##### Table of Contents



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, 2006ORo

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 Stock 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
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      Documents
    Incorporated by Reference
  Form S-1




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##### 



ARTES
    MEDICAL, INC.
    ANNUAL REPORT ON
    FORM 10-K
    Fiscal Year Ended December 31, 2006
    TABLE OF CONTENTS
  
  PagePART IITEM 1.


BUSINESS


4ITEM 1A.


RISK
    FACTORS


27ITEM 1B.


UNRESOLVED STAFF
    COMMENTS


46ITEM 2.


PROPERTIES


46ITEM 3.


LEGAL
    PROCEEDINGS


47ITEM 4.


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


49PART IIITEM 5.


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


49ITEM 6.


SELECTED
    CONSOLIDATED FINANCIAL DATA


52ITEM 7.


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


53ITEM 7A.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


64ITEM 8.


CONSOLIDATED
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


64ITEM 9.


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


64ITEM 9A.


CONTROLS AND
    PROCEDURES


64ITEM 9B.


OTHER
    INFORMATION


65PART IIIITEM 10.


DIRECTORS AND
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


65ITEM 11.


EXECUTIVE
    COMPENSATION


65ITEM 12.


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


65ITEM 13.


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE


65ITEM 14.


PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


65PART IVITEM 15.


EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


65SIGNATURES


69INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS


70EXHIBIT 10.31EXHIBIT 10.32EXHIBIT 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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##### Table of Contents



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;
    an increasing willingness of physicians to use products beyond
    their labeled indications; 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 2006Temporary Muscle
    Paralytics

Botox®
    Cosmetic

Botulinum toxin type A


3,200,000Temporary Dermal
    Fillers

Captiquetm

Hyaluronic acid (HA)


1,600,000Hylaform®Hylaform®
    PlusRestylane®
    CosmoDerm®

Human or bovine collagen


160,000CosmoPlast®Zyderm®Zyplast®Radiessetm

Calcium hydroxylapatite (CaHA)


77,000   ® and/or
    Market
    Dynamics for Injectable Aesthetic Treatments
    Rapid market acceptance of innovative
    and/or
    longer lasting aesthetic products. and/or
  
    Botox.  Botox treatments are the most common
    aesthetic procedure performed in the United States. According to
    the ASAPS, approximately 3.2 million Botox treatments for
    aesthetic use were performed in the United States in 2006. Since
    1997, Botox treatments have experienced an annual growth rate of
    54%.
    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 three years, from approximately
    120,000 procedures in 2003, to 900,000 procedures in 2004, to
    1.2 million procedures in 2005 and to 1.6 million
    procedures in 2006. We believe this increase was mainly
    attributable to the market launch of Restylane, which provides
    patients with a moderately longer lasting 6




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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.  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

Yes

Moderate to severe frown lines

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

Captique 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.
  Growing consumer base for injectable aesthetic
    treatments.
 7




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Limitations
    of Current Treatments
    Time Lapse betweenProduct Categories

Representative Brands

TreatmentsBotulinum toxin type A

Botox Cosmetic

4 to 6 monthsHyaluronic acid

Captique 
    Hylaform 
    Restylane

4 to 12 monthsBovine or human collagen

CosmoDerm 
    CosmoPlast 
    Zyderm 
    Zyplast

3 to 6 months     
    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,
    as well as experience a decrease in the aesthetic effect of each
    successive treatment over time.
    Cumulative cost of repeat injections.  The
    cumulative cost 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
    that we established as the official endpoint in our
    U.S. clinical trial.  5-year follow-up five-year six-month
  
    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.
    Drive the adoption of our products through a direct sales and
    marketing effort.  We have built a direct sales
    team of 25 sales professionals as of March 1, 2007. 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 1,000 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.
    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 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
   10




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Bovine
    Collagen
      18-month
  Lidocaine
    Storage
    and handling
   11




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Our
    Proprietary Microsphere Technology
    ArteFill
    Treatment
  touch-up
  28-day
  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.
    Training Seminars. 12




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
    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.
    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 using training masks. 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
            
    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.   13




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Manufacturing
              Material
    Agreements
   14




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Competition
   15




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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
   16




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Pre-market
    Approval Pathway
    Clinical
    Trials
   17




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Regulatory
    Status of ArteFill
        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;
    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.   18




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
    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.    Promotion
    and Advertising Restrictions
   19




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FDA
    Investigation
    International
    Regulation
    Environmental
    Regulation
    State
    and Federal Physician and Healthcare Regulation
   20




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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
   21




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Open
    Label Trial
   22




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Five-Year
    Follow-up
    Study
    follow-up follow-up
      follow-up Plastic and Reconstructive Surgery
  
 23




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Research
    and Development
    Intellectual
    Property
          Employees
   24




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Executive
    Officers
    Name

Age

Position(s)Christopher J. Reinhard


54


Executive Chairman of the Board of
    DirectorsDiane S. Goostree


51


President and Chief Executive
    Officer and DirectorPeter C. Wulff


47


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


53


Chief Legal Officer, General
    Counsel and Corporate SecretaryAdelbert L. Stagg, Ph.D.


60


Vice President 
    Regulatory Affairs and Chief Compliance OfficerRussell J. Anderson


51


Vice President  New
    Products EngineeringLarry J. Braga


45


Vice President 
    ManufacturingSusan A. Brodsky-Thalken


53


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


38


Vice President 
    Marketing   Christopher J. Reinhard
  Diane S. Goostree
  Peter C. Wulff
  Karla R. Kelly, J.D.
 25




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Adelbert L. Stagg, Ph.D.
  Russell J. Anderson
  Larry J. Braga
  Susan A. Brodsky-Thalken Ms. Brodsky-Thalken
  Frank M. Fazio
  Additional
    Information
  (858) 550-9999. Form 10-K.
  Form 10-K, Form 10-Q Form 8-K,
 26




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http://www.sec.gov
  Trademarks
  ® ® ® tm tm tm ®
  Item 1A.
    Risk
    Factors.  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 contained in this
    report and the other public statements we make. If any of the
    following risks actually occurs, 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 operating experience and a history of net losses
    and may never achieve or maintain profitability.
    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;
    the costs of our sales and marketing activities;
    the introduction of new technologies and competing products that
    may make ArteFill a less attractive treatment option for
    physicians and patients; 27




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
    our pricing strategy and ability to protect the price of
    ArteFill against price erosion due to the availability of
    alternative treatments;
    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;
    our ability to receive, and the timing in which we may receive,
    approval from various foreign regulatory bodies to market
    ArteFill outside the United States; and
    general economic conditions affecting the ability of patients to
    pay for elective cosmetic procedures.    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.
     28




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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.
    
    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 and alternative treatments;
    the price of ArteFill relative to other injectable aesthetic
    products and alternative treatments; 29




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
    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
    publicity concerning ArteFill or competing products 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
    Juvedermtm,
    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 derma filler; and
    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.   30




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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
   31




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
    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.    We
    have never commercialized any product, and the successful
    commercialization of ArteFill will require us to build and
    maintain a sophisticated sales and marketing
    organization.
  12-month
  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.
   32




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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.
      We may
    experience negative publicity regarding ArteFill or predecessor
    products sold outside of the United States, which may harm our
    business.
    
    concerns about the safety of ArteFill or the predecessor
    products;
    negative side effects, or alleged or perceived negative side
    effects, relating to the use of ArteFill or the predecessor
    products;
    concerns about the safety of competing products, such as
    temporary muscle paralytics or temporary dermal fillers, or
    aesthetic treatments generally;
    negative side effects, or alleged or perceived negative side
    effects, relating to the use of these competing products;
    any product recalls relating to ArteFill or competing products; 33




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##### Table of Contents




    negative side effects or safety issues resulting from any
    off-label use of ArteFill;
    administration of ArteFill by unlicensed or untrained
    individuals; and
    any lawsuits or administrative actions that we or our officers
    or directors may be party to or involved in.    Sales
    of ArteFill could be harmed 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
  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.
   34




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##### Table of Contents



follow-up 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.
    If
    changes in the economy and consumer spending reduce demand for
    ArteFill, our sales and profitability could
    suffer.
   35




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##### Table of Contents



We are
    dependent on our key management personnel. The loss of any of
    these individuals could harm our business.
    Legal
    proceedings with a former officer and employee could be costly
    and could divert our management teams attention from our
    business and operations.
  180-day
  lock-up
 36




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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.
  day-to-day
 37




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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.
   38




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Changes
    in, or interpretations of, accounting rules and regulations,
    such as expensing of stock options, could result in unfavorable
    accounting charges or require us to change our compensation
    policies.
      Impairment
    of our significant intangible assets may reduce our
    profitability.
    Risks
    Related to Our Intellectual Property
  Our
    ability to achieve commercial success will depend 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.   39




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
    our issued patents may not be valid or enforceable or may not
    provide adequate coverage for our products;
    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.
   40




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Pursuant
    to the terms of an intellectual property litigation settlement,
    we have licensed some of our technology to a
    competitor.
  ®
  Our
    business may be harmed, and we may incur substantial costs as a
    result of litigation or other proceedings relating to patent and
    other intellectual property rights.
    
    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 41




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##### Table of Contents



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.
      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; 42




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
    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;
    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; 43




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
    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.    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.
   44




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and/or
  The
    price of our common stock may be volatile, and any investments
    in our common stock could suffer a decrease in
    value.
      
    reports of adverse side effects resulting from treatment with
    ArteFill;
    adverse actions taken by regulatory agencies with respect to
    open investigations, including the ongoing investigation by the
    FDAs Office of Criminal Investigations 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. 45




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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.   46




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##### Table of Contents



Item 3.
    Legal
    Proceedings.  Sandor
    Litigation
  and/or
  FDA
    Investigation
     47




---



##### Table of Contents



Mel
    Ehrlich Litigation
  180-day
   48




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##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders.   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information for Common Stock
    2006

High


LowFourth Quarter beginning on
    December 20, 2006

$
9.50


$
7.01January 1, 2007 to
    March 15, 2007


9.96



7.35     Dividend
    Policy
    Stock
    Performance Graph
  COMPARISON
    OF CUMULATIVE RETURN*
 Among Artes Medical Inc., The NASDAQ Composite Index
 And The NASDAQ Medical Equipment Index
  49




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##### Table of Contents



*
    $100 invested on 12/20/06 in stock on 11/30/06 in
    index-including reinvestment of dividends. Fiscal year ending
    December 31.  Recent
    Sales of Unregistered Securities
  1-for-4.25 Series C-1
  1-for-4.25
  
    From January 2006 through March 2006, we issued shares of
    Series E convertible preferred stock representing
    4,092,422 shares of common stock and warrants for
    Series E convertible preferred stock that represent the
    right to purchase 531,454 shares of common stock at an
    exercise price of $10.63 per share to investors for
    aggregate gross proceeds of approximately $43.5 million in
    a private placement transaction. In connection with the private
    placement, we paid cash commissions in an aggregate amount of
    approximately $3.5 million and issued warrants to purchase
    shares of Series E convertible preferred stock that
    represent the right to purchase 324,607 shares of common
    stock at an exercise price of $10.63 per share to National
    Securities Corporation in consideration for its services as
    placement agent. In addition, we reimbursed National Securities
    Corporation for certain legal and other expenses incurred in
    connection with the private placement.
    In November 2006, we granted a warrant for shares of
    Series E convertible preferred stock that represents the
    right to purchase 28,235 shares of common stock at an
    exercise price of $10.63 per share to Comerica Bank in
    connection with a loan and security agreement entered into
    between us an Comerica Bank. 50




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
    From March 2006 through December 2006, we granted options to
    purchase an aggregate of 1,319,857 shares of our common
    stock at a weighted average exercise price of $8.00 per
    share to our employees, consultants and directors under our
    Amended and Restated 2001 Stock Option Plan, or 2001 Plan.
    During this period, 334,965 of these options were surrendered,
    resulting in a net of 984,892 options granted.
    From January 2006 through December 2006, we issued and sold an
    aggregate of 99,404 shares of our common stock at a
    weighted average exercise price of $3.49 per share to our
    employees, consultants and directors pursuant to exercises of
    options granted under our 2001 Plan.
    From January 2006 through December 2006, we issued an aggregate
    of 12,793 shares of our common stock in consideration for
    services provided to us by our employees and consultants.
    In May 2006, we issued 2,352 shares of our common stock
    pursuant to the exercise of a warrant to purchase common stock
    at an exercise price of $5.31 per share.
    In December 2006, we issued 168,580 shares of our common
    stock pursuant to the cashless exercise of warrants and
    107,754 shares of our common stock pursuant to the cash
    exercise of warrants at a weighted average exercise price of
    $5.57 per share, in connection with and effective upon the
    completion of our initial public offering.    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
   51




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Item 6.
    Selected
    Consolidated Financial Data.    Years Ended December 31,2002


2003


2004


2005


2006(In thousands, except share and per share amounts)Consolidated Statements of
    Operations Data:Expenses:Research and development

$
1,457


$
974


$
3,634


$
10,189


$
8,084Selling, general and administrative


1,975



2,976



5,155



10,137



17,299Total expenses


3,432



3,950



8,789



20,326



25,383Loss from operations


(3,432
)


(3,950
)


(8,789
)


(20,326
)


(25,383
)Interest expense, net


(914
)


(2,170
)


(4,028
)


(4,416
)


(1,779
)Other income (expense), net










(22
)


2,041



363Loss before benefit for income
    taxes


(4,346
)


(6,120
)


(12,839
)


(22,701
)


(26,800
)Benefit for income taxes










454



458



476Net loss

$
(4,346
)

$
(6,120
)

$
(12,385
)

$
(22,243
)

$
(26,323
)Historical net loss per common
    share:Basic and diluted

$
(4.10
)

$
(5.76
)

$
(11.20
)

$
(18.76
)

$
(14.23
)Weighted average
    shares  basic and diluted


1,060,117



1,062,825



1,106,188



1,185,387



1,850,255Stock-based compensation is
    included in the following categories:Capitalized to inventory

$



$



$



$



$
263Research and development










91



256



766Selling, general and administrative






159



1,042



1,038



4,165$



$
159


$
1,133


$
1,294


$
4,931     As of December 31, 20062002


2003


2004


2005


2006(In thousands)Consolidated Balance Sheet
    Data:Cash and cash equivalents

$
55


$
36


$
2,269


$
6,930


$
46,258Working capital (deficit)


(2,036
)


(2,659
)


(3,792
)


(2,974
)


39,406Total assets


220



450



10,296



20,320



60,613Long-term debt and capital lease
    obligations, less current portion


2,255



371



5,323



66



3,362Stockholders equity (deficit)


(4,139
)


(2,628
)


(4,594
)


5,537



43,186  52




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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
         53




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Financial
    Operations Overview
  Sales
    Cost
    of 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.    Research
    and Development Expenses
       54




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Amortization
    of Acquired Intangible Assets
    Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
         55




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Allowance
    for Doubtful Accounts
    Valuation
    of Inventory
  first-in,
  Impairment
    of Long-Lived Assets
    Intangible
    Assets
    Deferred
    Taxes
  Asset
    Valuation Allowance
    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
 56




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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
    Deferred
    Stock-Based Compensation
     57




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Results
    of Operations
  Comparison
    of Year Ended December 31, 2005 to December 31,
    2006
  Research and development.
  Selling, general and administrative.
  Amount of2005


2006


ChangeSales and marketing

$
2,777


$
6,480


$
3,703General and administrative


7,360



10,819



3,459Total selling, general and
    administrative

$
10,137


$
17,299


$
7,162    58




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##### Table of Contents



Interest expense, net.
  Income tax benefit. EITF 98-11 EITF 98-11
  Comparison
    of Year Ended December 31, 2004 to December 31,
    2005
  Research and development. scale-up
  Selling, general and administrative.
  Amount of2004


2005


ChangeSales and marketing

$
339


$
2,777


$
2,438General and administrative


4,816



7,360



2,544Total selling, general and
    administrative

$
5,155


$
10,137


$
4,982       Interest expense, net.
 59




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Income tax benefit. EITF 98-11 EITF 98-11
  Liquidity
    and Capital Resources
  Sources
    of Liquidity
      Cash
    Flow
  Net cash used in operating activities.
    Net cash used in investing activities.
   60




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Net cash provided by financing
    activities.
        Funding
    Requirements
  scale-up
    
    the costs of establishing and maintaining the sales and
    marketing organization required for successful commercialization
    of ArteFill; 61




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
    the success of our product launch and growth in sales and
    related collections;
    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 costs relating to changes in regulatory policies or laws
    that affect our operations;
    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


2007


2008


2009


After 2009(In thousands)Contractual
    ObligationsComerica Bank term loan

$
4,895,833


$
1,250,000


$
1,250,000


$
1,250,000


$
1,145,833Comerica Bank revolving line of
    credit


5,000,000



5,000,000











Equipment lease obligations


66,457



45,117



21,340







Operating lease obligations


5,082,841



984,892



985,714



1,035,940



2,076,295Other contractual obligations


939,487



939,487











Total

$
15,984,618


$
8,219,496


$
2,257,024


$
2,285,940


$
3,222,128      62




---



##### Table of Contents



Related
    Party Transactions
    Off-Balance
    Sheet Arrangements
   63




---



##### Table of Contents



Recent
    Accounting Pronouncements
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
        Impact of
    Inflation
    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
  Rule 13a-15(e) Form 10-K. Form 10-K
 64




---



##### Table of Contents



Changes
    in Internal Control over Financial Reporting:
    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
   65




---



##### Table of Contents



Exhibits
  Exhibit

ExhibitNumber

Description3
.4**

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

Amended and Restated Bylaws.3
.7**

Certificate of Amendment to
    Amended and Restated Bylaws.4
.1**

Specimen common stock certificate.4
.2**

Amended and Restated Investor
    Rights Agreement dated June 23, 2006, by and among us and
    the holders of our preferred stock listed on Schedule A
    thereto.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, 2006.10
.1#**

2000 Stock Option Plan. 66




---



##### Table of Contents



Exhibit

ExhibitNumber

Description10
.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
.17**

Building Lease Agreement, dated
    July 26, 2004, between us and Robert Jean Lichter and Gail
    F. Lichter, Trustees of the Lichter Family Trust First
    Amended and Restated Declaration of Trust Dated
    November 7, 1996, and Kenneth R. Satterlee and Candace C.
    Satterlee, Trustees of the Satterlee Family Trust UTD
    April 24, 1986, as
    tenants-in-common.10
.18**

Sublease Agreement, dated
    June 1, 2005, between us and InfoSonics Corporation.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. 67




---



##### Table of Contents



Exhibit

ExhibitNumber

Description10
.30**

Loan and Security Agreement dated
    November 27, 2006 between us and Comerica Bank.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 Schreiber23
.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.     **
    
    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.#
    
    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.(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.  Financial Statement Schedules
   68




---



##### Table of Contents



SIGNATURES      By:
    /s/  Diane
    S. Goostree    President and Chief Executive Officer
    attorneys-in-fact, attorneys-in-fact,
    Signature

Title(s)

Date/s/  Christopher
    J. ReinhardChristopher
    J. Reinhard

Executive Chairman of the Board of
    Directors (principal executive officer)

March 30, 2007/s/  Diane
    S. GoostreeDiane
    S. Goostree

President, Chief Executive Officer
    and Director

March 30, 2007/s/  Peter
    C. WulffPeter
    C. Wulff

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

March 30, 2007/s/  Daren
    J. BaroneDaren
    J. Barone

Director

March 30, 2007/s/  John
    R.
    CostantinoJohn
    R. Costantino

Director

March 30, 2007/s/  Lon
    E. OtrembaLon
    E. Otremba

Director

March 30, 2007  69




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
 Index to
    Consolidated Financial Statements  Report of
    Independent Registered Public Accounting Firm


71Consolidated
    Balance Sheets as of December 31, 2005 and 2006


72Consolidated
    Statements of Operations for the Years Ended December 31,
    2004, 2005 and 2006 and for the period from August 24, 1999
    (inception) through December 31, 2006


73Consolidated
    Statements of Stockholders Equity for the period from
    August 24, 1999 (inception) through December 31,
    2006


74Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2004, 2005 and 2006 and for the period from August 24, 1999
    (inception) through December 31, 2006


76Notes to
    Consolidated Financial Statements


77  70




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm  
              71




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
  Consolidated Balance Sheets
  December 31,2005


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

$
6,930


$
46,258Prepaid expenses


204



304Inventory, net


692



4,761Other assets


374



102Deferred financing costs


1,011



Total current assets


9,211



51,425Property and equipment, net


4,926



5,271Intellectual property, net


4,770



3,578Deposits


233



239Other assets


1,180



100Total assets

$
20,320


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

$
3,317


$
2,218Accrued compensation and benefits


1,499



1,774Accrued severance






920Accrued liabilities


1,585



690Income taxes payable


70



73Convertible notes payable (net of
    discount of $860 at December 31, 2005)


5,665



Capital lease obligations, current
    portion


49



45Revolving credit line






5,000Term note payable, current portion






1,250Deferred rent, current portion






49Total current liabilities


12,185



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






3,341Capital lease obligations, less
    current portion


66



21Deferred rent, less current portion


686



678Deferred tax liability


1,846



1,368Commitments and contingenciesStockholders equity:Series A convertible preferred
    stock, $0.001 par value, 2,050,839 shares and no
    shares authorized, 2,050,839 shares and no shares issued
    and outstanding at December 31, 2005 and 2006; liquidation
    preference of $3,076 and $0 at December 31, 2005 and 2006


2



Series B convertible preferred
    stock, $0.001 par value, 679,239 shares and no shares
    authorized, 679,239 shares and no shares issued and
    outstanding at December 31, 2005 and 2006; liquidation
    preference of $2,262 and $0 at December 31, 2005 and 2006


1



Series C-1
    convertible preferred stock, $0.001 par value,
    7,052,741 shares and no shares authorized, 4,437,741 and no
    shares issued and outstanding at December 31, 2005 and
    2006; liquidation preference of $12,204 and $0 at
    December 31, 2005 and 2006


4



Series D convertible preferred
    stock, $0.001 par value, 11,500,000 shares and no
    shares authorized, 10,019,857 and no shares issued and
    outstanding at December 31, 2005 and 2006, respectively;
    liquidation preference of $20,040 and $0 at December 31,
    2005 and 2006


10



Series E convertible preferred
    stock, $0.001 par value, 10,000,000 shares and no
    shares authorized, 3,463,615 and no shares issued and
    outstanding at December 31, 2005 and 2006, respectively;
    liquidation preference of $8,659 and $0 at December 31,
    2005 and 2006


3



Convertible preferred stock,
    $0.001 par value, 10,000,000 shares authorized, no
    shares issued and outstanding at December 31, 2006;
    liquidation preference of $0 at December 31, 2006






Convertible preferred stock
    subscribed


6,900



Common stock, $0.001 par value
    150,000,000 and 200,000,000 shares authorized at
    December 31, 2005 and 2006; 1,229,553 and
    16,361,246 shares issued and outstanding at
    December 31, 2005 and 2006


5



16Common stock issuable


735



Additional paid-in capital


53,635



122,572Deferred stock-based compensation


(2,679
)


Deficit accumulated during the
    development stage


(53,079
)


(79,402
)Total stockholders equity


5,537



43,186Total liabilities and
    stockholders equity

$
20,320


$
60,613    72




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
 Consolidated
    Statements of Operations  Period fromAugust 24, 1999(Inception)throughYears Ended December 31,


December 31,2004


2005


2006


2006(In thousands, except share and per share data)Expenses:Research and development

$
3,634


$
10,189


$
8,084


$
28,989Selling, general and administrative


5,155



10,137



17,299



40,898Loss from operations


(8,789
)


(20,326
)


(25,383
)


(69,887
)Interest income






52



675



841Interest expense


(4,028
)


(4,468
)


(2,454
)


(14,225
)Other income (expense), net


(22
)


2,041



363



2,481Loss before benefit for income
    taxes


(12,839
)


(22,701
)


(26,799
)


(80,790
)Benefit for income taxes


454



458



476



1,388Net loss

$
(12,385
)

$
(22,243
)

$
(26,323
)

$
(79,402
)Loss per share:Basic and diluted

$
(11.20
)

$
(18.76
)

$
(14.23
)Weighted average
    shares  basic and diluted


1,106,188



1,185,387



1,850,255    73




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
 Consolidated
    Statements of Stockholders Equity  DeficitConvertible





Accumulated





AccumulatedConvertible








Common


Preferred


Additional


Other


Deferred


During the


TotalPreferred


Stock


Common


Stock


Stock


Stock


Paid-In


Comprehensive


Stock-Based


Development


StockholdersShares


Amount


Shares


Amount


Issuable


Subscribed


Capital


Loss


Compensation


Stage


Equity(In thousands, except share and per share data)Issuance of common stock for cash
    at $0.09 per share





$




735,294


$
1


$



$



$
84


$



$



$



$
85Issuance of common stock for
    services










173,529















176















176Issuance of Series A preferred
    stock for cash at $1.50 per share


112,266























168















168Net loss and comprehensive loss






































(896
)


(896
)Balance at December 31, 1999


112,266







908,823



1











428











(896
)


(467
)Issuance of Series A preferred
    stock for cash at $1.50 per share, net of issuance costs


1,912,902



2



















2,811















2,813Issuance of Series A preferred
    stock for services


25,671























114















114Issuance of Series B preferred
    stock for cash at $3.33 per share


489,187



1



















1,417















1,418Issuance of Series B preferred
    stock for services


1,141























4















4Issuance of common stock for cash,
    in March, May, and September










151,294















508















508Issuance of stock options to
    consultants


























48















48Unrealized loss on
    available-for-sale
    investments






























(36
)










(36
)Net loss






































(2,147
)


(2,147
)Comprehensive loss










































(2,183
)Balance at December 31, 2000


2,541,167



3



1,060,117



1











5,330



(36
)






(3,043
)


2,255Series C preferred stock
    subscriptions at $7.00 per share for cash






















682



















682Stock-based compensation


























1















1Issuance of Series B preferred
    stock in July for cash at $3.33 per share, net of issuance costs


188,911























620















620Reclassification adjustment for
    losses realized in net loss






























36











36Net loss






































(4,942
)


(4,942
)Comprehensive loss










































(4,906
)Balance at December 31, 2001


2,730,078



3



1,060,117



1







682



5,951











(7,985
)


(1,348
)Issuance of subscribed
    Series C preferred stock in March


88,857



















(622
)


622















Issuance of Series C preferred
    stock, in March, for cash at $7.00 per share, net of issuance
    costs


21,286























99















99Refund due to cancellation of
    Series C preferred stock subscribed






















(60
)


















(60
)Stock-based compensation


























6















6Issuance of warrants in connection
    with convertible notes from May to November


























1,489















1,489Issuance of Series C preferred
    stock for services in March


2,730























19















19Net loss and comprehensive loss






































(4,346
)


(4,346
)Balance at December 31, 2002


2,842,951



3



1,060,117



1











8,186











(12,331
)


(4,141
)Issuance of common stock upon
    exercise of stock options in November










17,647















7















7Issuance of
    Series C-1
    preferred stock for services in July


25,000























69















69Issuance of warrants in connection
    with convertible notes from January through March


























1,126















1,126Issuance of
    Series C-1
    preferred stock for cash, in July, at $2.75 per share, net of
    issuance costs


637,980



1



















1,595















1,596Stock-based compensation


























159















159Issuance of warrant in June in
    connection with patent acquisition


























34















34Conversion of Series C
    preferred stock to
    Series C-1
    preferred stock in July


174,954







































Conversion of principal and
    interest on promissory notes to
    Series C-1
    preferred stock in July


3,486,934



3



















4,639















4,642Net loss and comprehensive loss






































(6,120
)


(6,120
)Balance at December 31, 2003


7,167,819



7



1,077,764



1











15,815











(18,451
)


(2,628
)  74




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
  Consolidated Statements of Stockholders
    Equity (continued)
  DeficitConvertible





Accumulated





AccumulatedConvertible








Common


Preferred


Additional


Other


Deferred


During the


TotalPreferred


Stock


Common


Stock


Stock


Stock


Paid-In


Comprehensive


Stock-Based


Development


StockholdersShares


Amount


Shares


Amount


Issuable


Subscribed


Capital


Loss


Compensation


Stage


Equity(In thousands, except share and per share data)Issuance of common stock upon
    exercise of stock options, in April and October










14,117















29















29Issuance of common stock in
    connection with intellectual property acquisition, in March and
    September










42,352















270















270Issuance of common stock for
    services rendered in September










4,411















37















37Series D preferred stock
    subscriptions at $2.00 per share for cash






















3,543



















3,543Stock-based compensation


























1,096















1,096Deferred stock compensation


























740







(740
)






Issuance of warrants in connection
    with convertible notes from January though September


























5,335















5,335Amortization of deferred
    compensation


































109







109Net loss and comprehensive loss






































(12,385
)


(12,385
)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 warrants in May through October










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 in March through December










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
)

$
43,186  75




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
  Consolidated Statements of Cash Flows
  Period fromAugust 24, 1999(Inception)throughYears Ended December 31,


December 31,2004


2005


2006


2006(In thousands)Operating activitiesNet loss

$
(12,385
)

$
(22,243
)

$
(26,323
)

$
(79,402
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


1,148



1,742



2,428



5,505Provision for obsolete inventory


117



120



881



1,118Benefit for income taxes


(454
)


(458
)


(478
)


(1,390
)Non-cash interest expense
    associated with issuance of warrants and convertible notes


4,002



4,308



2,350



13,275Warrant modification expense










899



899Stock-based compensation


1,133



1,294



4,032



6,673Issuance of stock for services


38



558



90



1,066Issuance of stock for settlement
    and termination agreements






412







412Issuance of common stock for
    intellectual property


270







49



319Loss on disposal of fixed assets


25







43



68Deferred rent


474



200



42



728Deferred taxes


(43
)


(27
)






(70
)Changes in operating assets and
    liabilities:Inventory


(160
)


(562
)


(4,951
)


(5,673
)Prepaid expenses and other assets


(776
)


(208
)


172



(812
)Accounts payable


1,281



(398
)


(1,099
)


2,370Accrued compensation and benefits


(20
)


1,346



275



1,805Accrued severance










920



920Accrued expenses


471



834



(896
)


869Income taxes payable


43



27



3



73Net cash used in operating
    activities


(4,836
)


(13,055
)


(21,563
)


(51,247
)Investing activitiesPurchase of short-term investments














(3,028
)Sale of short-term investments














3,028Acquisition of intellectual
    property, net of cash acquired


(1,730
)


(2,250
)






(3,980
)Purchases of property and equipment


(816
)


(4,554
)


(1,623
)


(7,254
)Deposits and other assets






(950
)


(3,156
)


(4,411
)Net cash used in investing
    activities


(2,546
)


(7,754
)


(4,779
)


(15,645
)Financing activitiesProceeds from term loan payable










4,945



4,945Payments on term loan payable










(104
)


(104
)Proceed from revolving credit line










5,000



5,000Proceeds from issuance of
    convertible notes payable


6,093



6,970







17,519Payments on convertible notes
    payable


(50
)






(6,525
)


(6,575
)Proceeds from capital lease
    obligations






157







157Payments on capital lease
    obligations






(41
)


(49
)


(90
)Proceeds from issuance of note
    payable














416Payments on note payable














(416
)Refund on canceled subscribed
    Series C preferred stock














(60
)Proceeds from subscribed preferred
    stock


3,543



6,900







11,125Proceeds from issuance of preferred
    stock, net






11,456



31,816



49,986Proceeds from issuance of common
    stock










29,513



30,108Proceeds from exercise of stock
    options and warrants


29



28



1,074



1,139Net cash provided by financing
    activities


9,615



25,470



65,670



113,150Net increase in cash and cash
    equivalents


2,233



4,661



39,328



46,258Cash and cash equivalents at
    beginning of period


36



2,269



6,930



Cash and cash equivalents at end of
    period

$
2,269


$
6,930


$
46,258


$
46,258Noncash financing
    activitiesIssuance of subscribed preferred
    stock

$



$
3,543


$
6,900


$
11,065Issuance of warrants and common
    stock in connection with intellectual property acquisition

$
270


$



$
49


$
353Conversion of convertible notes and
    interest into convertible preferred stock

$



$
8,246


$



$
12,886Issuance of convertible notes
    payable as commission for financing

$
141


$
203


$



$
344Conversion of payables to
    convertible notes payable

$
234


$
95


$



$
327Supplemental
    activitiesCash paid for income taxes

$
2


$
1


$
1


$
13Cash paid for interest

$
26


$
160


$
104


$
320    76




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)Notes to Consolidated Financial
    Statements
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    and Business
    scale-up
    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
   77




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
  Use of
    Estimates
    Cash
    and Cash Equivalents
    Reclassifications
    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
  Deferred
    Rent
   78




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
   Patent
    Costs
    Research
    and Development Expenses
    Income
    Taxes
  Accounting for
    Income Taxes.
    Foreign
    Currency Translation and Transactions
    Comprehensive
    Income (Loss)
  Reporting Comprehensive Income
  Stock-based
    Compensation
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting
    for Stock Issued to Employees
 79




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
        Years Ended December 31,2006


2005

2004Actual


Pro Forma

Pro FormaVolatility


60
%

0%

0%Expected term (years)


6.0


4.0

4.0Risk free interest rate


4.55
%

3.00%  4.50%

3.00%Expected dividend yield


0
%

0%

0%            80




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
     Year EndedDecember 31, 2006(In thousands, exceptper share amounts)Net loss as reported

$
(26,323
)Add: Stock-based compensation
    included in net loss


719Deduct: Stock-based employee and
    director compensation determined under fair value method for all
    awards


(458
)Pro forma net loss

$
(26,062
)Basic and diluted net loss per
    share as reported

$
(14.23
)Basic and diluted pro forma net
    loss per share

$
(14.09
)   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
       81




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
         2007

$
5652008


5272009


371Total

$
1,463       Years EndedDecember 31,2005


2006(In thousands, except per share amounts)Capitalized to inventory

$



$
263Research and development expense

$
256


$
766Sales, general and administrative
    expense


1,092



4,165$
1,348


$
4,931Net effect on basic and diluted
    net loss per share

$
1.14


$
2.67   Recently
    Issued Accounting Standards
  Inventory Costs, an amendment of ARB No. 43,
    Chapter 4. Inventory
    Pricing
   82




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
   2.  Net
    Loss Per Common Share
      December 31,2004


2005


2006Convertible preferred stock


1,712,800



5,307,180



Warrants to purchase preferred and
    common stock


1,566,653



2,423,758



2,512,542Options to purchase common stock


560,470



1,149,000



2,133,8423,839,923



8,879,938



4,646,384   3.
    Acquisitions         83




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
     Total purchase price, including
    acquisition related expenses





$
4,549Allocated to assets and
    liabilities:Tangible net assets acquired:Inventory

$
208Other assets


33Net tangible assets acquired


241Total liabilities assumed


2,847Net liabilities assumed






2,606Net intangible assets acquired





$
7,155   EITF 98-11 EITF 98-11
  MediPlant
    Acquisition Settlement Agreement
       84




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
   4.
    Balance
    Sheet Details  Other
    Assets
    Deferred
    Financing Costs
    Inventory
      December 31,2005


2006Raw materials

$
590


$
727Work in process


320



1,619Unpackaged finished goods


19



3,169929



5,515Less: reserve for obsolete
    inventory


(237
)


(754
)Total

$
692


$
4,761   Property
    and Equipment
    December 31,2005


2006Furniture and fixtures

$
385


$
588Office equipment


471



734Lab equipment


1,820



2,464Leasehold improvements


2,894



3,3515,570



7,137Less accumulated depreciation and
    amortization


(644
)


(1,866
)Total

$
4,926


$
5,271    85




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
   5.
    Commitments
    and Contingencies      Comerica Bank revolving line of
    credit

$
5,000Comerica B term loan


4,8969,896Less current portion


6,2503,646Debt discount


(305
)Long-term debt

$
3,341         Years ended December 31,2007

$
452008


21Total

$
66    86




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
     Years ended December 31,2007

$
9852008


9862009


1,0362010


1,0862011


990Total minimum lease payments

$
5,083       Litigation
    Settlement Agreement
    Settlement
    Agreements
         87




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
          FDA
    Investigation
   88




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
    6.
    Convertible
    Notes Payable  Series C-1
    Series C-1
        00-27, No. 98-5
 89




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
       00-27, No. 98-5
            7.
    Stockholders
    Equity   90




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
    Convertible
    Preferred Stock
                 91




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
              December 31,2004


2005Shares Issued


Aggregate





Shares Issued


AggregateShares


and


Liquidation


Shares


and


LiquidationDesignated


Outstanding


Preference


Designated


Outstanding


Preference(In thousands)








(In thousands)Series A


2,050,839



2,050,839


$
3,076



2,050,839



2,050,839


$
3,076Series B


679,239



679,239



2,262



679,239



679,239



2,262Series C-1


7,052,741



4,437,741



12,204



7,052,741



4,437,741



12,204Series D


11,000,000











11,500,000



10,019,857



20,040Series E














10,000,000



3,463,615



8,65920,782,819



7,167,819


$
17,542



31,282,819



20,651,291


$
46,241   Conversion
  1-for-4.25 Series C-1
  1-for-4.25
 92




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
   Dividends
    Voting
    Rights
    Liquidation
  Series C-1,
  Anti-Dilution
    Provisions
  Series C-1
  Series C-1 Series C-1
  Stock
    Option Plans
     93




---



##### Table of Contents



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


Exercise PriceAugust 24, 1999 (inception)Granted


71


$
0.43Outstanding, December 31, 1999


71



0.43Granted


187



1.36Canceled


(29
)


2.34Outstanding, December 31, 2000


229



1.15Granted


94



1.53Canceled


(6
)


0.64Outstanding, December 31, 2001


317



1.28Granted


11



1.49Canceled


(8
)


1.40Outstanding, December 31, 2002


320



1.28Granted


118



6.38Exercised


(18
)


0.43Canceled


(46
)


6.38Outstanding, December 31, 2003


374



2.30Granted


391



4.25Exercised


(14
)


2.04Canceled


(191
)


2.34Outstanding, 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



6.65  94




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
    Options Outstanding


Options ExercisableWeighted-AverageRemaining


Weighted-





Weighted-Number


Contractual


Average


Number


AverageGrant Exercise Price

Outstanding


Life


Exercise Price


Exercisable


Exercise Price$0.43 - $ 0.64


29,880



3.0 years


$
0.52



27,306


$
0.50$1.49 - $ 2.34


88,231



4.6 years



1.74



77,324



1.71$4.25 - $ 6.38


1,005,291



8.7 years



5.15



414,050



5.06$7.86 - $10.63


1,010,440



9.6 years



8.75



174,717



8.542,133,842



8.9 years



6.65



693,397



5.38     Warrants
      Series C-1
  Series C-1 Series C-1
 95




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
                 12-month
   96




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
                  97




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
              Common
    Shares Reserved for Issuance
    December 31,


December 31,2005


2006Convertible preferred stock as
    adjusted for anti-dilution provisions in conjunction with Series
    B and
    Series C-1 shares
    issued


5,307,180



Warrants for common and preferred
    stock


2,423,758



2,512,542Common stock options outstanding
    previous to 2001 Plan


58,117



55,760Common stock options outstanding
    under 2001 Plan


1,090,880



2,078,082Common stock options available for
    future grant


1,256,176



3,661,341Total common shares reserved for
    issuance


10,136,111



8,307,725  98




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
  8.
    Income
    Taxes        December 31,2005


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

$
17,146


$
24,885Reserves and other


2,200



3,840Total deferred tax assets


19,346



28,725Valuation allowance for deferred
    tax assets


(19,346
)


(28,447
)



278Deferred tax liabilities:Foreign intangible


(1,831
)


(1,368
)Other


(15
)


(278
)Total deferred tax liabilities


(1,846
)


(1,646
)Net deferred tax liabilities

$
(1,846
)

$
(1,368
)     Years Ended December 31,2004


2005


2006Current:Federal

$



$



$
State










Foreign


(43
)


(37
)


(43
)


(37
)


Deferred:Federal










State










Foreign


497



495



476497



495



476$
454


$
458


$
476  99




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##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
    December 31,2004


2005


2006Tax benefit at federal statutory
    rate

$
4,365


$
7,718


$
9,114State, net of federal benefit


749



1,324



1,541Tax credits










308Foreign tax


454



458



476Change in valuation allowance
    excluding change applicable to purchased intangibles


(4,034
)


(8,202
)


(9,101
)Change in valuation allowance
    applicable to purchased intangibles


84



5



Other foreign loss


(452
)


(457
)


(408
)Other permanent differences


(712
)


(388
)


(1,454
)Benefit for income taxes

$
454


$
458


$
476   9.
    Employee
    Benefit Plan    10.
    Related-Party
    Transactions        11.
    Subsequent
    Events   100




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##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
       12.
    Quarterly
    Information (Unaudited)    2006First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)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
)


(6,398
)


(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



3,348,081   101




---



##### Table of Contents



Artes
    Medical, Inc.
    (a development stage company)
    Notes to Consolidated Financial
    Statements  (Continued)
  2005First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share data)Research and development

$
1,557


$
2,356


$
2,841


$
3,435Selling, general and administrative


1,482



2,239



3,002



3,414Loss from operations


(3,039
)


(4,595
)


(5,843
)


(6,849
)Net loss

$
(4,516
)

$
(5,620
)

$
(6,729
)

$
(5,378
)Net loss per share 
    Basic and diluted

$
(3.96
)

$
(4.78
)

$
(5.61
)

$
(4.44
)Shares used in calculating net
    loss per share  Basic and diluted


1,139,497



1,176,822



1,200,269



1,210,372  102