1351197--3/14/2008--ARTES_MEDICAL

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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 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. 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. 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. 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. 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 face significant competition from companies with greater resources and well-established sales channels, which may make it difficult for us to achieve market penetration. 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. 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. If changes in the economy and consumer spending reduce demand for ArteFill, our sales and profitability could suffer. 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. 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. 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. 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. 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. 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 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. 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 are dependent on our key management personnel. The loss of any of these individuals could harm our business. We may rely on third parties for our international sales, marketing and distribution activities. 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 we acquire any companies or technologies, our business may be disrupted and the attention of our management may be diverted. 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 are recording non-cash compensation expense that may result in an increase in our net losses for a given period. 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. Impairment of our significant intangible assets may reduce our profitability. 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 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. Pursuant to the terms of an intellectual property litigation settlement, we have licensed some of our technology to a competitor. 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. Our ability to market ArteFill in some foreign countries may be impaired by the activities and intellectual property rights of third parties. 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. 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 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 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. 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. The price of our common stock may be volatile, and any investments in our common stock could suffer a decrease in value.

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1351197--3/14/2008--ARTES_MEDICAL_INC