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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 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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

92121San 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 RegisteredCommon Stock, par value $0.001 per share

The NASDAQ Global Market   Securities registered pursuant to Section 12(g) of the
    Exchange Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
    Large accelerated filer
    o

Accelerated filer
    þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      Documents
    Incorporated by Reference




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##### 





ARTES
    MEDICAL, INC.
    ANNUAL REPORT ON
    FORM 10-K
    Fiscal Year Ended December 31, 2007
    TABLE OF CONTENTS
   
 PagePART IITEM 1.


BUSINESS


4ITEM 1A.


RISK FACTORS


29ITEM 1B.


UNRESOLVED STAFF COMMENTS


50ITEM 2.


PROPERTIES


50ITEM 3.


LEGAL PROCEEDINGS


51ITEM 4.


SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS


52PART IIITEM 5.


MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES


53ITEM 6.


SELECTED CONSOLIDATED FINANCIAL DATA


56ITEM 7.


MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS


57ITEM 7A.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


68ITEM 8.


CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA


69ITEM 9.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE


69ITEM 9A.


CONTROLS AND PROCEDURES


69ITEM 9B.


OTHER INFORMATION


71PART IIIITEM 10.


DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE


71ITEM 11.


EXECUTIVE COMPENSATION


71ITEM 12.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


71ITEM 13.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
    AND DIRECTOR INDEPENDENCE


71ITEM 14.


PRINCIPAL ACCOUNTANT FEES AND SERVICES


71PART IVITEM 15.


EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES


71SIGNATURES


76INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


77EXHIBIT 4.2EXHIBIT 4.19EXHIBIT 4.20EXHIBIT 4.21EXHIBIT 10.43EXHIBIT 10.44EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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##### Table of Contents



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.
 3




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PART I  Item 1.
    Business.  Overview
    ® ®
  follow-up follow-up
   4




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Market
    Opportunity
  Market
    Overview
        Injectable
    Aesthetic Treatment Market
      
    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.   5




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ApproximateNumber ofProceduresProduct Category

Leading Brands

Ingredient

Performed in 2007Temporary Muscle Paralytics

Botox®
    Cosmetic

Botulinum toxin type A


2,800,000Temporary Dermal Fillers

Captiquetm

Hyaluronic acid (HA)


1,400,000Perlane®Hylaform®Hylaform®
    PlusRestylane®JuvedermtmCosmoDerm®

Human or bovine collagen


64,000CosmoPlast®Zyderm®Zyplast®Radiessetm

Calcium hydroxylapatite (CaHA)


119,000Non-resorbable Dermal Filler

ArteFill

Purified bovine collagen and PMMA microspheres


12,000   ® and/or
    Market
    Dynamics for Injectable Aesthetic Treatments
    Rapid market acceptance of innovative
    and/or
    longer lasting aesthetic products. and/or
  
    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 6




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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.
    Approved by theFDA for theProduct

Leading

Treatment of

FDA-Approved

Common Off-LabelFormulation

Brand(s)

Facial Wrinkles

Indications

UsesBotulinum toxin type A

Botox Cosmetic

Yes

Moderate to severe frown lines

Forehead wrinkles; crows feet; and vertical neck bandsHyaluronic acid

Captique, Perlane, Hylaform, Restylane, Juvederm

Yes

Moderate to severe facial wrinkles and folds, such as smile lines

Forehead wrinkles; lip augmentation; and acne scarsBovine or human collagen

CosmoDerm, CosmoPlast, Zyderm, Zyplast

Yes

Soft tissue contour deficiencies such as wrinkles and acne scars

Lip augmentationCalcium 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 augmentationPoly-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.
 7




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Growing consumer base for injectable aesthetic
    treatments.
  Limitations
    of Current Treatments
      
    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.     8




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Our
    Solution  ArteFill
      
    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.  5-year follow-up 5-year
  
    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. 9




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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
    
    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 10




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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
    PMMA
    Microspheres
        Bovine
    Collagen
       11




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18-month
  Lidocaine
    Storage
    and handling
  o o o o
  Our
    Proprietary Microsphere Technology
    ArteFill
    Treatment
  touch-up
  28-day
 12




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Our
    Physician Training and Education Program
    
    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
         13




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
    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.    Manufacturing
         14




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Material
    Agreements
  Intercompany Manufacturing and Supply Agreement
    Master Services Agreement
  5-year
  Supply Agreement
   15




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Settlement and License Agreement
      Financing Arrangement
    ® ®
       16




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®
    Form S-3
    Competition
   17




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
    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
    
    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
    510(k)
    Clearance Pathway
   18




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Pre-market
    Approval Pathway
    Clinical
    Trials
    Regulatory
    Status of ArteFill
   19




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follow-up follow-up
    Pervasive
    and Continuing Regulation
    
    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; 20




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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.      
    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
    
    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.    
    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.   21




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Promotion
    and Advertising Restrictions
    FDA
    Investigation
    International
    Regulation
    Environmental
    Regulation
    State
    and Federal Physician and Healthcare Regulation
   22




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Clinical
    History
    U.S.
    Clinical Trial
  Follow-up
    Facial
    Fold Assessment Scale Ratings
  Score


Description

Depth(Mm)0


No folds


1


Folds just perceptible


0.12


Shallow folds with some defined edges


0.23


Moderately deep folds with some well-defined edges


0.54


Deep folds with most edges well-defined and some redundant folds


1.05


Very deep folds with most edges well-defined and some redundant
    folds


2.0   follow-up
   23




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Open
    Label Trial
   24




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Five-Year
    Follow-up
    Study
    follow-up follow-up
      follow-up 5-year
  
 25




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Research
    and Development
  5-year
    Intellectual
    Property
       26




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Employees
    Executive
    Officers
    Name

Age

Position(s)Christopher J. Reinhard


54


Executive Chairman of the Board of DirectorsDiane S. Goostree


52


President and Chief Executive Officer and DirectorPeter C. Wulff


48


Executive Vice President and Chief Financial OfficerKarla R. Kelly, J.D.


54


Chief Legal Officer, General Counsel and Corporate SecretaryGreg Kricorian, M.D.


38


Chief Medical OfficerRussell J. Anderson


52


Vice President  New Products EngineeringLarry J. Braga


46


Vice President  ManufacturingSusan A. Brodsky-Thalken


54


Vice President  U.S. Sales and TrainingFrank M. Fazio


38


Vice President  Marketing and International MarketsJohn F. Kay, Ph. D.


57


Vice President  Engineering and DevelopmentKaron J. Morell


58


Vice President  Regulatory Affairs and Quality
    Affairs   Christopher J. Reinhard
  Diane S. Goostree
 27




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Peter C. Wulff
  Karla R. Kelly, J.D.
  Greg J. Kricorian, M.D.
  Russell J. Anderson
  Larry J. Braga
  Susan A. Brodsky-Thalken
  Frank M. Fazio
 28




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John F. Kay, Ph.D.
  Karon J. Morell
  Additional
    Information
  (858) 550-9999. http://www.artesmedical.com. Form 10-K.
  Form 10-K, Form 10-Q Form 8-K,
  http://www.sec.gov
  Trademarks
  ® ® ® tm ® ®
  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
 29




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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
    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.
   30




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
    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.    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.
       31




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##### Table of Contents



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.
    
    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.    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.
   32




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
    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
    face significant competition from companies with greater
    resources and well-established sales channels, which may make it
    difficult for us to achieve market penetration.
    
    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
    Radiessetm,
    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 33




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##### Table of Contents




    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.    
    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.    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.
  28-day
 34




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##### Table of Contents



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.
         35




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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.
  and/or
     36




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##### Table of Contents




    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.    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.
       37




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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.
   38




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##### Table of Contents



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.
  follow-up
 39




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##### Table of Contents



follow-up
    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.
   40




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##### Table of Contents



We may
    rely on third parties for our international sales, marketing and
    distribution activities.
    
    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.    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.
   41




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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.
   42




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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.
    
    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.        
    our issued patents may not be valid or enforceable or may not
    provide adequate coverage for our products; 43




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##### Table of Contents




    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.
      Pursuant
    to the terms of an intellectual property litigation settlement,
    we have licensed some of our technology to a
    competitor.
   44




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##### Table of Contents



®
  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.
    
    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.    Our
    ability to market ArteFill in some foreign countries may be
    impaired by the activities and intellectual property rights of
    third parties.
   45




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##### Table of Contents



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.
  18-month
    
    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    
    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; 46




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##### Table of Contents




    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 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.
      
    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.   47




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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 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.
  and/or
 48




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##### Table of Contents



The
    price of our common stock may be volatile, and any investments
    in our common stock could suffer a decrease in
    value.
      
    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.   49




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You
    could experience substantial dilution of your investment as a
    result of subsequent exercises of our outstanding warrants and
    options.
    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.
    
    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.    Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.   50




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##### Table of Contents



Item 3.
    Legal
    Proceedings.  Sandor
    Litigation
  co-founder, and/or
  co-founder,
      FDA
    Investigation
   51




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders.   52




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information for Common Stock
    High


LowFourth Quarter beginning on December 20, 2006

$
9.50


$
7.01First Quarter of 2007


10.50



7.21Second Quarter of 2007


9.54



7.14Third Quarter of 2007


8.15



3.82Fourth Quarter of 2007


4.88



1.91     Dividend
    Policy
   53




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##### Table of Contents



Stock
    Performance Graph
    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
    
    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.   54




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##### Table of Contents



Use of
    Proceeds
  Form S-1 No. 333-134086)
    
    approximately $2.2 million in underwriters discounts, fees
    and commissions; and
    approximately $4.2 million in legal, accounting and
    printing fees and miscellaneous expenses.      Purchases
    of Equity Securities
   55




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##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data.    Years Ended December 31,2007


2006


2005


2004


2003Consolidated 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



974Selling, general and administrative


24,331



17,299



10,137



5,155



2,976Loss 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



1,062,825Stock-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     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


$
36Working capital (deficit)


16,489



39,406



(2,974
)


(3,792
)


(2,659
)Total assets


35,721



60,613



20,320



10,296



450Long-term debt and capital lease obligations, less current
    portion


2,231



3,362



66



5,323



371Stockholders equity (deficit)


20,624



43,186



5,537



(4,594
)


(2,628
)  56




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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
         57




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Financial
    Operations Overview
  Product
    Sales
    License
    Revenues
    Cost
    of Product Sales
      Selling,
    General and Administrative Expenses
    
    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.   58




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Research
    and Development Expenses
          Amortization
    of Acquired Intangible Assets
    Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
  Revenue Recognition
 59




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##### Table of Contents



Allowance
    for Doubtful Accounts
    Valuation
    of Inventory
  first-in,
  Impairment
    of Long-Lived Assets
    Intangible
    Assets
    Deferred
    Taxes
   60




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##### Table of Contents



Deferred
    Tax Liability
    No. 98-11, Accounting for Acquired Temporary Differences in Certain
    Purchase Transactions That Are Not Accounted for as Business
    Combinations EITF 98-11
  Stock-Based
    Compensation Expense
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting
    for Stock Issued to Employees Accounting for Stock Issued to Employees
          Accounting for Stock-Based Compensation 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods and Services
   61




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Deferred
    Stock-Based Compensation
              Results
    of Operations
  Comparison
    of Year Ended December 31, 2007 to December 31,
    2006
  Product sales.
  License revenues.
  Cost of product sales.
 62




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##### Table of Contents



Research and development.
  Selling, general and administrative.
  Amount of2007


2006


ChangeSales and marketing

$
12,573


$
6,480


$
6,093General and administrative


11,758



10,819



939Total selling, general and administrative

$
24,331


$
17,299


$
7,032       Interest, net.
  Income tax benefit. EITF 98-11 EITF 98-11
  Comparison
    of Year Ended December 31, 2006 to December 31,
    2005
  Research and development.
 63




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##### Table of Contents



Selling, general and administrative.
  Amount of2006


2005


ChangeSales and marketing

$
6,480


$
2,777


$
3,703General and administrative


10,819



7,360



3,459Total selling, general and administrative

$
17,299


$
10,137


$
7,162       Interest expense, net.
  Income tax benefit. EITF 98-11 EITF 98-11
  Liquidity
    and Capital Resources
  Sources
    of Liquidity
       64




---



##### Table of Contents



® ®
       65




---



##### Table of Contents



Cash
    Flow
  Net cash used in operating activities.
  Net cash used in investing activities.
  Net cash used by financing activities.
    Funding
    Requirements
  scale-up
    
    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; 66




---



##### Table of Contents




    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.    Contractual
    Obligations
    Payments Due by PeriodTotal


2008


2009


2010


2011


2012(In thousands)Contractual ObligationsComerica 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



1,769,000Other 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          67




---



##### Table of Contents



Related
    Party Transactions
    Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements
      Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
        Impact of
    Inflation
   68




---



##### Table of Contents



Item 8.
    Consolidated
    Financial Statements and Supplementary Data.  page F-1
  Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    And Procedures  Conclusion Regarding the Effectiveness of Disclosure Controls
    and Procedures. Rules 13a-15(e) 15d-15(e) Form 10-K. Form 10-K.
    Managements Report on Internal Control Over Financial
    Reporting. Rule 13a-15(f) Internal
    Control  Integrated Framework Internal Control  Integrated Framework
  Form 10-K,
  Changes
    in Internal Control over Financial Reporting:
   69




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                     70




---



##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors
    and Executive Officers and Corporate Governance.    Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.   PART IV Item 15.
    Exhibits
    and Financial Statement Schedules.  Financial Statements and Financial Statement
    Schedules
    page F-1
  Form 10-K.
    Exhibits
  Exhibit

ExhibitNumber

Description3
.4**

Amended and Restated Certificate of Incorporation.3
.6**

Amended and Restated Bylaws. 71




---



##### Table of Contents



Exhibit

ExhibitNumber

Description3
.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. 72




---



##### Table of Contents



Exhibit

ExhibitNumber

Description10
.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 73




---



##### Table of Contents



Exhibit

ExhibitNumber

Description10
.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 amended31
.2

Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a)
    and 15d-14(a) of the Securities Exchange Act of 1934, as amended32
.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




---



##### Table of Contents



(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.  Financial Statement Schedules
  Form 10-K:
  Schedule Number

Description


PageII


Valuation and Qualifying Accounts



106  75




---



##### Table of Contents



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   President and Chief Executive Officer
        Signature

Title(s)

Date/s/  Diane
    S. GoostreeDiane
    S. Goostree

President, Chief Executive Officer and Director (principal
    executive officer)

March 14, 2008/s/  Peter
    C. WulffPeter
    C. Wulff

Executive Vice President and Chief Financial Officer (principal
    financial and accounting officer)

March 14, 2008/s/  Christopher
    J. ReinhardChristopher
    J. Reinhard

Executive Chairman of the Board of Directors

March 14, 2008/s/  John
    R. CostantinoJohn
    R. Costantino

Director

March 14, 2008/s/  Lon
    E. OtrembaLon
    E. Otremba

Director

March 14, 2008/s/  Beverly
    HussBeverly
    Huss

Director

March 14, 2008/s/  Robert
    ShermanRobert
    Sherman

Director

March 14, 2008/s/  Todd
    C. DavisTodd
    C. Davis

Director

March 14, 2008  76




---



##### 



Artes
    Medical, Inc.
  Index
    to Consolidated Financial Statements
   
 Report of Independent Registered Public
    Accounting Firm


78Consolidated Balance Sheets


79Consolidated Statements of Operations


80Consolidated Statements of Stockholders
    Equity (Deficit)


81Consolidated Statements of Cash Flows


82Notes to Consolidated Financial Statements


83   77




---



##### Table of Contents



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




---



##### Table of Contents



Artes
    Medical, Inc.
  Consolidated
    Balance Sheets
  December 31,2007


2006(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
20,293


$
46,258Accounts receivable (net of allowance for doubtful accounts of
    $20 and $0 at December 31, 2007 and December 31, 2006,
    respectively)


792



Prepaid expenses


754



304Inventory, net


5,528



4,761Other assets


290



102Total current assets


27,657



51,425Property and equipment, net


5,034



5,271Intellectual property, net


2,385



3,578Deposits and other assets


645



339Total assets

$
35,721


$
60,613LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,880


$
2,218Accrued compensation and benefits


1,802



1,774Accrued severance






920Accrued expenses


1,194



690Income taxes payable






73Capital lease obligations, current portion


21



45Revolving credit line


5,000



5,000Term note payable, current portion


1,250



1,250Deferred rent, current portion


21



49Total current liabilities


11,168



12,019Term note payable (net of discount of $165 and $305 at
    December 31, 2007 and 2006, respectively)


2,231



3,341Capital lease obligations, less current portion






21Deferred rent, less current portion


783



678Deferred tax liability


915



1,368Commitments and contingenciesStockholders 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



16Additional paid-in capital


126,894



122,572Accumulated deficit


(106,287
)


(79,402
)Total stockholders equity


20,624



43,186Total liabilities and stockholders equity

$
35,721


$
60,613    79




---



##### Table of Contents



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



10,189Selling, general and administrative


24,331



17,299



10,137Loss from operations


(27,697
)


(24,993
)


(20,326
)Interest income


1,391



675



52Interest expense


(1,119
)


(2,454
)


(4,468
)Other income (expense), net


(2
)


(27
)


2,041Loss before benefit for income taxes


(27,427
)


(26,799
)


(22,701
)Benefit for income taxes


542



476



458Net 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    80




---



##### Table of Contents






Artes
    Medical, Inc.
  Consolidated
    Statements of Stockholders Equity (Deficit)
  Convertible











TotalConvertible





Common


Common


Preferred


Additional


Deferred





StockholdersPreferred


Stock


Common


Stock


Stock


Stock


Paid-In


Stock-Based


Accumulated


EquityShares


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











25Issuance of common stock upon exercise of options and warrants










23,731















120











120Issuance of common stock for services rendered in April through
    December










51,528















386











386Issuance of common stock in connection with settlement agreement
    in October










9,768















102











102Common stock issuable in exchange for guarantee on convertible
    debt in December


















735



















735Issuance 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











10,712Issuance of Series D preferred stock at $2.00 in exchange
    for services in May


265,096























367











367Issuance of warrants in connection with Series D
    convertible preferred stock in May


























809











809Issuance of warrants in connection with convertible note payable
    in January through September


























2,007











2,007Issuance of warrants in connection with amendment of convertible
    notes in December


























276











276Issuance 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











7,706Series E preferred stock subscriptions at $2.50 per share
    for cash in December






















6,900















6,900Issuance of Series E preferred stock at $2.50 per share in
    exchange for termination agreement in December


124,000























310











310Issuance of Series E preferred stock at $2.50 per share in
    exchange for amendment of convertible note payable in December


250,000























625











625Stock-based compensation


























959











959Deferred stock compensation


























2,383



(2,383
)






Amortization of deferred compensation






























335







335Net 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
)


5,537Issuance of common stock upon exercise of warrants and stock
    options










114,506















440











440Issuance of common stock for services in January through May










8,048















89











89Issuance of common stock in connection with intellectual
    property in January










4,705















49











49Issuance 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











2,621Issuance 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











12,300Issuance 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











16,896Issuance of
    Series C-1
    convertible preferred stock upon exercise of warrants for cash
    in May


50,000























50











50Issuance 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











25,284Exercise of warrants upon initial public offering










276,334















583











583Issuance of warrants to purchase Series E convertible
    preferred stock in connection with financing agreement


























253











253Conversion 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











547Stock-based compensation


























2,526











2,526Stock-based severance


























958











958Deferred stock compensation


























(2,679
)


2,679







Warrant modification expense


























1,376











1,376Net loss and comprehensive loss


































(26,323
)


(26,323
)Balance at December 31, 2006





$




16,361,246


$
16


$



$



$
122,572


$



$
(79,402
)

$
43,186Issuance of common stock upon exercise of warrants and stock
    options










152,917



1











535











536Initial public offering cost


























(14
)










(14
)Stock-based compensation


























3,238











3,238Deferred stock compensation


























563











563Net loss and comprehensive loss


































(26,885
)


(26,885
)Balance at December 31, 2007





$




16,514,163


$
17


$



$



$
126,894


$



$
(106,287
)

$
20,624  81




---



##### Table of Contents





Artes
    Medical, Inc.



Consolidated
    Statements of Cash Flows  Years Ended December 31,2007


2006


2005(In thousands)Operating activitiesNet 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



1,742Bad 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



4,308Warrant modification expense






899



Stock-based compensation


3,801



4,032



1,294Issuance of stock for services






90



558Issuance of stock for settlement and termination agreements










412Issuance of common stock for intellectual property






49



Loss on disposal of fixed assets






43



Deferred rent


77



42



200Deferred 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



1,346Accrued severance


(920
)


920



Accrued expenses


504



(896
)


834Income taxes payable


(73
)


3



27Net cash used in operating activities


(23,661
)


(21,563
)


(13,055
)Investing activitiesAcquisition 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 activitiesProceeds 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










6,970Payments on convertible notes payable






(6,525
)


Proceeds from capital lease obligations










157Payments on capital lease obligations


(45
)


(49
)


(41
)Proceeds from subscribed preferred stock










6,900Proceeds from issuance of preferred stock, net






31,816



11,456Proceeds from issuance of common stock


(14
)


29,513



Proceeds from exercise of stock options and warrants


535



1,074



28Net cash (used in) provided by financing activities


(775
)


65,670



25,470Net (decrease) increase in cash and cash equivalents


(25,965
)


39,328



4,661Cash and cash equivalents at beginning of year


46,258



6,930



2,269Cash and cash equivalents at end of year

$
20,293


$
46,258


$
6,930Noncash financing activitiesIssuance of subscribed preferred stock

$



$
6,900


$
3,543Issuance of warrants and common stock in connection with
    intellectual property acquisition

$



$
49


$
Conversion of convertible notes and interest into convertible
    preferred stock

$



$



$
8,246Issuance of convertible notes payable as commission for financing

$



$



$
203Conversion of payables to convertible notes payable

$



$



$
95Supplemental activitiesCash paid for income taxes

$
1


$
1


$
1Cash paid for interest

$
979


$
104


$
160    82




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes
    to Consolidated Financial Statements
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    and Business
    Basis
    of Presentation and Managements Plan
      Principles
    of Consolidation
      Reverse
    Stock Split, Conversion to Common Stock and Initial Public
    Offering
  1-for-4.25 Series C-1 1-for-4.25
 83




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
        Use of
    Estimates
    Reclassifications
    Cash
    and Cash Equivalents
    Revenue
    Recognition
  Revenue Recognition
       84




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Allowance
    for Doubtful Accounts
    Valuation
    of Inventory
  first-in,
  Fair
    Value of Financial Instruments
    Concentration
    of Credit Risk
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
 85




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Deferred
    Rent
    Patent
    Costs
    Research
    and Development Expenses
    Shipping
    and Handling Costs
    Advertising
    Sales
    Taxes
    Income
    Taxes
  Accounting for
    Income Taxes.
   86




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Foreign
    Currency Translation and Transactions
    Stock-based
    Compensation
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting
    for Stock Issued to Employees
      Years Ended December 31,2007


2006

2005Actual


Actual

Pro FormaVolatility


48
%

60%

0%Expected term (years)


6.0


6.0

4.0Risk free interest rate


4.75
%

4.55%

3.00%  4.50%Expected dividend yield


0
%

0%

0%Forfeiture rate


14
%

14%

4%    87




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
          Accounting for Stock-Based Compensation 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods and Services
    Deferred
    Stock-Based Compensation
     88




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
          2008

$
4632009


337Total

$
800       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


$
256Sales, general and administrative expense


2,773



4,165



1,092$
3,226


$
4,931


$
1,348Net effect on basic and diluted net loss per share

$
0.20


$
2.67


$
1.14   Recently
    Issued Accounting Standards
     89




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  2.
    Net Loss
    Per Common Share      December 31,2007


2006


2005Convertible preferred stock










5,307,180Warrants to purchase preferred and common stock


2,470,638



2,530,336



2,423,758Options to purchase common stock


3,181,958



2,133,842



1,149,0005,652,596



4,664,178



8,879,938   3.
    Acquisitions  MediPlant
    Acquisition Settlement Agreement
        4.
    License
    Agreement     90




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  5.
    Balance
    Sheet Details  Inventory
  first-in,
    December 31,2007


2006Raw materials

$
1,147


$
727Work in process


2,462



1,619Unpackaged finished goods


3,555



3,169Finished goods


602



7,766



5,515Less: reserve for excess and obsolete inventory


(2,238
)


(754
)Total

$
5,528


$
4,761   Property
    and Equipment
    December 31,Useful Lives

2007


2006Furniture and fixtures

7 years

$
625


$
588Office equipment

3 - 5 years


949



734Lab equipment

3 - 5 years


2,726



2,464Leasehold improvements

Life of lease


4,050



3,3518,350



7,137Less accumulated depreciation and amortization




(3,316
)


(1,866
)Total



$
5,034


$
5,271      91




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Intellectual
    Property
    December 31, 2007


December 31, 2006Accumulated


Net Book





Accumulated


Net BookGross


Amortization


Value


Gross


Amortization


ValuePatents

$
287


$
192


$
95


$
287


$
144


$
143Core technology


6,868



4,578



2,290



6,868



3,433



3,435Total

$
7,155


$
4,770


$
2,385


$
7,155


$
3,577


$
3,578     6.
    Commitments
    and Contingencies      Comerica Bank revolving line of credit

$
5,000Comerica Bank term loan


3,6468,646Less current portion


6,2502,396Debt discount


(165
)Long-term debt

$
2,231       5-year
   92




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    5-year
  5-year
      Years ended December 31, 2008


1,4872009


1,5562010


1,6262011


1,6962012


1,769Total minimum lease payments

$
8,134          93




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Litigation
    Settlement Agreement
    Settlement
    Agreements
           94




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
        Sandor
    Litigation
  and/or
  co-founder,
     95




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    FDA
    Investigation
    7.
    Convertible
    Notes Payable      EITF 00-27, No. 98-5
   96




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
        8.
    Stockholders
    Equity    Convertible
    Preferred Stock
           97




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
                  Conversion
  1-for-4.25 Series C-1
 98




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  1-for-4.25
  Stock
    Option Plans
       99




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Weighted-AverageOptions


Exercise PriceOutstanding, December 31, 2004


560


$
3.57Granted


611



5.31Exercised


(6
)


4.25Canceled


(16
)


5.31Outstanding, December 31, 2005


1,149



4.46Granted


1,320



8.00Exercised


(99
)


3.49Canceled


(236
)


4.91Outstanding, December 31, 2006


2,134



6.65Granted


1,392



7.58Exercised


(47
)


2.47Canceled


(297
)


7.05Outstanding, December 31, 2007


3,182


$
7.08Vested or expected to vest at December 31, 2007


2,577


$
6.99         Options Outstanding


Options ExercisableWeighted-AverageRemaining


Weighted-





Weighted-Number


Contractual


Average


Number


AverageGrant 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



10.633,181,958



8.3 years


$
7.08



1,166,515


$
6.42    100




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Warrants
  Series C-1
    Weighted Avg.Warrants


Exercise PriceOutstanding, December 31, 2006


2,530,336


$
7.00Granted


25,000



8.07Exercised


(78,816
)


5.31Cancelled


(5,882
)


8.50Outstanding, December 31, 2007


2,470,638


$
7.06       Common
    Shares Reserved for Issuance
    December 31,2007Warrants for common and preferred stock


2,470,638Common stock options outstanding previous to 2001 Plan


55,760Common stock options outstanding under 2001 and 2006 Plans


3,126,198Common stock options available for future grant


2,381,582Total common shares reserved for issuance


8,034,178   9.
    Income
    Taxes     101




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
        December 31,2007


2006(In thousands)Deferred tax assets:Net operating loss carryforwards

$



$
24,885Reserves and other


3,677



3,840Total deferred tax assets


3,677



28,725Valuation allowance for deferred tax assets


(3,538
)


(28,447
)139



278Deferred 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
)     Years Ended December 31,2007


2006


2005Current:Federal

$



$



$
State










Foreign


90







(37
)90







(37
)Deferred:Federal










State










Foreign


452



476



495452



476



495$
542


$
476


$
458  102




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    December 31,2007


2006


2005Tax benefit at federal statutory rate

$
9,325


$
9,114


$
7,718State, net of federal benefit


1,576



1,541



1,324Tax credits


198



308



Foreign tax


437



476



458Change 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










5Other foreign loss


(371
)


(408
)


(457
)Other permanent differences


(2,084
)


(1,454
)


(388
)Benefit for income taxes

$
542


$
476


$
458   10.
    Employee
    Benefit Plan    11.
    Related-Party
    Transactions    12.
    Subsequent
    Events    ® ®
 103




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
          13.
    Quarterly
    Information (Unaudited)    2007First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)Product sales

$
1,442


$
2,055


$
1,220


$
2,367License revenues






732



5,500



Total revenues


1,442



2,787



6,720



2,367Cost of product sales


1,720



2,159



3,002



3,778Gross profit (loss)


(278
)


628



3,718



(1,411
)Research and development


1,032



1,136



1,541



2,314Selling, general and administrative


5,570



6,327



5,868



6,566Loss 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   104




---



##### Table of Contents



Artes
    Medical, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  2006First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)License revenues

$



$
390


$



$
Total revenues






390







Research and development


2,949



1,530



1,219



2,386Selling, general and administrative


3,194



4,868



3,401



5,836Loss 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




---



##### Table of Contents



Schedule II
  Artes
    Medical, Inc.
  Valuation
    and Qualifying Accounts
 For the
    years ended December 31, 2007, 2006 and 2005
  Balance at


Charged toBeginning


Costs and





Balance atof Year


Expenses


Deductions


End of YearAllowance for doubtful accounts receivable2005

$



$



$



$
2006














2007






72,474



52,474



20,000Reserve for excess, obsolete and short-dated inventories2005

$



$



$



$
236,7502006


236,750



917,137



399,513



754,3742007


754,374



3,764,188



2,280,861



2,237,701  106