereunder, if its board of directors determines it is in the best interests of the Company and its stockholders to enforce such rights and remedies.

     Section 5.10 Intellectual Property.

     (a) Except with respect to the Patents set forth on Schedule 5.10, the Company shall, at its sole expense, either directly or by causing any Licensee to do so, take any and all commercially reasonable actions (including taking legal action to specifically enforce the applicable terms of any License Agreement) and prepare, execute, deliver and file any and all agreements, documents or instruments which are necessary to (A) diligently maintain the applicable Intellectual Property and the Patents and (B) diligently defend or assert such Intellectual Property and such Patents against infringement or interference in the Territory by any other Persons, and against any claims of invalidity or unenforceability, in any jurisdiction in the Territory (including, without limitation, by bringing any legal action for infringement or defending any counterclaim of invalidity or action of a Third Party for declaratory judgment of non-infringement or non-interference). Except with respect to the patents set forth on Schedule 5.10, the Company shall not and shall use its commercially reasonable efforts to cause any Licensee not to, disclaim or abandon, or fail to take any action necessary or desirable to prevent the disclaimer or abandonment of, the applicable Patents in the Territory or other Intellectual Property; provided, however, this Section shall not apply to abandonment of any Patents and trademarks made in the ordinary course of business to the extent consented to by CHRP (not to be unreasonably withheld, conditioned or delayed.)

     (b) In the event that the Company becomes aware that the Use of any Included Product or Additional Included Product in the Territory infringes or violates any Third Party

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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intellectual property, the Company shall promptly use commercially reasonable efforts to attempt to secure the right to use such intellectual property on behalf of itself and the affected Licensee and shall pay all costs and amounts associated with obtaining any such license, without any reduction in the Revenue Interest.

     (c) The Company shall directly, or through a Licensee, take any and all commercially reasonable actions and prepare, execute, deliver and file any and all agreements, documents or instruments that are necessary or desirable to secure and maintain all Regulatory Approvals in the Territory. The Company shall not withdraw or abandon, or fail to take any action necessary to prevent the withdrawal or abandonment of, any Regulatory Approval in the Territory once obtained.

     Section 5.11 Negative Covenants.

     The Company shall not, nor shall it permit any of its Subsidiaries to, without the prior written consent of CHRP:

     (a) forgive, release or reduce any amount, or delay or postpone (other than on a commercially reasonable basis) any amount, owed to the Company or its Subsidiaries and relating to the Revenue Interest;

     (b) waive, amend, cancel or terminate, exercise or fail to exercise, any of its material rights constituting or relating to the Revenue Rights except in respect of the abandonment on non-material non-United States Patents which has been determined by the Company’s board of directors to be in the best interests of the Company and its stockholders;

     (c) amend, modify, restate, cancel, supplement, terminate or waive any provision of any License Agreement, or grant any consent thereunder, or agree to do any of the foregoing, including, without limitation, entering into any agreement with any Licensee under the provisions of such License Agreement; or

     (d) create, incur, assume or suffer to exist any Lien, upon or with respect to the Revenue Interest, the Revenue Rights or the other Collateral, or agree to do or suffer to exist any of the foregoing, except for any Permitted Liens and any Lien or agreements in favor of CHRP granted under or pursuant to this Agreement and the other Transaction Documents.

     Section 5.12 Future Agreements.

     The Company shall not enter into, nor shall it permit any of its Subsidiaries to enter into, any agreement that would or could reasonably be expected to result in a Material Adverse Effect without CHRP’s prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned.

     Section 5.13 Insurance.

     The Company shall (i) maintain insurance policies with insurance companies rated not less than “A-” by A.M. Best Company, Inc. with coverages and in amounts customary for companies of comparable size and condition similarly situated in the same industry as the Company and its Subsidiaries, including product liability insurance, directors and officers insurance and general liability, subject only to such exclusions and deductible items as are usual

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and customary in insurance policies of such type, and (ii) maintain CHRP as an additional insured party with respect to its general liability and product liability insurance policies.

     Section 5.14 Notice.

     The Company shall provide CHRP with written notice as promptly as practicable (and in any event within five (5) Business Days) after becoming aware of any of the following:

     (a) the occurrence of a Bankruptcy Event;

     (b) any material breach or default by the Company or any of its Subsidiaries of any covenant, agreement or other provision of this Agreement or any other Transaction Document;

     (c) any representation or warranty made or deemed made by the Company or any of its Subsidiaries in any of the Transaction Documents or in any certificate delivered to CHRP pursuant hereto shall prove to be untrue, inaccurate or incomplete in any material respect on the date as of which made or deemed made; or

     (d) the occurrence of a Change of Control.

     Section 5.15 Use of Proceeds.

     The Company and its Subsidiaries shall use all proceeds received from CHRP pursuant to Section 2.03 for the purpose of generating and increasing Net Product Sales and for working capital and general corporate purposes, including, but not limited to, the repayment of outstanding debt to Comerica, build out of commercial infrastructure, promotional, marketing and sales efforts and the hiring of sales representatives and other employees. The Company and its Subsidiaries shall not use any such proceeds for any other purposes.

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ARTICLE VI

THE CLOSING; CONDITIONS TO CLOSING

     Section 6.01 Closing.

     Subject to the closing conditions set forth in Sections 6.02 and 6.03, the closing of the assignment of the Revenue Interest and the Second Warrant (the “Closing”) shall take place at the offices of McDermott Will & Emery LLP, 227 W. Monroe St., Chicago, Illinois 60606, on the Closing Date.

     Section 6.02 Conditions Applicable to CHRP.

     The obligations of CHRP to effect the Closing shall be subject to the satisfaction of the following conditions, any of which may be waived by CHRP in its sole discretion:

     (a) Accuracy of Representations and Warranties. The representations and warranties of the Company set forth in the Transaction Documents shall be true, correct and complete in all material respects as of the Closing Date.

     (b) No Adverse Circumstances. Except as disclosed to CHRP in the Disclosure Schedule or the Company’s Form 10-Q for the third quarter of 2007 as filed with the SEC, there shall not have occurred or be continuing any event or circumstance (including any development with respect to the efficacy of the Included Products or the Intellectual Property or the use or expected future use of the same as opposed to competing products) that could reasonably be expected to have a Material Adverse Effect.

     (c) Litigation. No action, suit, litigation, proceeding or investigation shall have been instituted, be pending or threatened (i) challenging or seeking to make illegal, to delay or otherwise directly or indirectly to restrain or prohibit the consummation of the transactions contemplated by this Agreement, or seeking to obtain damages in connection with the transactions contemplated by this Agreement, or (ii) seeking to restrain or prohibit CHRP’s acquisition of the Revenue Interest or the Second Warrant.

     (d) Consents. All notices to, consents, approvals, authorizations and waivers from Third Parties and Government Authorities that are required for the consummation of the transactions contemplated by this Agreement or any of the Transaction Documents shall have been obtained or provided for and shall remain in effect.

     (e) Comerica Deposit Agreement. The Comerica Deposit Agreement (together with any necessary account control agreements) shall have been executed and delivered by the Company and the Collection Bank, and CHRP shall have received the same.

     (f) JPMorgan Deposit Agreement. The JPMorgan Deposit Agreement (together with any necessary account control agreements) shall have been executed and delivered by the Company and the Deposit Bank, and CHRP shall have received the same.

     (g) Note and Warrant Purchase Agreement. The Note and Warrant Purchase Agreement shall have been executed and delivered by the Company, and CHRP shall have received the same.

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     (h) Second Warrant. The Second Warrant shall have been executed and delivered by the Company, and CHRP shall have received the same.

     (i) Investor Rights Agreement. The Investor Rights Agreement shall have been executed and delivered by the Company, and CHRP shall have received the same.

     (j) Officer’s Certificate. CHRP shall have received a certificate of an executive officer of the Company pursuant to which such officer certifies that the conditions set forth in Sections 6.02(a), (b), (c), and (o) have been satisfied in all respects.

     (k) Assignment of Revenue Interest. The Assignment of Revenue Interest shall have been executed and delivered by the Company to CHRP, and CHRP shall have received the same.

     (l) Security Agreements. The Revenue Interest Security Agreement, the Note Security Agreement and the Subsidiary Note Security Agreement shall have been duly executed and delivered by all the parties thereto, together with proper financing statements (including Form UCC-1s) for filing under the UCC and/or any other applicable law, rule, statute or regulation relating to the perfection of a security interest in filing offices in the jurisdictions listed on Schedule 6.02(l), and such agreements shall be in full force and effect.

     (m) Legal Opinions.

          (i) CHRP shall have received an opinion of Heller Ehrman LLP, transaction counsel to the Company, in form and substance satisfactory to CHRP and its counsel, to the effect set forth in Exhibit G.

          (ii) CHRP shall have received an opinion of Heller Ehrman LLP, intellectual property counsel to the Company, in form and substance satisfactory to CHRP and its counsel, to the effect set forth in Exhibit H.

     (n) Corporate Documents of the Company and its Subsidiaries. CHRP shall have received on the Closing Date, certificates, dated as of the Closing Date, of an executive officer of the Company and its Subsidiaries (the statements made in which shall be true and correct on and as of the Closing Date): (i) attaching copies, certified by such officer as true and complete, of each the Company’s and its Subsidiaries’ certificate of incorporation or other organizational documents (together with any and all amendments thereto) certified by the appropriate Governmental Authority as being true, correct and complete copies; (ii) attaching copies, certified by such officer as true and complete, of resolutions of the board of directors of each of the Company and its Subsidiaries authorizing and approving the execution, delivery and performance by it of the Transaction Documents and the transactions contemplated herein and therein; (iii) setting forth the incumbency of the officer or officers of the Company and its Subsidiaries who have executed and delivered the Transaction Documents including therein a signature specimen of each such officer or officers; and (iv) attaching copies, certified by such officer as true and complete, of a certificate of the appropriate Governmental Authority of each of the Company and its Subsidiaries’ jurisdiction of incorporation, stating that it is in good standing under the laws of its incorporation.

     (o) Covenants. Each of the Company and its Subsidiaries shall have complied in all material respects with its covenants set forth in the Transaction Documents.

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     (p) Due Diligence. CHRP’s due diligence review of the Company and its Subsidiaries shall have been completed to CHRP’s reasonable satisfaction.

     Section 6.03 Conditions Applicable to the Company.

     The obligation of the Company to effect the Closing shall be subject to the satisfaction of each of the following conditions, any of which may be waived by the Company in their sole discretion:

     (a) Accuracy of Representations and Warranties. The representations and warranties of CHRP set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date.

     (b) Litigation. No action, suit, litigation, proceeding or investigation shall have been instituted, be pending or threatened (i) challenging or seeking to make illegal, to delay or otherwise directly or indirectly to restrain or prohibit the consummation of the transactions contemplated by this Agreement, or seeking to obtain damages in connection with the transactions contemplated by this Agreement, or (ii) seeking to restrain or prohibit CHRP’s acquisition of the Revenue Interest or the Second Warrant.

     (c) Closing Certificate. The Company shall have received at the Closing a certificate of an authorized representative of CHRP certifying that the conditions set forth in Sections 6.03(a) and (b) have been satisfied in all material respects as of the Closing Date.

     (d) Funding. CHRP shall have funded under its obligations arising under Section 2.03(a)(i) within fifteen (15) Business Days of the date hereof.

ARTICLE VII

TERMINATION

     Section 7.01 Termination Date.

     Except as otherwise provided in this Section 7.01 and in Sections 7.02 and 8.01, this Agreement shall terminate upon expiration of the Term. If any payments are required to be made by one of the parties hereunder after that date, this Agreement shall remain in full force and effect until any and all such payments have been made in full, and (except as provided in Section 7.02) solely for that purpose. In addition, this Agreement shall sooner terminate if CHRP shall have exercised the Put Option, pursuant to Section 5.07, with the termination date in that event being the date on which the Company completes the repurchase of the Revenue Interest with payment in full to CHRP.

     Section 7.02 Effect of Termination.

     In the event of the termination of this Agreement pursuant to Section 7.01, this Agreement shall forthwith become void and have no effect without any liability on the part of any party hereto or its Affiliates, directors, officers, stockholders, partners, managers or members other than the provisions of this Section 7.02 and Sections 5.04, 5.05, 8.01, 8.02, 8.04 and 8.05 hereof, which shall survive any termination as set forth in Section 8.01. Nothing contained in this Section 7.02 shall relieve any party from liability for any breach of this Agreement.

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ARTICLE VIII

MISCELLANEOUS

     Section 8.01 Survival.

     (a) All representations and warranties made herein and in any other Transaction Document, any certificates or in any other writing delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Closing and shall continue to survive to the extent permitted by law until the termination of this Agreement in accordance with Article VII. Notwithstanding anything in this Agreement or implied by law to the contrary, all the agreements contained in Sections 5.04, 5.05, 8.01, 8.02, 8.04 and 8.05 shall survive indefinitely following the execution and delivery of this Agreement and the Closing and the termination of this Agreement.

     (b) Any investigation or other examination that may have been made or may be made at any time by or on behalf of the party to whom representations and warranties are made shall not limit, diminish or in any way affect the representations and warranties in the Transaction Documents, and the parties may rely on the representations and warranties in the Transaction Documents irrespective of any information obtained by them by any investigation, examination or otherwise.

     Section 8.02 Future Equity Offerings.

     In the event that the Company desires to conduct a transaction or series of transactions after the Closing Date, in which the Company issues its equity securities and/or rights to acquire its equity securities, then the Company shall take commercially reasonable efforts to discuss the opportunity for CHRP to participate in such transaction or series of transactions, without any further obligation.

     Section 8.03 Notices.

     All notices, consents, waivers and communications hereunder given by any party to the other shall be in writing (including facsimile transmission and electronic mail) and delivered personally, facsimile, by electronic mail, by a recognized overnight courier, or by dispatching the same by certified or registered mail, return receipt requested, with postage prepaid, in each case addressed:

     If to CHRP to:

Cowen Healthcare Royalty Partners, L.P.
c/o Cowen Healthcare Royalty GP, LLC
177 Broad Street
Suite 1101
Stamford, CT 06901
Attention: Clarke B. Futch
Facsimile No.: (646) 562-1293
Email: clarke.futch@cowen.com

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     with a copy to:

McDermott Will & Emery LLP
227 West Monroe Street
Chicago, IL 60606-5096
Attention: Timothy R.M. Bryant
Facsimile No.: (312) 984-7700
Email: tbryant@mwe.com

     If to the Company or any of its Subsidiaries to:

Artes Medical, Inc.
5870 Pacific Center Boulevard
San Diego, CA 92121
Attention: Karla R. Kelly, General Counsel
Facsimile No.: (858) 875-5609
Email: kkelly@artesmedical.com

     with a copy to:

Heller Ehrman LLP
4350 La Jolla Village Drive, 7th Floor
San Diego, CA 92122
Attention: Jeff Thacker
Facsimile No.: (858) 587-5941
Email: jthacker@hellerehrman.com

or to such other address or addresses as CHRP or the Company may from time to time designate by notice as provided herein, except that notices of changes of address shall be effective only upon receipt. All such notices, consents, waivers and communications shall: (a) when posted by certified or registered mail, postage prepaid, return receipt requested, be effective three (3) Business Days after dispatch, unless such communication is sent trans-Atlantic, in which case they shall be deemed effective three (3) Business Days after dispatch, (b) when facsimiled or sent by electronic mail, be effective one (1) Business Day after transmission, or (c) when delivered by a recognized overnight courier or in person, be effective upon receipt when hand delivered.

     Section 8.04 Successors and Assigns.

     The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. None of the Company nor its Subsidiaries shall be entitled to assign any of its obligations and rights under the Transaction Documents without the prior written consent of CHRP. CHRP may assign without consent of the Company or its Subsidiaries any of its rights under the Transaction Documents without restriction; provided, that if CHRP completes a financing, securitization or other capital markets transaction with respect to the Revenue Interest, CHRP will use its commercially reasonable efforts to remain the servicer or administrator.

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     Section 8.05 Indemnification.

     (a) The Company hereby indemnifies and holds CHRP and its Affiliates and any of their respective partners, directors, managers, members, officers, employees and agents (each a “CHRP Indemnified Party”) harmless from and against any and all Losses (including all Losses in connection with any product liability claims or claims of infringement or misappropriation of any intellectual property rights of any Third Parties) incurred or suffered by any CHRP Indemnified Party arising out of (i) the failure of any representation, warranty or certification made by the Company or its Subsidiaries in any of the Transaction Documents or certificates given by the Company or its Subsidiaries in writing pursuant hereto or thereto to be true and correct in all material respects as of the Closing Date (except (A) for such representations and warranties that are made as of a specific date, in which case such representations and warranties shall apply only as of such specified date and (B) for such representations and warranties that are qualified by a materiality or similar standard which shall be true and correct in all respects) or (ii) any breach of or default under any covenant or agreement by the Company or its Subsidiaries pursuant to any Transaction Document, including any failure by the Company or its Subsidiaries to satisfy any of the Excluded Liabilities.

     (b) CHRP hereby indemnifies and holds the Company, its Affiliates and any of their respective partners, directors, managers, officers, employees and agents (each a “Company Indemnified Party”) harmless from and against any and all Losses incurred or suffered by a Company Indemnified Party arising out of (i) the failure of any representation, warranty or certification made by the CHRP in any of the Transaction Documents or certificates given by the CHRP in writing pursuant hereto or thereto to be true and correct in all material respects as of the Closing Date (except (A) for such representations and warranties that are made as of a specific date, in which case such representations and warranties shall apply only as of such specified date and (B) for such representations and warranties that are qualified by a materiality or similar standard which shall be true and correct in all respects) or (ii) any breach of or default under any covenant or agreement by CHRP pursuant to any Transaction Document

     (c) If any claim, demand, action or proceeding (including any investigation by any Governmental Authority) shall be brought or alleged against an indemnified party in respect of which indemnity is to be sought against an indemnifying party pursuant to the preceding paragraphs, the indemnified party shall, promptly after receipt of notice of the commencement of any such claim, demand, action or proceeding, notify the indemnifying party in writing of the commencement of such claim, demand, action or proceeding, enclosing a copy of all papers served, if any; provided, that the omission to so notify such indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party under the foregoing provisions of this Section 8.05 unless, and only to the extent that, such omission results in the forfeiture of, or has a material adverse effect on the exercise or prosecution of, substantive rights or defenses by the indemnifying party. In case any such action is brought against an indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who may be counsel to the indemnifying party, unless such representation would be inappropriate due to actual or potential conflicts of interest between them based on the advice of such counsel), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 8.05 for any

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legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, an indemnified party shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the indemnifying party has assumed the defense of such proceeding and has failed within a reasonable time to retain counsel reasonably satisfactory to such indemnified party or (iii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interests between them based on the advice of such counsel. It is agreed that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate law firm (in addition to local counsel where necessary) for all such indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.

     Section 8.06 Independent Nature of Relationship.

     (a) The relationship between the Company and its Subsidiaries, on the one hand, and CHRP, on the other hand, is solely that of assignor and assignee, and neither CHRP, on the one hand, nor the Company and its Subsidiaries, on the other hand, has any fiduciary or other special relationship with the other or any of their respective Affiliates.

     (b) No officer or employee of CHRP will be located at the premises of the Company or any of its Affiliates, except in connection with an audit performed pursuant to Section 5.02. No officer, manager or employee of CHRP shall engage in any commercial activity with the Company or any of its Affiliates other than as contemplated herein and in the other Transaction Documents.

     (c) The Company and/or any of its Affiliates shall not at any time obligate CHRP, or impose on CHRP any obligation, in any manner or respect to any Person not a party hereto.

     Section 8.07 Tax.

     (a) For United States federal, state and local tax purposes, the Company and CHRP shall treat the assignment of the Revenue Interest as debt for United States tax purposes. The parties hereto agree not to take any position that is inconsistent with the provisions of this Section 8.07 on any tax return or in any audit or other administrative or judicial proceeding unless (i) the other party to this Agreement has consented to such actions, or (ii) the party that contemplates taking such an inconsistent position has been advised by counsel in writing that it is more likely than not (x) that there is no “reasonable basis” (within the meaning of Treasury Regulation Section 1.6662-3(b)(3)) for the position specified in this Section 8.07 or (y) that

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taking such a position would otherwise subject the party to penalties under the Internal Revenue Code of 1986, as amended.

     (b) This Agreement is not intended to create a deemed partnership, association or joint venture between CHRP and any counterparty. Each party agrees not to refer to the other as a “partner” or the relationship as a “partnership” or “joint venture”.

     (c) The parties agree that the payments made by CHRP under Section 2.03 shall be allocated for income tax purposes as follows:

          (i) $83,390 shall be allocated to the Second Warrant; and

          (ii) all other amounts paid by CHRP under Section 2.03 shall be allocated to the Revenue Interest.

     Section 8.08 Entire Agreement.

     This Agreement, together with the Exhibits and Schedules hereto (which are incorporated herein by reference), and the other Transaction Documents constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements (including the Letter of Intent dated December 12, 2007 between Cowen Healthcare Royalty Management, LLC and the Company), understandings and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement; provided, however, the terms of that certain Confidentiality Agreement by and between the Company and CHRP dated as of August 24, 2007 shall continue in effect. No representation, inducement, promise, understanding, condition or warranty not set forth herein (or in the Exhibits, Schedules or other Transaction Documents) has been made or relied upon by either party hereto. None of this Agreement, nor any provision hereof, is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder.

     Section 8.09 Amendments; No Waivers.

     (a) This Agreement or any term or provision hereof may not be amended, changed or modified except with the written consent of the parties hereto. No waiver of any right hereunder shall be effective unless such waiver is signed in writing by the party against whom such waiver is sought to be enforced.

     (b) No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

     Section 8.10 Interpretation.

     When a reference is made in this Agreement to Articles, Sections, Schedules or Exhibits, such reference shall be to an Article, Section, Schedule or Exhibit to this Agreement unless otherwise indicated. The words “include”, “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation”. Neither party hereto shall

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be or be deemed to be the drafter of this Agreement for the purposes of construing this Agreement against one party or the other.

     Section 8.11 Headings and Captions.

     The headings and captions in this Agreement are for convenience and reference purposes only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

     Section 8.12 Counterparts; Effectiveness.

     This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other parties hereto. Any counterpart may be executed by facsimile or pdf signature and such facsimile or pdf signature shall be deemed an original.

     Section 8.13 Severability.

     If any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nevertheless be given full force and effect.

     Section 8.14 Expenses; Attorneys Fees.

     Each party hereto will pay all of its own fees and expenses in connection with entering into and consummating the transactions contemplated by this Agreement; provided, that the Company agrees to reimburse CHRP for CHRP’s actual, reasonable and documented out-of-pocket expenses to cover due diligence and other, including legal, expenses associated with the transactions contemplated hereby up to $300,000 in the aggregate; and provided, further, that if any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

     Section 8.15 Governing Law; Jurisdiction.

     (a) This Agreement shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the state of New York, without giving effect to the principles of conflicts of law thereof.

     (b) Any legal action or proceeding with respect to this Agreement or any other Transaction Document may be brought in any state or federal court of competent jurisdiction in the state, county and city of New York. By execution and delivery of this Agreement, each party hereto hereby irrevocably consents to and accepts, for itself and in respect of its property, generally and unconditionally the non-exclusive jurisdiction of such courts. Each party hereto hereby further irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of any Transaction Document.

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     (c) Each party hereto hereby irrevocably consents to the service of process out of any of the courts referred to in subsection (b) above of this Section 8.15 in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address set forth in this Agreement. Each party hereto hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any suit, action or proceeding commenced hereunder or under any other Transaction Document that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of a party to serve process on the other party in any other manner permitted by law.

     Section 8.16 Waiver of Jury Trial.

     Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any action, proceeding, claim or counterclaim arising out of or relating to any Transaction Document or the transactions contemplated under any Transaction Document. This waiver shall apply to any subsequent amendments, renewals, supplements or modifications to any Transaction Document.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

COMPANY:	ARTES MEDICAL, INC.
	By:	/s/ Diane S. Goostree
		Name:	Diane S. Goostree
		Title:	President & CEO
CHRP:	COWEN HEALTHCARE ROYALTY PARTNERS, L.P.
	By	Cowen Healthcare Royalty GP, LLC
		Its General Partner
	By:	/s/ Todd C. Davis
		Name:	Todd C. Davis
		Title:

SIGNATURE PAGE TO
REVENUE INTEREST FINANCING AND
WARRANT PURCHASE AGREEMENT

EX-10.44

EXHIBIT 10.44

Execution Version

ARTES MEDICAL, INC.

$6,500,000 10% Senior Secured Note
due on the fifth (5th) anniversary of the Closing Date

and

Common Stock Purchase Warrant
for 1,300,000 Shares of Common Stock

NOTE AND WARRANT PURCHASE AGREEMENT

Dated as of January 28, 2008

TABLE OF CONTENTS

			Page
ARTICLE I AUTHORIZATION OF NOTES AND FIRST WARRANT				1
	Section 1.01	Amount		1
	Section 1.02	Maturity Date		1
	Section 1.03	Interest		2
ARTICLE II SALE AND PURCHASE OF NOTE				2
ARTICLE III CLOSING				2
ARTICLE IV CONDITIONS TO CLOSING				3
	Section 4.01	Accuracy of Representations and Warranties		3
	Section 4.02	Performance; No Default		3
	Section 4.03	Litigation		3
	Section 4.04	Consents		3
	Section 4.05	Compliance Certificates		3
	Section 4.06	Opinions of Counsel		4
	Section 4.07	Purchase Permitted By Applicable Law, etc		4
	Section 4.08	Proceedings and Documents		4
	Section 4.09	Financing Transactions		4
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY				4
	Section 5.01	Authorization		4
	Section 5.02	Governmental Authorization		5
	Section 5.03	Ownership of Shares of Subsidiaries and Capitalization		5
	Section 5.04	Financial Statements		5
	Section 5.05	Existing Debt		5
	Section 5.06	Use of Proceeds		6
	Section 5.07	Foreign Assets Control Regulations, etc		6
	Section 5.08	Status under Certain Statutes		6
	Section 5.09	Additional Representations and Warranties		6
ARTICLE VI REPRESENTATIONS OF CHRP				6
ARTICLE VII FINANCIAL AND BUSINESS INFORMATION				7
ARTICLE VIII PREPAYMENT OF THE NOTE				8
ARTICLE IX AFFIRMATIVE COVENANTS				8
	Section 9.01	Insurance		9
	Section 9.02	Corporate Existence, etc		9
	Section 9.03	Note Security Agreement		9
	Section 9.04	Further Assurance		9

TABLE OF CONTENTS

(continued)

			Page
ARTICLE X NEGATIVE COVENANTS				10
	Section 10.01	Liens		10
	Section 10.02	Sale of Assets		10
	Section 10.03	Mergers, Consolidations, etc		10
	Section 10.04	Nature of Business		10
	Section 10.05	Debt		11
	Section 10.06	Transactions with Affiliates		11
	Section 10.07	Investments		11
	Section 10.08	Distributions		11
	Section 10.09	Subordinated Debt		11
	Section 10.10	Inventory and Equipment		11
ARTICLE XI EVENTS OF DEFAULT				12
ARTICLE XII ACCELERATION UPON DEFAULT; PREPAYMENT				12
	Section 12.01	Acceleration Upon Default		12
ARTICLE XIII REGISTRATION; EXCHANGE; SUBSTITUTION AND ALLOCATION OF NOTE AND FIRST WARRANT				13
	Section 13.01	Registration of Note and First Warrant		13
	Section 13.02	Transfer and Exchange of Note and/or Warrant		14
	Section 13.03	Replacement of Note and First Warrant		14
	Section 13.04	Tax Allocation of Note and First Warrant		15
ARTICLE XIV PAYMENTS ON NOTES				15
	Section 14.01	Place of Payment		15
	Section 14.02	Home Office Payment		15
ARTICLE XV AMENDMENT AND WAIVER				16
	Section 15.01	Requirements		16
	Section 15.02	Solicitation of the Holder of the Note and First Warrant		16
ARTICLE XVI NOTICES				16
ARTICLE XVII MISCELLANEOUS				18
	Section 17.01	Survival		18
	Section 17.02	Successors and Assigns		18
	Section 17.03	Payments Due on Non-Business Days		18
	Section 17.04	Entire Agreement		18
	Section 17.05	Interpretation		19
	Section 17.06	Headings and Captions		19

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TABLE OF CONTENTS

(continued)

		Page
Section 17.07	Counterparts; Effectiveness		19
Section 17.08	Severability		19
Section 17.09	Governing Law; Jurisdiction		19
Section 17.10	Waiver of Jury Trial		20
Section 17.11	Expenses; Attorney’s Fees		20

SCHEDULE A	Defined Terms
SCHEDULE 5.03	Subsidiaries; Capitalization of Company
SCHEDULE 5.05(A)	Debt to be Repaid
SCHEDULE 5.05(B)	Continuing Existing Debt
SCHEDULE 10.01	Existing Liens
EXHIBIT 1.01(i)	Form of Senior Secured Note
EXHIBIT 1.01(ii)	Form of First Warrant
EXHIBIT 4.06	Opinion Matters
EXHIBIT 4.09(a)	Form of Note Security Agreement
EXHIBIT 4.09(B)	Form of Subsidiary Note Security Agreement
EXHIBIT 4.09(C)	Form of Subsidiary Guaranty
EXHIBIT 4.09(D)	Form of Mortgage

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Artes Medical, Inc.
5870 Pacific Center Boulevard
San Diego, CA 92121
Phone: (858) 550-9999

$6,500,000 10% Senior Secured Note
due on the fifth (5th) anniversary of the Closing Date

and

Common Stock Purchase Warrant
for 1,300,000 Shares of Common Stock

Dated as of January 28, 2008

Cowen Healthcare Royalty Partners, L.P.
c/o Cowen Healthcare Royalty GP, LLC
177 Broad Street
Suite 1101
Stamford, CT 06901

Ladies and Gentlemen:

     Artes Medical, Inc., a Delaware corporation (the “Company”), agrees with Cowen Healthcare Royalty Partners, L.P., a Delaware limited partnership (“you” or “CHRP”), as follows:

ARTICLE I

AUTHORIZATION OF NOTES AND FIRST WARRANT

     Section 1.01 Amount.

     The Company has authorized the issue and sale of (i) a $6,500,000 aggregate principal amount 10% Senior Secured Note, due on the fifth (5th) anniversary of the Closing Date (the “Note,” such term to include any such notes issued in substitution therefor pursuant to Article XIII of this Agreement) substantially in the form set out in Exhibit 1.01(i), and (ii) a Common Stock Purchase Warrant (the “First Warrant”) substantially in the form set out in Exhibit 1.01(ii), each with such changes therefrom, if any, as may be approved by you and the Company.

     Section 1.02 Maturity Date.

     The initial maturity date of the Note shall be the fifth (5th) anniversary of the Closing Date.

     Section 1.03 Interest.

     The Note shall, subject to the addition of any default interest, bear interest at a per annum rate of 10%. Interest shall be computed on the basis of a three hundred sixty (360) day year, comprised of twelve (12) thirty (30) day months. Interest shall be payable, in cash, monthly in arrears on the last day of each calendar month. In no event shall the interest charged in respect of the Note exceed the highest maximum amount chargeable as interest under applicable law, provided that if applicable law limits the amount chargeable as interest hereunder and applicable law subsequently permits a rate of interest in respect of the Note which is higher than the stated rate chargeable under the terms of the Note, the Note shall bear interest at such higher rate until the aggregate interest charged in respect of the Note equals the amount which would have been charged if the rate chargeable in respect of the Note had not been so previously limited and thereafter the rate chargeable in respect of the Note shall reduce from such higher rate to the stated rate of interest hereunder.

ARTICLE II

SALE AND PURCHASE OF NOTE

     Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Article III, the Note in the aggregate principal amount specified in Section 1.01, together with the First Warrant, at the purchase price of 100% of the principal amount of the Note.

ARTICLE III

CLOSING

     The sale and purchase of the Note and the First Warrant to be purchased by you shall occur at the offices of McDermott Will & Emery LLP, Chicago, Illinois at 9:00 a.m., Chicago time, at a closing (the “Closing”) as soon as practicable after the satisfaction or waiver by you and the Company of the closing conditions set forth in Article IV, or as otherwise may be agreed upon by you and the Company. At the Closing, the Company will deliver to you the Note and the First Warrant, each dated the date of the Closing and registered in your name (or in the name of your nominee) against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to Comerica Bank, Routing # ^***, Account # ***, Beneficiary Name: ARTES MEDICAL INC. If at the Closing the Company fails to tender the Note and the First Warrant to you as provided above in this Article III, or any of the conditions specified in Article IV shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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ARTICLE IV

CONDITIONS TO CLOSING

     Your obligation to purchase and pay for the Note and the First Warrant is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions:

     Section 4.01 Accuracy of Representations and Warranties.

     The representations and warranties of the Company set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date.

     Section 4.02 Performance; No Default.

     The Company shall have materially performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Note and the First Warrant (and the application of the proceeds thereof as contemplated by Section 5.06) no Default or Event of Default shall have occurred and be continuing.

     Section 4.03 Litigation.

     No action, suit, litigation, proceeding or investigation shall have been instituted, be pending or threatened (i) challenging or seeking to make illegal, to delay or otherwise directly or indirectly to restrain or prohibit the consummation of the transactions contemplated by this Agreement, or seeking to obtain damages in connection with the transactions contemplated by this Agreement, or (ii) seeking to restrain or prohibit your rights or performance under the Revenue Agreement.

     Section 4.04 Consents.

     All material notices to, consents, approvals, authorizations and waivers from Third Parties and Government Authorities that are required for the consummation of the transactions contemplated by this Agreement or any of the Note Documents shall have been obtained or provided for and shall remain in effect.

     Section 4.05 Compliance Certificates.

     (a) Officer’s Certificate. The Company shall have delivered to you a certificate of an executive officer of the Company pursuant to which such officer certifies that the conditions set forth in Sections 4.01, 4.02, and 4.03 have been satisfied in all material respects.

     (b) Secretary’s Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and any other corporate proceedings relating to the authorization, execution and delivery of the Note, the First Warrant and this Agreement.

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     Section 4.06 Opinions of Counsel.

     You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing from Heller Ehrman LLP, covering the matters set forth in Exhibit 4.06 and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company instructs its counsel to deliver such opinion to you).

     Section 4.07 Purchase Permitted By Applicable Law, etc.

     On the date of the Closing your purchase of the Note and the First Warrant shall (i) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (ii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you at least three (3) Business Days prior to the Closing, you shall have received an Officer’s certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted.

     Section 4.08 Proceedings and Documents.

     All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request, including without limitation, the Security Documents and the Subsidiary Guaranty.

     Section 4.09 Financing Transactions.

     The Company shall have consummated the transactions contemplated by the Revenue Agreement, all on the terms and conditions described therein. The Company shall have issued the Second Warrant to CHRP pursuant to the terms of the Revenue Agreement.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     As of the date hereof (it being understood that the representations and warranties contained herein shall be deemed to be made both before and after giving effect to the consummation of the transactions contemplated under the Revenue Agreement), the Company represents and warrants to you that:

     Section 5.01 Authorization.

     The Company has all necessary power and authority to enter into, execute and deliver this Agreement, the Note and the First Warrant and to perform all of the obligations to be performed by it hereunder and thereunder and to consummate the transactions contemplated hereunder and thereunder. This Agreement, the Note and the First Warrant each have been duly authorized,

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executed and delivered by the Company and each of this Agreement, the Note and the First Warrant constitutes the valid and binding obligation of the Company, enforceable against it in accordance with their respective terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or general equitable principles.

     Section 5.02 Governmental Authorization.

     The execution and delivery by the Company of this Agreement, the Note and the First Warrant, and the performance by it of its obligations hereunder and thereunder, does not require any notice to, action or consent by, or in respect of, or filing with, any Governmental Authority, except for the filing of financing statements under the UCC and filings required under federal and state securities laws.

     Section 5.03 Ownership of Shares of Subsidiaries and Capitalization.

     (a) Except as set forth on Schedule 5.03, the Company has no Subsidiaries and owns no equity interests or debt interests of any other Person.

     (b) Except as set forth on Schedule 5.03, there are no options, warrants, convertible instruments or other rights held by any Person to acquire any equity interest (or interest convertible or exchangeable for any equity interest) in the Company. The authorized capital stock of the Company consists of (i) 200,000,000 shares of Common Stock, par value $0.001 per share, of which 16,514,163 shares are issued and outstanding as of the date hereof, and of which an additional 5,562,219 shares have been reserved for issuance upon exercise or conversion of outstanding securities; and (ii) 10,000,000 shares of undesignated preferred stock, none of which are issued and outstanding or reserved for issuance upon exercise or conversion of securities.

     (c) The shares of Common Stock issuable upon exercise of the First Warrant will, when issued, in accordance with the exercise provisions of the First Warrant, will be duly and validly issued, fully paid, non assessable and free and clear of all Liens, except any Liens created by or through you.

     Section 5.04 Financial Statements.

     The Financial Statements are complete and accurate in all material respects, were prepared in conformity with GAAP and present fairly in all material respects the financial position and the financial results of the Company and its Subsidiaries as of the dates and for the periods covered thereby.

     Section 5.05 Existing Debt.

     Other than (i) with respect to the Debt identified on Schedule 5.05(A) hereto (the “Debt to be Repaid”), (ii) Debt identified on Schedule 5.05(B) hereto and (iii) with respect to its obligations in respect of the Note, the Company has no Debt.

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     Section 5.06 Use of Proceeds.

     The Company shall use all proceeds from the issuance of the Note and the First Warrant (i.e., not including any proceeds received by the Company upon exercise of the First Warrant) to repay in full all obligations in respect of the Debt to be Repaid. The Company shall not use any such proceeds for any other purpose.

     Section 5.07 Foreign Assets Control Regulations, etc.

     (a) Neither the sale of the Note or the First Warrant by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

     (b) The Company (i) is not a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) does not engage in any dealings or transactions with any such Person. The Company is in compliance, in all material respects, with the USA Patriot Act.

     (c) No part of the proceeds from the sale of the Note and the First Warrant hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company.

     Section 5.08 Status under Certain Statutes.

     The Company is not subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 2006, as amended, the Interstate Commerce Act, as amended by the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended.

     Section 5.09 Additional Representations and Warranties.

     The representations and warranties of the Company contained in Sections 3.06 through 3.19, inclusive, of the Revenue Agreement are hereby incorporated by reference as if such sections were set forth in full herein, mutatis mutandi.

ARTICLE VI

REPRESENTATIONS OF CHRP

     You represent that (i) the Note and the First Warrant are being acquired for the your own account and without a view to the resale or distribution of the Note, the First Warrant or any interest therein; (ii) you are an “accredited investor” as such term is defined in Rule 501(a) of Regulation D under the Securities Act; (iii) you understand that the Note and the First Warrant

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being sold hereby have not been registered under the Securities Act, or applicable state securities laws, and are being issued in reliance on exemptions for private offerings contained in Section 4(2) of the Securities Act and in reliance on exemptions from the registration requirements of certain state securities laws; (iv) because the Note and the First Warrant have not been registered under the Securities Act or applicable state securities laws, the Note and the First Warrant may not be re-offered or resold except through a valid and effective registration statement or pursuant to a valid exemption from the registration requirements under the Securities Act and applicable state securities laws; (v) you have sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of your investment in the Note and the First Warrant and are capable of bearing the economic risks of such investment, including a complete loss of your investment in the Note and the First Warrant; and (vi) you understand that your investment in the Note and the First Warrant involves a high degree of risk.

ARTICLE VII

FINANCIAL AND BUSINESS INFORMATION

     Following the termination of the Revenue Agreement, the Company agrees to deliver to you and to perform the following:

     (a) Promptly after receipt by the Company of notice of any action, claim, investigation, proceeding (commenced or threatened), certificate, offer, proposal, material correspondence or other material written communication relating to the transactions contemplated by this Agreement, the Revenue Agreement, or documents related thereto or transactions contemplated thereby, then, the Company shall inform you of the receipt of such notice and the substance of such action, claim, investigation, proceeding, certificate, offer, proposal, correspondence or other written communication and, if in writing shall furnish you with a copy of such notice and any related materials with respect to such action, claim, investigation, proceeding, certificate, offer, proposal, correspondence or other written communication.

     (b) The Company shall keep and maintain, or cause to be kept and maintained, at all times accurate and complete books and records.

     (c) You and any of your representatives shall have the right (at your cost), from time to time (but no more frequently than four (4) times per twelve (12) month period), to visit the Company and its Subsidiaries’ offices and properties where the Company and its Subsidiaries keep and maintain its books and records relating or pertaining to the Collateral for purposes of conducting an audit of such books and records, and to inspect, copy and audit such books and records, during normal business hours, and, upon five (5) Business Days’ written notice given by you to the Company, the Company will provide you and any of your representatives reasonable access to such books and records, and shall permit you and any of your representatives to discuss the business, operations, properties and financial and other condition of the Company or any of its Affiliates including, but not limited to, matters relating or pertaining to the Collateral with officers of such parties, and with their independent certified public accountants (to the extent such independent certified accountants agree to discuss such matters with you).

     (d) The Company shall deliver to you the following financial statements:

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          (i) Within forty-five (45) calendar days after the end of each Fiscal Quarter, copies of the unaudited consolidated financial statements of the Company and its Subsidiaries for such Fiscal Quarter; and

          (ii) Within ninety (90) calendar days after the end of each Fiscal Year, copies of the audited consolidated financial statements of the Company and its Subsidiaries for such Fiscal Year.

     (e) The Company shall maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP.

     (f) All information furnished by the Company to CHRP in connection with this Agreement shall be kept confidential by CHRP in accordance with the terms of the Confidentiality Agreement, dated August 24, 2007, between CHRP and the Company, and shall be used by CHRP only in connection with this Agreement and any other Transaction Document and the transactions contemplated hereby and thereby.

ARTICLE VIII

PREPAYMENT OF THE NOTE

     No regularly scheduled principal prepayments are due on the Note prior to its stated maturity. The Company may at any time prepay all or any portion of the obligations under the Note in accordance with this Article VIII. In the event of prepayment of the Note by the Company, (i) the Company shall give the holder of the Note written notice of its election to optionally prepay all or a portion of the Note under this Article VIII not less than thirty (30) days prior to the date fixed for such prepayment (such notice shall specify the date (which shall be a Business Day) for prepayment of the Note and the amount of principal to be repaid), and (ii) the Company shall pay to the holder of the Note on the date fixed for such prepayment (which shall be a Business Day), an amount in cash equal to (x) a principal amount of the Note as stated in such notice, (y) all accrued and unpaid interest on such principal amount, and (z) the applicable pro rata portion of the Prepayment Premium (based on the portion of principal amount to be repaid).

     From and after the date (which shall be a Business Day) properly fixed for prepayment of the Note, unless the Company shall fail to pay such amounts set forth in clauses (x), (y) and (z) of the paragraph above, interest on such portion of principal amount repaid shall cease to accrue. Upon the payment or prepayment of the Note in full, it shall be surrendered to the Company and canceled and shall not be reissued.

ARTICLE IX

AFFIRMATIVE COVENANTS

     The Company covenants and agrees that, until the outstanding Obligations are paid in full, except with CHRP’s prior written consent:

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     Section 9.01 Insurance.

     The Company shall (i) maintain insurance policies with insurance companies rated not less than “A-” by A.M. Best Company, Inc. with coverages and in amounts customary for companies of comparable size and condition similarly situated in the same industry as the Company, including product liability insurance, directors and officers insurance and general liability insurance, subject only to such exclusions and deductible items as are usual and customary in insurance policies of such type, and (ii) maintain you as an additional insured party with respect to its general liability and product liability insurance policies.

     Section 9.02 Corporate Existence, etc.

     The Company will at all times preserve and keep in full force and effect its corporate existence.

     Section 9.03 Note Security Agreement.

     The Company and its Subsidiaries shall, at all times until the Note has been paid and performed in full, grant in favor of you a valid, continuing, first perfected Lien on and security interest in the collateral described in the Security Documents; it being understood that your security interest in that portion of the Collateral consisting of “Subordinated Collateral” (as defined in the Note Security Agreement) shall be subordinated to the security interest of the Revenue Interest Secured Party (as defined in the Note Security Agreement) in such collateral pursuant to the Revenue Interest Security Agreement (as defined in the Note Security Agreement).

     Section 9.04 Further Assurance.

     (a) Subject to the terms and conditions of this Agreement, you and the Company will use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable laws and regulations to consummate the transactions contemplated by this Agreement. You and the Company agree to execute and deliver such other documents, certificates, agreements and other writings (including any financing statement filings requested by you) and to take such other actions as may be reasonably necessary in order to consummate or implement expeditiously the transactions contemplated by this Agreement.

     (b) You and the Company shall execute and deliver such additional documents, certificates and instruments, and to perform such additional acts, as may be reasonably requested and necessary or appropriate to carry out and effectuate all of the provisions of this Agreement and to consummate all of the transactions contemplated by this Agreement.

     (c) You and the Company shall cooperate and provide assistance as reasonably requested by the other respective party in connection with any litigation, arbitration or other proceeding (whether threatened, existing, initiated, or contemplated prior to, on or after the date hereof) to which any party hereto or any of its officers, directors, shareholders, agents or employees is or may become a party or is or may become otherwise directly or indirectly affected

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or as to which any such Persons have a direct or indirect interests, in each case relating to this Agreement or the transactions described herein.

ARTICLE X

NEGATIVE COVENANTS

     The Company covenants and agrees that, until the outstanding Obligations are paid in full, the Company will not do any of the following without CHRP’s prior written consent:

     Section 10.01 Liens.

     (a) Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any accounts (within the meaning of the UCC), or permit any of its Subsidiaries so to do, except for Permitted Liens.

     (b) Agree with any Person other than CHRP not to grant a security interest in, or otherwise encumber, any of its, or covenant to any other Person that the Company in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of the Company’s property, or permit any Subsidiary to do so, except in connection with the Permitted Liens.

     Section 10.02 Sale of Assets.

     Convey, sell, lease, license, transfer or otherwise dispose of (collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer, all or any material part of its business or property, including its intellectual property, other than Permitted Transfers or move cash balances on deposit with institutions with which CHRP has deposit account control agreements to accounts opened at another financial institution.

     Section 10.03 Mergers, Consolidations, etc.

     Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into the Company), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except where (i) no Event of Default has occurred, is continuing or would exist after giving effect to such transactions, (ii) such transactions do not in the aggregate exceed Five Hundred Thousand Dollars ($500,000) during any Fiscal Year, (iii) such transactions do not result in a Change in Control, and (iv) the Company is the surviving entity.

     Section 10.04 Nature of Business.

     Engage in any business if, as a result, the general nature of the business in which the Company would then be engaged would be substantially changed from the general nature of the business and related services in which the Company is engaged on the date of this Agreement.

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     Section 10.05 Debt.

     Create, incur, assume, guarantee or be or remain liable with respect to any Debt, or permit any Subsidiary so to do, other than Permitted Debt, or prepay any Debt or take any actions which impose on the Company an obligation to prepay any Debt, except Debt to CHRP.

     Section 10.06 Transactions with Affiliates.

     Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of the Company (not including a subsidiary of the Company which has guaranteed the obligations of the Company hereunder and granted liens on such subsidiary’s assets to secure such guaranty obligations) except for transactions that are in the ordinary course of the Company’s business, upon fair and reasonable terms that are no less favorable to the Company than would be obtained in an arm’s length transaction with a non-affiliated Person.

     Section 10.07 Investments.

     Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments, or maintain or invest any of its property with a Person other than CHRP or CHRP’s Affiliates or permit any Subsidiary to do so unless such Person has entered into a control agreement with CHRP, in form and substance satisfactory to CHRP, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to the Company.

     Section 10.08 Distributions.

     Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that the Company may (i) repurchase the stock of former employees pursuant to stock option agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase, and (ii) repurchase the stock of former employees pursuant to stock option agreements by the cancellation of indebtedness owed by such former employees to the Company regardless of whether an Event of Default exists.

     Section 10.09 Subordinated Debt.

     Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision affecting CHRP’s rights contained in any documentation relating to the Subordinated Debt without CHRP’s prior written consent.

     Section 10.10 Inventory and Equipment.

     Store its inventory or its equipment with a bailee, warehouseman, or similar Third Party unless the Third Party has been notified of CHRP’s security interest and CHRP is in possession of the warehouse receipt, where negotiable, covering such inventory or equipment and, to the extent the amount of such inventory and equipment which is stored with a Third Party is in excess of

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$250,000, the Third Parties where inventory and equipment constituting such excess are located shall have executed a collateral access agreement reasonably acceptable to CHRP.

ARTICLE XI

EVENTS OF DEFAULT

     An “Event of Default” shall exist if:

     (a) any “Put Option Event,” as defined in the Revenue Agreement, shall occur and be continuing;

     (b) the Company fails to pay the Note when due;

     (c) the Company violates any material term, provision, condition, covenant (including the covenants contained in Article X) contained in this Agreement, in any of the Note Documents, or in any other present or future agreement between the Company and CHRP related to the Note Documents and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within ten (10) days after the Company receives notice thereof or any officer of the Company becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by the Company be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then the Company shall have an additional reasonable period (which shall not in any case exceed ten (10) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default;

     (d) if there is a default or other failure to perform in any agreement to which the Company is a party with a Third Party or parties resulting in a right by such Third Party or parties, whether or not exercised, to accelerate the maturity of any Debt in an amount in excess of *** Dollars ($^***); or

     (e) if any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to CHRP by any the Company pursuant to this Agreement or to induce the Company to enter into this Agreement or any other Note Document.

ARTICLE XII

ACCELERATION UPON DEFAULT; PREPAYMENT

     Section 12.01 Acceleration Upon Default.

     (a) If an Event of Default with respect to the Company described in Article XI has occurred, the Note shall automatically become immediately due and payable.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     (b) Upon the Note becoming due and payable under this Section 12.01, the Note will forthwith mature and the entire principal amount of the Note, plus (y) all accrued and unpaid interest thereon and (z) the Prepayment Premium, shall all be immediately due and payable, without presentment, demand, protest or further notice, all of which are hereby waived.

     (c) If any Event of Default has occurred and is continuing, and irrespective of whether the Note has become or has been declared immediately due and payable under Section 12.01, the holder of the Note at the time outstanding may proceed to protect and enforce the rights of the holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in the Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.

     (d) At any time after the Note has been declared due and payable pursuant to Section 12.01, the holder of the Note outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (x) the Company has paid all overdue interest on the Note, all principal of the Note, the Prepayment Premium and all interest on such overdue principal, (y) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Article XV, and (z) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Note. No rescission and annulment under this Section 12.01(d) will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

     (e) No course of dealing and no delay on the part of the holder of the Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice the holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by the Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. The Company will pay to the holder of the Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Article XII, including, without limitation, reasonable attorneys’ fees, expenses and disbursements.

ARTICLE XIII

REGISTRATION; EXCHANGE; SUBSTITUTION AND ALLOCATION OF NOTE AND FIRST WARRANT

     Section 13.01 Registration of Note and First Warrant.

     The Company shall keep at its principal executive office a register for the registration and registration of transfers of the Note and the First Warrant. The name and address of the holders the Note and the First Warrant, each transfer thereof and the name and address of each transferee of the Note and the First Warrant shall be registered in such register. Prior to due presentment for registration of transfer, the Person(s) in whose name(s) the Note and the First Warrant shall be registered, respectively, shall be deemed and treated as the owner and holder thereof for all

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purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to holder(s) of the Note and/or the First Warrant (if the Note or the First Warrant shall have been sold or assigned in part), promptly upon request therefor, a complete and correct copy of the names and addresses of all other registered holders thereof, if any.

     Section 13.02 Transfer and Exchange of Note and/or Warrant.

     Upon surrender of the Note or the First Warrant, as the case may be, at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or First Warrant or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or First Warrant or part thereof), the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes or First Warrants (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note, or exercisable into the number of shares previously unexercised under the First Warrant, as the case may be. Each such new Note or First Warrant shall be payable to or exercisable by such Person as such holder may request and shall be substantially in the form of Note or First Warrant established for such series, as the case may be. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of the Note and/or First Warrant. Neither the Note nor the First Warrant shall be transferred in denominations (or notional values) of less than $1,000,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of the Note or First Warrant, one Note or First Warrant may be in a denomination (or notional value) of less than $1,000,000. Any transferee, by its acceptance of a Note or First Warrant registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Article VI. If the Note or the First Warrant initially issued hereunder is transferred in part, rather than in whole, each reference herein or in the Note, to the “holder of the Note,” to the First Warrant, to the “holder of the First Warrant” or like reference shall be deemed to be a reference to the “holders” thereof or a similar reference, as appropriate.

     Section 13.03 Replacement of Note and First Warrant.

     Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of the Note or First Warrant (which evidence shall be notice from the holder of such ownership and such loss, theft, destruction or mutilation), and

     (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of the Note or First Warrant is you or your nominee, your own unsecured agreement of indemnity shall be deemed to be satisfactory), or

     (b) in the case of mutilation, upon surrender and cancellation thereof,

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the Company at its own expense shall execute and deliver, in lieu thereof, a new Note or First Warrant of, as applicable, the same series or tranche, dated and bearing interest from the date to which interest shall have been paid on, or exercisable for the number of shares of Common Stock, such lost, stolen, destroyed or mutilated Note or First Warrant, as applicable, or dated the date of such lost, stolen, destroyed or mutilated Note or First Warrant if no interest shall have been paid thereon or shares exercised therefore, as applicable.

     Section 13.04 Tax Allocation of Note and First Warrant.

     The parties agree that the payments made by CHRP under this Agreement shall be allocated for income tax purposes as follows:

          (i) $67,369 shall be allocated to the First Warrant; and

          (ii) $6,432,631 shall be allocated to the Note.

ARTICLE XIV

PAYMENTS ON NOTES

     Section 14.01 Place of Payment.

     Subject to Section 14.02, payments of principal, the Prepayment Premium, if any, and interest becoming due and payable on the Note shall be made in New York, New York at the address specified for delivery of notices to CHRP in Article XVI. The Company may at any time, by notice to the holder of the Note, change the place of payment of the Note so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.

     Section 14.02 Home Office Payment.

     So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in the Note to the contrary, the Company will pay all sums becoming due on the Note for principal and the Prepayment Premium, if any, and interest by the method and at the address specified for such purpose in Section 14.01, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.01. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.02.

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ARTICLE XV

AMENDMENT AND WAIVER

     Section 15.01 Requirements.

     (a) This Agreement or any term or provision hereof may not be amended, changed or modified except with the written consent of the parties hereto. No waiver of any right hereunder shall be effective unless such waiver is signed in writing by the party against whom such waiver is sought to be enforced.

     (b) No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

     Section 15.02 Solicitation of the Holder of the Note and First Warrant.

     (a) The Company will provide the holders of the Note and the First Warrant with sufficient information, sufficiently far in advance of the date a decision is required, to enable the holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Note or the First Warrant. The Company will deliver executed or true and correct copies of each amendment, waiver or consent to the holders of the Note or the First Warrant, as the case may be, promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the holder thereof.

     (b) Any consent made pursuant to this Article XV by the holder of the Note or the First Warrant that has transferred or has agreed to transfer its Note or First Warrant to the Company or any Affiliate of the Company and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force or effect except solely as to the holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent shall be void and of no force or effect except solely as to the holder.

ARTICLE XVI

NOTICES

     All notices, consents, waivers and communications hereunder given by any party to the other shall be in writing (including facsimile transmission) and delivered personally, by telegraph, telecopy, telex or facsimile, by a recognized overnight courier, or by dispatching the same by certified or registered mail, return receipt requested, with postage prepaid, in each case addressed:

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If to you to:

Cowen Healthcare Royalty Partners, L.P.
c/o Cowen Healthcare Royalty GP, LLC
177 Broad Street
Suite 1101
Stamford, CT 06901
Attention: Clarke B. Futch
Facsimile No.: (646) 562-1293
Email: clarke.futch@cowen.com

with a copy to:

McDermott Will & Emery LLP
227 West Monroe Street
Chicago, IL 60606-5096
Attention: Timothy R.M. Bryant
Facsimile No.: (312) 984-7700
Email: tbryant@mwe.com

If to the Company to:

Artes Medical, Inc.
5870 Pacific Center Boulevard
San Diego, CA 92121
Attention: Karla R. Kelly, General Counsel
Facsimile No.: (858) 875-5609
Email: kkelly@artesmedical.com

with a copy to:

Heller Ehrman LLP
4350 La Jolla Village Drive, 7th Floor
San Diego, CA 92122
Attention: Jeff Thacker
Facsimile No.: (858) 587-5941
Email: jthacker@hellerehrman.com

or to such other address or addresses as you or the Company may from time to time designate by notice as provided herein, except that notices of changes of address shall be effective only upon receipt. All such notices, consents, waivers and communications shall: (a) when posted by certified or registered mail, postage prepaid, return receipt requested, be effective three (3) Business Days after dispatch, unless such communication is sent trans-Atlantic, in which case they shall be deemed effective three (3) Business Days after dispatch, (b) when telegraphed, telecopied, telexed or facsimiled, be effective upon receipt by the transmitting party of confirmation of complete transmission, or (c) when delivered by a recognized overnight courier or in person, be effective upon receipt when hand delivered.

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ARTICLE XVII

MISCELLANEOUS

     Section 17.01 Survival.

     All representations and warranties and covenants made or contained herein, any certificates or in any other writing delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement, the Note and the First Warrant and shall continue to survive to the extent permitted by law until the later of (i) the termination of this Agreement upon the full payment and discharge of all amounts due under the Note and (ii) the third (3rd) anniversary hereof. Any investigation or other examination that may have been made or may be made at any time by or on behalf of the party to whom representations and warranties are made shall not limit, diminish or in any way affect the representations and warranties in this Agreement, and the parties may rely on the representations and warranties in this Agreement irrespective of any information obtained by them by any investigation, examination or otherwise.

     Section 17.02 Successors and Assigns.

     The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. None of the Company nor its Subsidiaries shall be entitled to assign any of its obligations and rights under the this Agreement without the prior written consent of CHRP. CHRP may assign without consent of the Company or its Subsidiaries any of its rights under this Agreement without restriction.

     Section 17.03 Payments Due on Non-Business Days.

     Anything in this Agreement or the Note to the contrary notwithstanding, any payment of principal of, the Prepayment Premium or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day (unless such next succeeding Business Day would fall in the next calendar month, in which case such payment shall be made on the next preceding Business Day) without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.

     Section 17.04 Entire Agreement.

     This Agreement, together with the Exhibits and Schedules hereto (which are incorporated herein by reference), the Note, the First Warrant, the Note Security Agreement and the agreements referenced herein and therein constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements (including the Summary of Terms and Conditions dated December 12, 2007 between CHRP and the Company), understandings and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement; provided, however, the terms of that certain Confidentiality Agreement by and between the Company and CHRP dated as of August 24, 2007 shall continue

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in effect. No representation, inducement, promise, understanding, condition or warranty not set forth herein (or in the Exhibits, Schedules, the Note or the First Warrant) has been made or relied upon by either party hereto. None of this Agreement, nor any provision hereof, is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder.

     Section 17.05 Interpretation.

     When a reference is made in this Agreement to Articles, Sections, Schedules or Exhibits, such reference shall be to an Article, Section, Schedule or Exhibit to this Agreement unless otherwise indicated. The words “include”, “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation”. Neither party hereto shall be or be deemed to be the drafter of this Agreement for the purposes of construing this Agreement against one party or the other.

     Section 17.06 Headings and Captions.

     The headings and captions in this Agreement are for convenience and reference purposes only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

     Section 17.07 Counterparts; Effectiveness.

     This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other parties hereto. Any counterpart may be executed by facsimile or pdf signature and such facsimile or pdf signature shall be deemed an original.

     Section 17.08 Severability.

     If any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nevertheless be given full force and effect.

     Section 17.09 Governing Law; Jurisdiction.

     (a) This Agreement shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the State of New York, without giving effect to the principles of conflicts of law thereof.

     (b) Any legal action or proceeding with respect to this Agreement may be brought in any state or federal court of competent jurisdiction in the state, county and city of New York. By execution and delivery of this Agreement, each party hereto hereby irrevocably consents to and accepts, for itself and in respect of its property, generally and unconditionally the non-exclusive jurisdiction of such courts. Each party hereto hereby further irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of this Agreement.

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     (c) Each party hereto hereby irrevocably consents to the service of process out of any of the courts referred to in subsection (b) above of this Section 17.09 in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address set forth in this Agreement. Each party hereto hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any suit, action or proceeding commenced hereunder that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of a party to serve process on the other party in any other manner permitted by law.

     Section 17.10 Waiver of Jury Trial.

     Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any action, proceeding, claim or counterclaim arising out of or relating to any Note Document or the transactions contemplated under any Note Document. This waiver shall apply to any subsequent amendments, renewals, supplements or modifications to any Note Document.

     Section 17.11 Expenses; Attorney’s Fees.

     Each party hereto will pay all of its own fees and expenses in connection with entering into and consummating the transactions contemplated by this Agreement; provided, that the Company agrees to reimburse you for your actual, reasonable and documented out-of-pocket expenses to cover due diligence and other, including legal, expenses associated with the transactions contemplated hereby and by the Revenue Agreement, but in no event shall such reimbursement exceed $300,000 in the aggregate; provided, further, that if any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

* * *

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     If you are in agreement with the foregoing, please execute the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company.

Very truly yours, Artes Medical, Inc.
By:	/s/ Diane S. Goostree
	Name:	Diane S. Goostree
	Title:	President & CEO

The foregoing is agreed to as of the date thereof. Cowen Healthcare Royalty Partners, L.P. By: Cowen Healthcare Royalty GP, LLC        Its: General Partner
By:	/s/ Todd C. Davis
	Name:	Todd C. Davis
	Title:

SIGNATURE PAGE TO
NOTE AND WARRANT
PURCHASE AGREEMENT

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SCHEDULE A

DEFINED TERMS

     As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

     “Affiliate” shall mean any Person that controls, is controlled by, or is under common control with another Person. For purposes of this definition, “control” shall mean (i) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (ii) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities.

     “Agreement” and references thereto, shall mean this Note and Warrant Purchase Agreement as it may from time to time be amended or supplemented.

     “Anti-Terrorism Order” shall mean Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), as amended.

     “Business Day” shall mean any day other than a Saturday, a Sunday, any day which is a legal holiday under the laws of the State of New York, or any day on which banking institutions located in the State of New York are required by law or other governmental action to close.

     “Change in Control” shall have the meaning provided therefor in the Revenue Agreement.

     “Closing” shall have the meaning set forth in Article III.

     “Closing Date” shall mean the date of the Closing.

     “Company” shall mean Artes Medical, Inc., a Delaware corporation, together with its successors and assigns.

     “Debt” with respect to any Person, shall mean, at any time, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into, and accruals (including accruals for patronage dividends payable in cash) arising, in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to surety instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller under such agreement in the event of default are limited to repossession or sale of such property, in which case the amount of the Debt with respect thereto shall be limited to the fair market value of such property); (f) all capital lease obligations; (g) all indebtedness referred to in foregoing clauses (a) through (f) secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and

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contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt; provided, the amount of such Debt for the purposes of this clause (g) shall be the amount stipulated in any agreement or instrument evidencing such Person’s obligation; (h) obligations arising in connection with the transfer of an interest in accounts or notes receivable which transfer constitutes a true sale, including securitizations, and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (h) above.

     “Debt to be Repaid” shall have the meaning set forth in Section 5.05.

     “Default” shall mean an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

     “Default Rate” shall mean that rate of interest that is the greater of (i) ***% per annum above the rate of interest stated in clause (a) of the first paragraph of the Note or (ii) ^***% over the rate of interest publicly announced by JPMorgan Chase, N.A. (or its successor) from time to time in New York, New York as its “base” or “prime” rate.

     “Event of Default” shall have the meaning set forth in Article XI.

     “FDA” shall mean the United States Food and Drug Administration or any successor federal agency thereto.

     “Financial Statements” shall mean the audited consolidated balance sheets of the Company and its Subsidiaries at December 31, 2006, 2005 and 2004, and the related audited consolidated statements of operations, stockholders’ equity and cash flows of the Company and its Subsidiaries for the Fiscal Years ended December 31, 2006, 2005 and 2004, and the unaudited consolidated balance sheet of the Company and its Subsidiaries at September 30, 2007 and the related unaudited consolidated statements of operations, stockholders’ equity and cash flows of the Company and its Subsidiaries for the Fiscal Quarter ended September 30, 2007 and the accompanying footnotes thereto.

     “First Warrant” shall have the meaning set forth in Section 1.01.

     “Fiscal Quarter” shall mean a calendar quarter.

     “Fiscal Year” shall mean a calendar year.

     “GAAP” shall mean generally accepted accounting principles in the United States in effect from time to time.

     “Governmental Authority” shall mean any government, court, regulatory or administrative agency or commission, or other governmental authority, agency or instrumentality, whether foreign, federal, state or local (domestic or foreign), including the United States Patent and Trademark Office, the FDA, the United States National Institutes of Health, or any other government authority in any country.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     “Guaranty Obligation” shall mean, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, without duplication, with respect to any Debt, lease, dividend, letter of credit or other obligation (the “primary obligations”) of another Person (the “primary obligor”), including any obligation of that Person (a) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (b) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof, excluding from the foregoing obligations in connection with the endorsement of checks.

     “holder” shall mean, with respect to the Note and/or the First Warrant, the Person in whose name the Note and/or the First Warrant, as applicable, is registered in the register maintained by the Company pursuant to Section 13.01.

     “Investment” shall mean any beneficial ownership of (including stock, partnership or limited liability company interest other securities) any Person, or any loan, advance or capital contribution to any Person.

     “Lien” shall mean any lien, hypothecation, charge, instrument, license, preference, priority, security agreement, security interest, interest, mortgage, option, privilege, pledge, liability, covenant, order, tax, right of recovery, trust or deemed trust (whether contractual, statutory or otherwise arising) or any encumbrance, right or claim of any other person of any kind whatsoever whether choate or inchoate, filed or unfiled, noticed or unnoticed, recorded or unrecorded, contingent or non-contingent, material or non-material, known or unknown.

     “Mortgage” shall mean the Leasehold Mortgage dated as of the Closing Date between the Company and CHRP and the other parties thereto, in the form of Exhibit 4.09(D), executed by the Company in favor of CHRP.

     “Note” shall have the meaning set forth in Section 1.01.

     “Note Documents” shall mean, collectively, this Agreement, the Note, the First Warrant, the Mortgage, the Security Documents and any other document, instrument or agreement entered into in connection with this Agreement, all as amended or extended from time to time.

     “Note Security Agreement” shall mean the Note Security Agreement, in the form of Exhibit 4.09(A), executed by the Company in favor of CHRP.

     “Obligations” shall mean all debt, principal, interest, expenses and other amounts owed to CHRP by the Company pursuant to this Agreement or any other Note Document, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Bankruptcy Event (as defined in the Revenue Agreement) and including any debt, liability, or obligation owing from the Company to others that CHRP may have obtained by assignment or otherwise.

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     “Permitted Debt” shall mean:

     (a) Debt of the Company in favor of CHRP arising under this Agreement or any other Note Document;

     (b) Debt existing on the Closing Date and disclosed in Schedule 5.05(B);

     (c) Debt not to exceed    ***    Dollars ($^***) in the aggregate in any Fiscal Year of the Company secured by a lien described in clause (c) of the defined term “Permitted Liens;” provided such Debt does not exceed the lesser of the cost or fair market value of the equipment financed with such Debt;

     (d) Subordinated Debt;

     (e) Debt to trade creditors incurred in the ordinary course of business;

     (f) so long as the lender thereunder has entered into an intercreditor agreement reasonably acceptable to CHRP with respect to the collateral therefor, a Permitted Working Capital Line of Credit; and

     (g) Extensions, refinancings and renewals of any items of Permitted Debt, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon the Company or its Subsidiaries, as the case may be.

     “Permitted Investment” shall mean:

     (a) Investments existing on the Closing Date disclosed in the Schedule; and

     (b) Investments permitted under the Company’s Investment Policy as in effect on the Closing Date, a true, correct and complete copy of which has been provided by the Company to CHRP;

     (c) Repurchases of stock from former employees or directors of the Company under the terms of applicable stock option agreements (i) in an aggregate amount not to exceed    ***    Dollars ($***) in any Fiscal Year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases, or (ii) in any amount where the consideration for the repurchase is the cancellation of indebtedness owed by such former employees to the Company regardless of whether an Event of Default exists;

     (d) Investments accepted in connection with Permitted Transfers;

     (e) Investments of Subsidiaries in or to other Subsidiaries or the Company and Investments by the Company in Subsidiaries not to exceed    ***    Dollars ($***) in the aggregate in any Fiscal Year;

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

A-4

     (f) Investments not to exceed    ***    Dollars ($^***) in the aggregate in any Fiscal Year consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of the Company or its Subsidiaries pursuant to employee stock purchase plan agreements approved by the Company’s Board of Directors;

     (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of the Company’s business;

     (h) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (h) shall not apply to Investments of the Company in any Subsidiary; and

     (i) Joint ventures or strategic alliances in the ordinary course of the Company’s business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by the Company do not exceed    ***    Dollars ($***) in the aggregate in any Fiscal Year;

provided, that in no event shall Permitted Investments include investments in Subsidiaries of the Company which either have not provided a guaranty of the Company’s Obligations hereunder or have not provided a security agreement securing such guaranty obligations (in each case in form and substance reasonably satisfactory to CHRP) other than aggregate Investments, at any one time outstanding, in Artes Medical Germany GmbH which are less than $***.

     “Permitted Liens” shall mean the following:

     (a) Any Liens existing on the Closing Date and disclosed in Schedule 10.01 (excluding Liens to be satisfied with the proceeds of the Note) or arising under this Agreement or the other Note Documents;

     (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which the Company maintains adequate reserves, provided the same have no priority over any of CHRP’s security interests;

     (c) Liens not to exceed    ***    Dollars ($***) in the aggregate in any Fiscal Year (i) upon or in any equipment acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

A-5

solely to the property so acquired and improvements thereon, and the proceeds of such equipment;

     (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase;

     (e) Liens arising from judgments, decrees or attachments in circumstances not involving amounts in excess of    ***    Dollars ($^***);

     (f) Liens on accounts receivable and inventory and products and proceeds thereof securing a Permitted Working Capital Line of Credit; provided that in no event shall such Lien extend to any of the Collateral under the Revenue Interest Security Agreement; and

     (g) Mechanics Liens related to the tenant improvements authorized by the Company’s leases for its corporate headquarters buildings in San Diego, California.

     “Permitted Transfer” shall mean the conveyance, sale, lease, transfer or disposition by the Company or any Subsidiary of:

     (a) inventory in the ordinary course of business;

     (b) licenses and similar arrangements for the use of the property of the Company or its Subsidiaries in the ordinary course of business;

     (c) worn-out or obsolete equipment;

     (d) other assets of the Company or its Subsidiaries that do not in the aggregate exceed    ***    Dollars ($***) during any Fiscal Year; or

     (e) assets or licenses for the use of the property of the Company (including the Company’s Intellectual Property) to a Subsidiary of the Company.

     “Permitted Working Capital Line of Credit” shall mean a secured revolving line of credit borrowed by the Borrower, in which the collateral for such Permitted Working Capital Line of Credit consists of the Company’s inventory and accounts receivable and the aggregate principal amount outstanding thereunder does not exceed the aggregate of    ***    percent (***%) of inventory (at the lower of cost and market) and    ***    percent (***%) of accounts receivable.

     “Person” shall mean an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, but not including a government or political subdivision or any agency or instrumentality of such government or political subdivision.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

A-6

     “Prepayment Premium” shall mean a prepayment premium payable by the Company (to the full extent permitted by applicable law) in an amount which, when added to principal and interest payments then due and to all other payments (including principal and interest payments) to CHRP made from and after the Closing Date in respect of the Note (exclusive of payments in respect of indemnification and expenses), would make the sum of the prepayment premium, together with the principal and interest payments then due and all other payments made from and after the Closing Date in respect of the Note (exclusive of payments in respect of indemnification and expenses) equal    ***    Percent (^***%) of the aggregate principal amount of the Note set forth in Section 1.01.

     “Put Option Event” shall have the meaning set forth in Article XI.

     “Revenue Agreement” shall mean the Revenue Interest Financing and Warrant Purchase Agreement of even date herewith between the Company and CHRP.

     “Second Warrant” shall mean the warrant issued to the initial holder of the Note pursuant to the Revenue Agreement, in consideration for such holder’s consummation of the transactions under the Revenue Agreement.

     “Security Documents” shall mean the Note Security Agreement, the Subsidiary Note Security Agreement, the Mortgage and documents referenced therein.

     “Securities Act” shall mean the Securities Act of 1933, as amended from time to time.

     “Subordinated Collateral” shall have the meaning set forth in Section 9.03.

     “Subordinated Debt” means any debt incurred by the Company that is subordinated in writing to the debt owing by the Company to CHRP on terms reasonably acceptable to CHRP (and identified as being such by the Company and CHRP).

     “Subsidiary” or “Subsidiaries” shall mean with respect to any Person (i) any corporation of which the outstanding capital stock having at least a majority of votes entitled to be cast in the election of directors under ordinary circumstances shall at the time owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. Unless otherwise indicated herein, a reference to a “Subsidiary” or to “Subsidiaries” shall be deemed to be a reference to a Subsidiary or Subsidiaries of the Company.

     “Subsidiary Guaranty” shall mean the Guaranty, in the form of Exhibit 4.09(C), executed by the domestic Subsidiaries of the Company in favor of CHRP.

     “Subsidiary Note Security Agreement” shall mean the Subsidiary Note Security Agreement, in the form of Exhibit 4.09(B), executed by the domestic Subsidiaries of the Company in favor of CHRP.

     “Third Party” shall mean any Person other than the Company or you or their or your respective Affiliates.

^*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.

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     “Transfer” shall have the meaning set forth in Section 10.02.

     “USA Patriot Act” shall mean United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

     “UCC” shall mean the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.

A-8

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-140904) pertaining to the Options Issued Pursuant to Individual Option Agreements, the 2000 Stock Option Plan, the Amended and Restated 2001 Stock Option Plan, the 2006 Equity Incentive Plan and the Warrants Issued to Employees, Directors and Service Providers of Artes Medical, Inc. of our reports dated March 13, 2008, with respect to: (1) the consolidated financial statements and schedule of Artes Medical, Inc., and (2) the effectiveness of internal control over financial reporting of Artes Medical, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2007.

/s/ Ernst & Young LLP

San Diego, California
March 13, 2008

EX-31.1

Exhibit 31.1

ARTES MEDICAL, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Diane S. Goostree, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Artes Medical, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

By:	/s/ Diane S. Goostree Diane S. Goostree
	President and Chief Executive Officer
Date: March 14, 2008

EX-31.2

Exhibit 31.2

ARTES MEDICAL, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Peter C. Wulff, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Artes Medical, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

By:	/s/ Peter C. Wulff Peter C. Wulff
	Executive Vice President and Chief Financial Officer
Date: March 14, 2008

EX-32.1

Exhibit 32.1

ARTES MEDICAL, INC.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Artes Medical, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Diane S. Goostree, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Diane S. Goostree Diane S. Goostree
	President and Chief Executive Officer
Date: March 14, 2008

EX-32.2

Exhibit 32.2

ARTES MEDICAL, INC.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Artes Medical, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter C. Wulff, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Peter C. Wulff Peter C. Wulff
	Executive Vice President and Chief Financial Officer
Date: March 14, 2008