UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

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Artes Medical, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 30, 2008

          The annual meeting of stockholders of Artes Medical, Inc. (the “Company”) will be held on October 30, 2008 at 10:00 a.m. (Pacific Time) at the San Diego Marriott Del Mar located at 11966 El Camino Real, San Diego, California 92130 for the following purposes, as more fully described in the accompanying proxy statement:

          1. To elect Christopher J. Reinhard and John R. Costantino as Class II directors to the Company’s board of directors to hold office until the 2011 annual meeting of stockholders and until their successors are duly elected and qualified;

          2. To approve the sale of the Company’s securities in one or more financing transactions to support the Company’s continued operations and business plan (the “Financing Proposal”); and

          3. To transact such other business that is both (i) necessary to obtain a stockholder vote for either of the two purposes identified above and (ii) properly comes before the annual meeting or any adjournments or postponements thereof.

          Only stockholders of record at the close of business on                     , 2008 will be entitled to notice of, and to vote at, the annual meeting or any adjournments or postponements of the annual meeting. A list of stockholders entitled to vote at the meeting will be available for inspection at the annual meeting and during normal business hours at our corporate offices located at 5870 Pacific Center Boulevard, San Diego, California 92121 for at least 10 days prior to the annual meeting.

          All stockholders are cordially invited to attend the annual meeting in person. Whether or not you plan to attend, please sign, date and return the enclosed WHITE proxy as promptly as possible in the envelope enclosed for your convenience. If you receive more than one WHITE proxy because your shares are registered in different names and addresses, each WHITE proxy should be signed, dated and returned to assure that all your shares will be voted. You may revoke your proxy at any time prior to the annual meeting. If you attend the annual meeting in person and vote by ballot, your proxy will be revoked automatically and only your vote at the annual meeting will be counted.

          If you wish to vote your shares in support of the board of directors’ nominees and other proposals, please vote only using the enclosed WHITE proxy card. Discard any other proxy cards that you may receive. Submission of any proxy card other than the WHITE proxy card will revoke your previously submitted WHITE proxy card. Similarly, you can revoke any proxy card previously signed by signing, dating and mailing the WHITE proxy card in the enclosed envelope provided.

          BY ORDER OF THE BOARD OF DIRECTORS

Karla R. Kelly
General Counsel and Corporate Secretary
San Diego, California
September __, 2008

YOUR VOTE IS IMPORTANT!

ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE ACCOMPANYING PROXY IN THE ENCLOSED RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THIS WILL ENSURE THE PRESENCE OF A QUORUM AT THE ANNUAL MEETING. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.

TABLE OF CONTENTS

		Page
PROXY STATEMENT			1
PROPOSAL 1—ELECTION OF DIRECTORS			3
BOARD OF DIRECTORS			3
DIRECTOR NOMINATIONS			6
CORPORATE GOVERNANCE			6
EXECUTIVE OFFICERS			9
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			13
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE			15
EQUITY COMPENSATION PLAN INFORMATION			15
EXECUTIVE COMPENSATION			16
DIRECTOR COMPENSATION			28
REPORT OF THE COMPENSATION COMMITTEE			31
REPORT OF THE AUDIT COMMITTEE			31
PROPOSAL 2—APPROVAL OF FINANCING PROPOSAL			32
OTHER MATTERS			35
DELIVERY OF PROXY MATERIALS AND ANNUAL REPORTS			35
STOCKHOLDER PROPOSALS FOR 2009 ANNUAL MEETING			35
FINANCIAL INFORMATION		Appendix 1

Artes Medical, Inc.
5870 Pacific Center Boulevard
San Diego, CA 92121
(858) 550-9999

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 30, 2008

          Artes Medical, Inc. is furnishing this proxy statement and the enclosed proxy in connection with the solicitation of proxies by its board of directors for use at its annual meeting of stockholders to be held on October 30, 2008 at 10:00 a.m. (Pacific Time) at the San Diego Marriott Del Mar located at 11966 El Camino Real, San Diego, California 92130, and at any adjournments or postponements of the annual meeting. We are mailing these materials to stockholders on or about                     , 2008. Unless the context requires otherwise, the words “we,” the “Company,” “us” and “our” refer to Artes Medical, Inc., and its wholly-owned subsidiaries.

RECORD DATE AND OUTSTANDING SECURITIES

          Only holders of our common stock as of the close of business on                     , 2008 are entitled to notice of, and to vote at, the annual meeting. Stockholders who hold our shares in “street name” may vote at the annual meeting only if they hold a valid proxy from their broker. As of                     , 2008, there were                      shares of our common stock issued and outstanding.

QUORUM AND VOTING

          The specific proposals to be considered and acted on at the annual meeting are summarized in the accompanying notice and are described in more detail in this proxy statement. Each stockholder is entitled to one vote for each share of our common stock held on the record date. Stockholders may not cumulate votes in the election of directors.

          All votes will be tabulated by the inspector of election appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions and “broker non-votes.” A broker non-vote occurs when you fail to provide voting instructions for shares you hold in “street name.” Under those circumstances, your broker may be authorized to vote for you on some routine matters but is prohibited from voting on other matters. Those items for which your broker cannot vote result in broker non-votes. Abstentions and broker non-votes are counted as present for purposes of determining the presence or absence of a quorum for the transaction of business. For proposals that require an affirmative vote of the majority of shares present and entitled to vote, abstentions will be counted towards the number of votes cast and will have the same effect as negative votes. However, abstentions will have no impact on the election of directors. Broker non-votes will not be counted for purposes of determining whether a proposal has received the requisite vote.

          The two individuals who have been properly nominated for election as directors and who receive the highest number of affirmative votes (among votes properly cast in person or by proxy) will be elected. The approval of the Financing Proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote.

PROXIES

          If you properly sign and return the enclosed form of WHITE proxy, the shares represented thereby will be voted at the annual meeting in accordance with your instructions specified therein. If your WHITE proxy does not specify how the shares represented thereby are to be voted, the WHITE proxy will be voted (i) FOR the election of the directors proposed by our board of directors unless the authority to vote for the election of such directors is withheld and (ii) FOR the approval of the Financing Proposal.

REVOCATION OF PROXY

          A stockholder of record may revoke a proxy at any time before it is voted at the annual meeting by (i) delivering a proxy revocation or another duly executed proxy bearing a later date to our Corporate Secretary at 5870 Pacific Center Boulevard, San Diego, California 92121 or (ii) attending the annual meeting and voting in person. Attendance at the annual meeting will not revoke a proxy unless the stockholder actually votes in person at the meeting by written ballot.

SOLICITATION AND COSTS

          We will bear the entire cost of soliciting proxies for the annual meeting, including the preparation, assembly, printing and mailing of this proxy statement, the proxy and any additional solicitation materials furnished to stockholders. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians holding shares in their names that are beneficially owned by others so that they may forward this solicitation material to the beneficial owners. In addition, we may reimburse such persons for their costs in forwarding the solicitation materials to the beneficial owners. The original solicitation of proxies by mail may be supplemented by a solicitation by telephone, electronic mail or other means by our directors, officers or employees. No additional compensation will be paid to these individuals for any of those services. We intend to retain a proxy solicitor in connection with the annual meeting.

FINANCIAL INFORMATION

          Attached in Appendix 1 is certain financial information from our Form 10-K for the fiscal year ended December 31, 2007 that we originally filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2008. We have not undertaken any updates or revisions to such information since the date it was originally filed with the SEC. Accordingly, we encourage you to review Appendix 1 together with any subsequent information we have filed with the SEC and our other publicly available information.

PROPOSAL 1—ELECTION OF DIRECTORS

          Our board of directors is divided into three classes of directors with staggered three-year terms, with each class consisting, as nearly possible, of one-third of the total number of directors. The board currently consists of seven persons. The class whose term of office expires and that is up for election at the Annual Meeting, the Class II Directors, currently consists of two directors: Messrs. Christopher J. Reinhard and John R. Costantino. A director elected to this class will serve for a term of three years, expiring at the 2011 annual meeting of stockholders, or until his earlier death, resignation or removal.

          The nominating and corporate governance committee of the board has nominated Messrs. Christopher J. Reinhard and John R. Costantino for election to fill these positions. You can find information about Messrs. Reinhard and Costantino below.

          The persons named in the WHITE proxy card will vote such WHITE proxy for the election of Messrs. Reinhard and Costantino unless you indicate that your vote should be withheld. You cannot vote for a greater number of directors than two. If elected, Messrs. Reinhard and Costantino will continue in office until their successors have been duly elected and qualified, or until the earlier of their respective death, resignation or retirement. Messrs. Reinhard and Costantino have each indicated to the Company that they will serve if elected. We do not anticipate that Messrs. Reinhard or Costantino will be unable to stand for election, but, if that happens, your WHITE proxy will be voted in favor of another person nominated by the board.

          The Board of Directors recommends a vote FOR the election of Messrs. Reinhard and Costantino as directors.

          A stockholder, H. Michael Shack, has filed preliminary proxy material stating that, at the annual meeting, he intends to submit proposals to (i) amend the Company’s bylaws to allow stockholders to fill vacancies on the board of directors resulting from the removal of directors, (ii) remove “for cause” three of the Company’s current directors and (iii) elect five of his nominees to the board of directors.

          Dr. Shack has not delivered a timely notice of his proposals to the Company as required by Article II, Section 2.1 of the bylaws. The board of directors believes that Dr. Shack’s proposals are not in your best interests. It believes, and has received a written opinion from Abrams & Laster LLP, the Company’s special Delaware counsel, that Dr. Shack’s proposals fail to comply with substantive and procedural requirements of Article II, Section 2.1 of the bylaws and Section 141(k) of the Delaware General corporation Law.

          The Company, therefore and in accordance with counsel’s opinion, does not intend to have Dr. Shack’s proposals brought before the annual meeting and the board of directors urges you to discard any proxy card that you may receive from Dr. Shack.

BOARD OF DIRECTORS

          The name, age, committee membership, if any, and term of each member of our board of directors is set forth below as of September 1, 2008:

								Term Expires at the
								Annual Meeting Held in
Name		Age				Position		the Year
Douglas Abel			46			Director			2009
John R. Costantino (1)(2)(3)			61			Director			2011
Todd C. Davis			47			Director			2010
Beverly A Huss (2)(3)			48			Director			2010
Lon E. Otremba (1)(2)(3)			51			Director			2010
Christopher J. Reinhard			55			Executive Chairman of the Board			2011
Robert B. Sherman (1)(2)(3)			65			Director			2009

Directors with a Term Ending at the 2008 Annual Meeting of Stockholders and Director Nominations for the Term Ending at the 2011 Annual Meeting of Stockholders

          At the annual meeting, our stockholders will vote on the election of Christopher J. Reinhard and John R. Costantino as Class II directors to serve for a three year term until the annual meeting of stockholders in 2011. Any proxy granted with respect to the annual meeting cannot be voted on for greater than two director nominees. Each of the board nominees listed in this proxy statement are current directors standing for re-election.

          Christopher J. Reinhard has been our executive chairman of our board of directors since June 2004. Since December 2003, Mr. Reinhard has also served as chairman of the board and chief executive officer of Cardium Therapeutics, Inc., a publicly-traded medical technology company. From July 2002 to December 2004, Mr. Reinhard served as chief executive officer of Collateral Therapeutics, Inc., a publicly-traded biotechnology company. Prior to the acquisition of Collateral Therapeutics, Inc. by Schering AG in July 2002, Mr. Reinhard worked for Collateral Therapeutics in a variety of roles from June 1995 to July 2002, including chief financial officer and president. Mr. Reinhard holds a B.S. in finance and an M.B.A. from Babson College.

          John R. Costantino has been a director since June 2006. Since January 2006, Mr. Costantino has also served as managing general partner of NGN Capital LLC, a venture capital advisory firm focusing on the healthcare and biotechnology industries. He has served as vice president of Walden Capital Partners since 1994, and has been a managing director at Walden Partners Ltd., a merchant bank providing consulting and investing services, since 1992. Mr. Costantino currently also serves on the board of directors of GE Funds, GE Investment Funds, Inc., GE Institutional Funds and GE LifeStyle Funds, each management investment companies. Mr. Costantino holds a B.S. from Fordham University and a J.D. from Fordham Law School. He is also a Certified Public Accountant.

          In February 2006, NGN Capital LLC purchased shares of our equity securities in a private placement financing. Mr. Costantino was appointed to the board in June 2006 in connection with the closing of this financing.

Director with a Term Ending at the 2009 Annual Meeting of Stockholders

          Douglas Abel has been a director since May 2008. Mr. Abel is the President, Chief Executive Officer and a director of Manhattan Pharmaceuticals, Inc., a publicly traded pharmaceutical company. From November 2004 to April 2005, Mr. Abel served as President and Chief Executive Officer of Tarpan Therapeutics, Inc., a privately-held biopharmaceutical company, until Tarpan Therapeutics, Inc. was acquired by Manhattan Pharmaceuticals, Inc. From August 2000 to November 2004, Mr. Abel served as Vice President of the dermatology business unit at Biogen Idec Inc. While at Biogen Idec Inc., he led more than 100 employees in support of the launch of AMEVIVE^®. From December 1987 to August 2000, Mr. Abel worked at Allergan, Inc., with his most recent position being Director of Marketing BOTOX^®. Mr. Abel holds an A.B. in Chemistry from Lafayette College and an M.B.A. from Temple University.

          In February 2008, the Company completed a financing arrangement with Cowen Healthcare Royalty Partners, L.P., or CHRP, to raise $21.5 million. In connection with this financing, the Company entered into an investor rights agreement with CHRP in which it agreed to elect two individuals designated by CHRP to the board, including: (i) an employee of CHRP, or the CHRP Director, and (ii) an individual with relevant experience in the Company’s industry and who is acceptable to a majority of the then serving directors on the Board, or the Industry Director. Mr. Abel has been appointed as the Industry Director. Mr. Abel will serve as a Class III director, with a term expiring at the 2009 annual meeting of the Company’s stockholders. The Company’s board will, subject to its fiduciary obligations, use commercially reasonable efforts to continue to nominate two individuals designated by CHRP to serve as the CHRP and Industry Directors at each election of directors until the earliest to occur of: (i) December 31, 2017, (ii) the date the cumulative payments to CHRP made by the Company pursuant to its agreements with CHRP first exceed a specified multiple of the consideration paid to the Company by CHRP or (iii) upon a change of control.

          Robert B. Sherman has been a director since October 2007. Mr. Sherman is a member of the Pilot Group, LLC, a private equity firm. From 2002 to 2003 he was America Online, Inc.’s (AOL) President, Interactive Marketing. Prior to AOL, from 2001 to 2002, Mr. Sherman was president of Time Warner Cable Advertising Sales. He also formerly served as Executive Vice President of NBC’s owned and operated radio stations and Chief Executive Officer of the advertising agency Della Femina, Travisano, Sherman & Olken, whose clients have included USA Network and Fox Television. Mr. Sherman holds a B.A. in Psychology from Adelphi University.

Directors with a Term Ending at the 2010 Annual Meeting of Stockholders

          Todd C. Davis has been a director since February 2008. Mr. Davis is co-founder and managing director of Cowen Healthcare Royalty Management, LLC, the investment advisor to Cowen Healthcare Royalty Partners, L.P., or CHRP. Mr. Davis was previously a partner at Paul Capital Partners, where he was focused on the activities of the Paul Royalty Funds. Prior to that, Mr. Davis was a partner at Apax Partners, a private equity fund. Mr. Davis has extensive healthcare operating experience, having worked in business development and general management at Elan Pharmaceuticals, and in sales and marketing at Abbott Laboratories. Mr. Davis currently also serves on the board of directors of Ligand Pharmaceuticals. He is a former U.S. naval officer and holds a B.S. from the U.S. Naval Academy, and an M.B.A. from Harvard Business School.

          As discussed above, the Company completed a financing arrangement with CHRP to raise $21.5 million. In connection with this financing, Todd Davis was appointed to the board as the CHRP Director in February 2008. The Company’s board will, subject to its fiduciary obligations, use commercially reasonable efforts to continue to nominate two individuals designated by CHRP to serve as the CHRP and Industry Directors at each election of directors until the earliest to occur of: (i) December 31, 2017, (ii) the date the cumulative payments to CHRP made by the Company pursuant to its agreements with CHRP first exceed a specified multiple of the consideration paid to the Company by CHRP or (iii) upon a change of control.

          Beverly A. Huss has been a director since October 2007. Ms. Huss is Chief Executive Officer of Vibrynt, Inc., a venture-backed medical device company. From 2001 to 2005, Ms. Huss served as President, Endovascular Solutions and Vice President of Guidant Corporation where she was responsible for research and development, manufacturing, sales, marketing, finance, regulatory affairs, quality assurance, clinical affairs and human resources within Endovascular Solutions. Ms. Huss holds a B.S. in Metallurgical Engineering from University of Illinois and a Masters in Technology Management from Pepperdine University.

          Lon E. Otremba has been a director since March 2006. Since October 2006, Mr. Otremba has served as Chief Executive Officer of Access 360 Media, a privately held media company. Since 2005, Mr. Otremba has also been the Principal Managing Partner of Otremba Management Advisory LLC, a strategic and operational management advisory firm. Mr. Otremba also served as Chief Executive Officer and a director of Muzak, LLC, a provider of commercial music services, from 2003 to 2005. Prior to joining Muzak, Mr. Otremba served as Executive Vice President, Strategic Planning and Operations of the AOL Interactive Marketing Group of Time Warner from 2002 to 2003, and as Executive Vice President, Strategic Planning, of the AOL Time Warner Local Partnership Group from 2001 to 2002. Mr. Otremba currently serves on the board of directors of Cardium Therapeutics, Access 360 Media, Power Medical Interventions, GGL, and EEI Communications and as a trustee of Buckley Country Day School. Mr. Otremba holds a B.A. in marketing and economics from Michigan State University.

          We completed a series of private financings from December 2005 to March 2006. Mr. Otremba was appointed to the board in connection with the closing of these financings upon the recommendation of the lead placement agent for these financings.

DIRECTOR NOMINATIONS

          Criteria for Board Membership. In selecting candidates for appointment or re-election to our board of directors, the nominating and corporate governance committee considers the appropriate balance of experience, skills and characteristics required of our board, seeks to insure that at least a majority of the directors are independent under the rules of the Nasdaq Global Market (“Nasdaq”), and that members of our audit committee meet the financial literacy and sophistication requirements under Nasdaq’s rules and regulations, including that at least one of them qualifies as an “audit committee financial expert” under the rules and regulations of the Securities and Exchange Commission (the “SEC”). Nominees for director are selected on the basis of their depth and breadth of experience, integrity, ability to make independent analytical inquiries, understanding of our business environment, and willingness to devote adequate time to board duties.

          Stockholder Nominees. The nominating and corporate governance committee will consider written proposals from stockholders for nominees for director. Any such nominations should be submitted to the nominating and corporate governance committee c/o the Corporate Secretary and should include the following information: (i) all information relating to such nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (ii) the names and addresses of the stockholders making the nomination and the number of shares of our common stock which are owned beneficially and of record by such stockholders; and (iii) appropriate biographical information and a statement as to the qualification of the nominee, and should be submitted in the time frame described in our Bylaws and under the section titled, “Stockholder Proposals for 2009 Annual Meeting” below.

          Process for Identifying and Evaluating Nominees. The nominating and corporate governance committee believes we are well served by our current directors. In the ordinary course, absent special circumstances or a material change in the criteria for board membership, the nominating and corporate governance committee will renominate incumbent directors who continue to be qualified for board service and are willing to continue as directors. If an incumbent director is not standing for re-election, or if a vacancy on our board occurs between annual stockholder meetings, the nominating and corporate governance committee will seek out potential candidates for board appointment who meet the criteria for selection as a nominee and have the specific qualities or skills being sought. Director candidates will be selected based on input from members of our board, our senior management and, if the nominating and corporate governance committee deems appropriate, a third-party search firm. The nominating and corporate governance committee will evaluate each candidate’s qualifications and check relevant references; in addition, such candidates will be interviewed by at least one member of the nominating and corporate governance committee. Candidates meriting serious consideration will meet with all members of our board. Based on this input, the nominating and corporate governance committee will evaluate which of the prospective candidates is qualified to serve as a director and whether the nominating and corporate governance committee should recommend to our board that this candidate be appointed to fill a current vacancy on our board, or presented for the approval of the stockholders, as appropriate.

          Although the nominating and corporate governance committee has not adopted a formal policy with respect to stockholder nominees, the nominating and corporate governance committee expects that the evaluation process for a stockholder nominee would be similar to the process outlined above.

          Director Nominees. Each of the board nominees listed in this proxy statement are current directors standing for re-election..

          No Family Relationships. There are no family relationships among any of our directors or executive officers.

CORPORATE GOVERNANCE

          We strive to operate within a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with these responsibilities and standards. We have implemented corporate governance procedures and guidelines to respond to the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC and Nasdaq. We believe that our current corporate governance structure and procedures, including our board committees, comply with existing corporate governance requirements. We will strive to maintain our board and committees in full compliance with these corporate governance requirements on an ongoing basis. We will also continue to regularly monitor developments in the area of corporate governance.

Board and Committee Meetings and Actions

          Our board of directors met 10 times and acted by written consent 3 times during fiscal year 2007. Our audit committee met 9 times during fiscal year 2007. Our compensation committee met 7 times. Our nominating and corporate governance committee met 4 times during fiscal year 2007 except for Daren Barone who attended 70% of the board meetings and for new members who joined the board in November of 2007, and the board members who served on the audit, compensation nominating and corporate governance committee attended at least 75% of the committee meetings during fiscal year 2007 except for Daren Barone who attended 66% of the audit committee meetings and new members who joined the committees in November of 2007.

Board Independence

          Our board has determined that the following directors are “independent” under Nasdaq’s current listing standards:

Douglas Abel
John R. Costantino
Todd C. Davis
Lon E. Otremba
Beverly A. Huss
Robert B. Sherman

          Under applicable SEC and Nasdaq rules, the existence of certain “related party” transactions above certain thresholds between a director and our company are required to be disclosed and preclude a finding by our board that the director is independent. In addition to transactions required to be disclosed under SEC rules, our board considered certain other relationships in making its independence determinations, and determined in each case that such other relationships did not impair the director’s ability to exercise independent judgment on our behalf.

Board Committees

          Our board has established an audit committee, a compensation committee and a nominating and corporate governance committee. Pursuant to our amended and restated bylaws, our board may from time to time establish other committees to facilitate the management of our business and operations.

          Audit Committee. Our audit committee consists of Messrs. Sherman, Costantino and Otremba, with Mr. Sherman serving as its chair. The audit committee is responsible for assuring the integrity of our financial control, audit and reporting functions and reviews with our management and our independent auditors the effectiveness of our financial controls and accounting and reporting practices and procedures. In addition, the audit committee reviews the qualifications of our independent auditors, is responsible for their appointment, compensation, retention and oversight and reviews the scope, fees and results of activities related to audit and non-audit services. We believe that our audit committee members meet the requirements for independence and financial literacy under the current requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by Nasdaq and the SEC. In addition, our board has determined that Mr. Costantino is an audit committee financial expert. We have made these determinations based on information received by our board, including questionnaires provided by the members of our audit committee. We intend to comply with future requirements established by Nasdaq or the SEC to the extent they become applicable to us. The audit committee is governed by a written charter approved by our board. The audit committee’s report is included in this proxy statement.

          Compensation Committee. Our compensation committee consists of Messrs. Costantino, Otremba, Sherman and Ms. Huss, with Mr. Otremba serving as its chair. The compensation committee’s principal responsibilities are to administer our stock plans and to set the salary and incentive compensation, including bonuses and stock option grants, for our executive chairman, our president and chief executive officer and our other executive officers. We believe that our compensation committee members meet the requirements for independence under the current requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by Nasdaq and the SEC. We have made this determination based on information received by our board, including questionnaires provided by the members of our compensation committee. We intend to comply with future requirements established by Nasdaq or the SEC to the extent they become applicable to us. The compensation committee is governed by a written charter approved by our board. The compensation committee’s report is included in this proxy statement.

          Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Messrs. Costantino, Otremba and Sherman, and Ms. Huss, with Mr. Costantino serving as its chair. The nominating and corporate governance committee is responsible for reviewing and making recommendations on the composition of our board and selection of directors, periodically assessing the functioning of our board and its committees, and making recommendations to our board regarding corporate governance matters and practices. We believe that our nominating and corporate governance committee members meet the requirements for independence under the current requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq Global Market and SEC rules and regulations. We have made this determination based on information received by our board, including questionnaires provided by the members of our nominating and corporate governance committee. We intend to comply with future requirements established by Nasdaq or the SEC to the extent they become applicable to us. The compensation committee is governed by a written charter approved by our board. The compensation committee also adopted written corporate governance guidelines for our company.

          Charters for our audit, compensation and nominating and corporate governance committees are available to the public at our website at www.artesmedical.com.

Communications with Directors

          Any stockholder who desires to contact any member of our board or management can write to:

Artes Medical, Inc.
Attn: Cheryl Monblatt Allen, Investor Relations
5870 Pacific Center Boulevard
San Diego, CA 92121

or send an e-mail to Cheryl Monblatt Allen, Investors Relations at callen@artesmedical.com.

          Your letter should indicate that you are a stockholder of the Company. Comments or questions regarding our accounting, internal controls or auditing matters will be referred to members of our audit committee. Comments or questions regarding the nomination of directors and other corporate governance matters will be referred to members of the nominating and corporate governance committee. For all other matters, our investor relations personnel will, depending on the subject matter:

	•		forward the communication to the director or directors to whom it is addressed;
	•		forward the communication to the appropriate management personnel;
	•		attempt to handle the inquiry directly, for example where it is a request for information about our company, or it is a stock-related matter; or
	•		not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.

          We have a policy of encouraging all directors to attend our annual stockholder meetings.

Compensation Committee Interlocks and Insider Participation

          No member of our compensation committee is an officer, former officer or employee of our company. No interlocking relationship exists between any of our executive officers or compensation committee members, on the one hand, and the executive officers or compensation committee members of any other entity, on the other hand, nor has any such interlocking relationship existed in the past.

Code of Business Conduct and Ethics

          We have adopted a code of business conduct and ethics that applies to all officers and employees, including our executive officers. This code of business conduct and ethics is posted on our website at www.artesmedical.com. Any amendments to, or waivers from, a provision of our code of business conduct and ethics that applies to any of our executive officers or directors will be posted on our website.

Corporate Governance Guidelines

          Our nominating and corporate governance committee adopted corporate governance guidelines to assist our board in exercising its responsibilities. These guidelines reflect our board’s commitment to building long-term stockholder value with an emphasis on corporate governance. We have posted a copy of the guidelines on our website at www.artesmedical.com . Copies of the guidelines may be obtained free of charge from our website. Any amendments to, or waivers from, a provision of our corporate governance guidelines that applies to any of our executive officers or directors will be posted on our website.

Comprehensive Compliance Program

          Our board has also adopted a comprehensive compliance program regarding our company’s commitment to comply with the rules, regulations and policies governing the marketing and sale of our products. We have posted a copy of this program on our website at www.artesmedical.com. Copies of the guidelines may be obtained free of charge from our website.

Form 10-K

          We filed an annual report on Form 10-K with the SEC on March 14, 2008, and amended our Form 10-K on April 22, 2008. Appendix 1 to this proxy statement includes certain financial information from our Form 10-K for the fiscal year ended December 31, 2007. Stockholders may obtain a copy of our annual report online at www.sec.gov, or without charge, by writing to our corporate secretary, at our principal executive offices located at 5870 Pacific Center Boulevard, San Diego, CA 92121.

EXECUTIVE OFFICERS

          Set forth below are the name, age, position, and a brief account of the business experience of each of our executive officers and significant employees as of September 1, 2008:

Name		Age		Position
Christopher J. Reinhard		55		Executive Chairman of the Board
Michael K. Green		52		Chief Financial Officer
Karla R. Kelly, J.D.		54		Chief Legal Officer, General Counsel and Corporate Secretary
Greg J. Kricorian, M.D.		38		Chief Medical Officer
Larry J. Braga		46		Vice President — Manufacturing
Susan A. Brodsky-Thalken		55		Vice President — U.S. Sales and Training
Frank M. Fazio		39		Vice President — Marketing
Karon J. Morell		58		Vice President — Regulatory Affairs and Quality Affairs

          Christopher J. Reinhard has been our executive chairman of our board of directors since June 2004. Since December 2003, Mr. Reinhard has also served as chairman of the board and chief executive officer of Cardium Therapeutics, Inc., a publicly-traded medical technology company. From July 2002 to December 2004, Mr. Reinhard served as chief executive officer of Collateral Therapeutics, Inc., a publicly-traded biotechnology company. Prior to the acquisition of Collateral Therapeutics, Inc. by Schering AG in July 2002, Mr. Reinhard worked for Collateral Therapeutics in a variety of roles from June 1995 to July 2002, including chief financial officer and president. Mr. Reinhard holds a B.S. in finance and an M.B.A. from Babson College.

          Michael K. Green has been our chief financial officer since May 2008. From October 2005 to May 2008, Mr. Green served as the chief operating officer and chief financial officer of Orchestra Therapeutics, Inc., a publicly-traded immuno-pharmaceutical company. From October 2003 to October 2005, he served as Orchestra Therapeutics, Inc.’s vice president, finance and chief financial officer. From May 1991 to September 2002, Mr. Green was senior vice president and chief financial officer of Synbiotics Corporation, a publicly traded animal health company. From May 1991 to October 1993, Mr. Green served as chief financial officer of Immunopharmaceutics Inc., a human pharmaceutical company, where he was responsible for all finance, accounting,

administrative, human resources and MIS matters. Before that, Mr. Green spent 13 years with Price Waterhouse in various offices in the United States and Australia. Mr. Green co-authored the Price Waterhouse guidebook titled “Taking Your Company Public,” and the Price Waterhouse lecture series titled “Initial Public Offerings for Smaller Businesses.” Mr. Green holds a Bachelor of Business Studies degree from the New South Wales Institute of Technology in Sydney, Australia. Mr. Green is a C.P.A. and a Chartered Accountant.

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

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

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

          Susan A. Brodsky-Thalken has been our vice president, U.S. sales and training since October 2006. From April 2006 to October 2006, she served as our executive director, U.S. marketing and aesthetic market development. From February 2003 to April 2006, Ms. Brodsky-Thalken was a principal at AAP, Inc. providing consulting services to the aesthetic medical device industry. From April 2002 to January 2003, Ms. Brodsky-Thalken served as vice president, sales of INAMED Corporation, a publicly-traded medical device company. From February 1995 to March 2002, Ms. Brodsky-Thalken served as regional sales director for INAMED Corporation. Ms. Brodsky-Thalken studied biological science at San Francisco State University.

          Frank M. Fazio has been our vice president, marketing since June 2006. From March 2005 to May 2006, Mr. Fazio served as director, market development of INAMED Corporation, a publicly-traded medical device company. From May 2002 to March 2005, Mr. Fazio served as director, facial aesthetics of INAMED Corporation. From April 2001 to May 2002, Mr. Fazio was a principal at AMC Consulting, providing consulting services to companies in the medical device industry. Mr. Fazio holds a B.S. in molecular and cellular biology from the University of Arizona.

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The following is a description of each transaction or series of transactions during fiscal year 2007, to which we have been a party, and in which the amount involved did or may exceed $120,000 and in which any of our directors, named executive officers or other executive officers, any holder of more than 5% of our common stock or any member of the immediate family of any of these persons had or will have a direct or indirect material interest, other than the compensation arrangements (including with respect to equity compensation) described in “Executive Compensation.” below. We believe that we have executed all of the transactions described below on terms no less favorable to us than we could have obtained from unaffiliated third parties.

Issuances of Stock Options

See “Executive Compensation — Stock-Based Incentive Awards” for information pertaining to stock option grants by the Company to its officers and directors.

Employment Arrangements

          Information on our employment arrangements with our executive officers is located under the section titled “Employment Arrangements and Severance and Change in Control Benefits” in Executive Compensation below.

Director and Officer Indemnification Agreements

          In addition to the indemnification provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, we have entered into separate indemnification agreements with each of our directors and executive officers. These agreements require us, among other things, to indemnify our directors and executive officers against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by these individuals in connection with any action, suit or proceeding arising out of their status or service as our director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by these individuals in connection with any proceeding against them with respect to which they may be entitled to indemnification by us. We also intend to enter into these agreements with our future directors and executive officers.

Separation Agreement with Diane S. Goostree

          On May 12, 2008, the Company’s board of directors accepted the resignation of Diane S. Goostree as the Company’s chief executive officer and president and as a director on the Company’s board of directors. Ms. Goostree’s resignation did not result from any disagreement with the Company or its board of directors.

          As part of her resignation, the Company entered into a Separation Agreement and General Release with Ms. Goostree on May 14, 2008. Under the terms of the Separation Agreement, the Company will pay Ms. Goostree the equivalent of 18 months of her base salary, less applicable payroll deductions and required withholdings, with $273,000 payable following the effective date of the Separation Agreement and $214,500 payable in six equal monthly installments over a six month period measured from the effective date of the Separation Agreement. In addition, the Company will pay or reimburse Ms. Goostree for the COBRA premiums required to insure Ms. Goostree and her legal dependents for a period not to exceed the earlier to occur of 18 months from the date of the Separation Agreement or the date Ms. Goostree is eligible to participate in another employer’s group insurance plan.

          The Company also agreed to accelerate the vesting of the common stock that Ms. Goostree may acquire under a stock option the Company granted to Ms. Goostree in February 2008. The option is exercisable for 93,024 shares of common stock at an exercise price of $2.20 per share. The Company also agreed to provide Ms. Goostree with an additional 24 months to exercise the February 2008 stock option as well as an additional 24 months to exercise two stock options granted to Ms. Goostree in 2006. Under the 2006 stock options, Ms. Goostree may acquire up to 63,723 shares of common stock at an exercise price of $5.31 per share and up to 21,567 shares of common stock at an exercise price of $7.86 per share. The parties agreed that all other stock options held by Ms. Goostree would terminate on the effective date of the Separation Agreement. The parties also entered into customary general releases as part of the agreement.

Separation Agreement with Peter C. Wulff

          On May 6, 2008, the Board of Directors accepted the resignation of Peter C. Wulff as the Company’s executive vice president and chief financial officer, effective immediately. Mr. Wulff’s resignation did not result from any disagreement with the Company. In connection with Mr. Wulff’s resignation, the Company and Mr. Wulff entered into a Separation Agreement and General Release. Under the terms of the Separation Agreement, the Company will pay Mr. Wulff the equivalent of 15 months of his base salary, less applicable payroll deductions and required withholdings, with $175,000 payable following the effective date of the Separation Agreement and $137,500 payable in six equal monthly installments over a six month period measured from the effective date of the Separation Agreement. In addition, the Company will pay or reimburse Mr. Wulff for the COBRA premiums required to insure Mr. Wulff and his legal dependents for a period not to exceed the earlier to occur of 15 months from the date of the Separation Agreement or the date Mr. Wulff is eligible to participate in another employer’s group insurance plan.

          The Company also agreed to accelerated the vesting of the common stock that Mr. Wulff may acquire under a stock option the Company granted to Mr. Wulff in February 2008. The option is exercisable for 26,391 shares of common stock at an exercise price of $2.20 per share. The Company also agreed to provide Mr. Wulff with an additional 24 months to exercise the February 2008 stock option as well as an additional 24 months to exercise two stock options granted to Mr. Wulff in 2005. Under the 2005 stock options, Mr. Wulff may acquire up to 51,959 shares of common stock at an exercise price of $5.31 per share. The parties agreed that all other stock options held by Mr. Wulff would terminate on the effective date of the Separation Agreement. The parties also entered into customary general releases as part of the agreement.

Revenue Financing Arrangement

     In February 2008, we completed a financing arrangement with CHRP in which we raised $21.5 million. Under a revenue interest financing and warrant purchase agreement, or Revenue Agreement, CHRP acquired the right to receive a revenue interest on our U.S. net product sales from October 2007 through December 2017. We are required to pay a revenue interest on U.S. net product sales of ArteFill^®, any improvements to ArteFill^®, any internally developed products and any products in-licensed or purchased by us, provided that such improvements, internally developed, in-licensed or purchased products are primarily used for or have an FDA-approved indication in the field of cosmetic, aesthetic or dermatologic procedures. The scope of the products subject to CHRP’s revenue interest narrows following the date the cumulative payments we make to CHRP first exceed a specified multiple of the consideration paid by CHRP for the revenue interest. In addition, we are required to make two lump sum payments of $7.5 million to CHRP, the first in January 2012 and the second in January 2013.

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

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

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

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

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

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

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

     We and CHRP also entered into an investor rights agreement, under which we agreed to file a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of the shares underlying the warrants issued to CHRP. Under the investor rights agreement, we also agreed to elect two individuals designated by CHRP to our Board of Directors, including: (i) an employee of CHRP, or the CHRP Director, and (ii) an individual with relevant experience in the Company’s industry and who is acceptable to a majority of the then serving directors on the Board, or the Industry Director. CHRP has elected Todd Davis and Douglas Abel as its two designated representatives.

Company Policy Regarding Related Party Transactions

          It is our policy that the audit committee approve or ratify transactions involving directors, executive officers or principal stockholders or members of their immediate families or entities controlled by any of them or in which they have a substantial ownership interest in which the amount involved exceeds $120,000 and that are otherwise reportable under SEC disclosure rules. Such transactions include employment of immediate family members of any director or executive officer. Management advises the audit committee on a regular basis of any such transaction that is proposed to be entered into or continued and seeks approval.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The following table sets forth information regarding ownership of our common stock as of June 30, 2008 (or such other date as provided below) by (i) each person known to us to own more than 5% of the outstanding shares of our common stock, (ii) each of our directors and director nominees, (iii) each named executive officer listed in the compensation tables under “Executive Compensation” below and (iv) all of our directors and executive officers as a group. Each stockholder’s percentage ownership is based on 16,514,163 shares of our common stock outstanding as of June 30, 2008. The information in this table is based solely on statements in filings with the SEC or other reliable information.

		Amount and Nature of				Percentage of
Name and Address of Beneficial Owner(1)		Beneficial Owned(2)				Class
Principal Stockholders
NGN Capital LLC(3)			1,112,046				6.7	%
369 Lexington Avenue, 17th Floor
New York, New York
Directors, Director Nominees and Executive Officers
Douglas Abel(4)			3,125				*
Michael K. Green(5)			—				*
Susan A. Brodsky-Thalken(6)			68,543				*
Frank M. Fazio(7)			44,849				*
Christopher J. Reinhard(8)			312,303				1.8	%
John R. Costantino(3)			1,112,046				6.7	%
Lon E. Otremba(9)			36,644				*
Beverly A. Huss(10)			4,411				*
Robert B. Sherman(10)			4,411				*
Todd C. Davis(11)			381,250				2.3	%
Diane S. Goostree (12) **			202,514				1.2	%
Peter C. Wulff (13)***			88,350				*
All directors and executive officers as a group (14 persons)(14)			2,155,308				12.2	%

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

          Under Section 16(a) of the Securities Exchange Act of 1934 and rules and regulations promulgated by the SEC, our directors, executive officers and beneficial owners of more than 10% of any class of equity security are required to file periodic reports of their ownership, and changes in that ownership, with the SEC. Based solely on our review of copies of reports provided to us pursuant to Rule 16a-3(e) of the Exchange Act and representations of such reporting persons, we believe that during fiscal year 2007, such SEC filing requirements were satisfied, with the exception of Diane Goostree, who filed a late Form 4 on April 25, 2007, Robert Sherman, who filed a late Form 4 on November 20, 2007, Beverly Huss, who filed a late Form 4 on November 20, 2007 and Greg Kricorian, who filed a late Form 4 on March 25, 2008, in connection with option grants made to these individuals.

EQUITY COMPENSATION PLAN INFORMATION

          The following table provides information as of June 30, 2008 with respect to the shares of our common stock that may be issued under our equity compensation plans:

Number of Securities

Number of Securities to

Weighted Average

Remaining Available for

be Issued Upon Exercise

Exercise Price of

Future Issuance Under

Exercise of Outstanding

Outstanding Options,

Equity Compensation

Options, Warrants

Weighted Average

Plans (Excluding Securities

and Rights

Warrants and Rights

Reflected in the First Column)

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by stockholders

3,299,178

(1)

$

5.24

1,818,123

(2)

Equity compensation plans not approved by stockholders(3)

335,761

$

4.66

—

Total:

3,634,939

$

5.19

1,818,123

EXECUTIVE COMPENSATION

          The compensation committee of our board of directors oversees our executive compensation program. In this role, the compensation committee reviews and approves annually all compensation decisions relating to our named executive officers.

          Our compensation program is designed to attract and retain talented employees, motivate them to achieve our key financial, operational and strategic goals and reward them for superior performance. We believe that attracting and retaining high caliber employees and providing them with appropriate performance incentives are critical steps to helping us achieve our corporate goals and build long-term value for our stockholders.

Overview of Compensation Program

     The elements of our compensation program are geared toward providing our executives with both short-term and long-term performance incentives, with the overall objective to motivate our executives to help us achieve our corporate goals and build long-term value for our stockholders. The elements of our compensation program include:

	•		Base salary;
	•		Annual performance-based cash bonus awards; and
	•		Long-term stock-based incentive awards.

     We also provide our executives with insurance and a limited number of additional benefits that are typical for companies in our industry. Each of these compensation elements is described in more detail below.

     In determining the relevant amounts for each of these compensation elements to be awarded to our executives, our compensation committee considers the following objectives:

	•		A Substantial Portion of Executive Compensation Should Be Performance-Based. We believe that a substantial portion of the compensation received by each of our executives should be directly tied to, and contingent upon, the performance of our company as a whole and the executive’s individual contribution and performance. To support this objective, our compensation committee established an Annual Bonus Incentive Plan (the “Bonus Plan”) in April 2007. The Bonus Plan is designed to align each eligible executive’s efforts with our key financial, operational and strategic goals by providing an opportunity for the executive to earn an annual cash bonus with amounts determined by considering our success in achieving our corporate goals and the executive’s success in achieving individual performance goals. The performance-based cash bonus awards payable to our executive chairman and our chief executive officer are based almost entirely on our success in achieving our corporate goals. Our corporate goals for fiscal year 2008 includes achieving sales targets for ArteFill and controlling our operating expenses.
	•		Stock-Based Incentive Awards Should Comprise a Substantial Portion of Executive Compensation. We believe that a substantial portion of executive compensation should be delivered in the form of stock-based incentive awards in order to align the long-term interests of our executives with those of our stockholders and to provide a retention incentive to our executives.
	•		Our Executive Compensation Should Be Competitive and Fair. In order to help us attract and retain talented executives, we believe that our compensation programs should be competitive when compared to our peers but also be perceived as fair, when considered both externally as well as internally. Because we compete with many larger companies for top executive-level talent, our compensation committee generally targets overall compensation for our executives at approximately the 50th percentile of the compensation paid to similarly situated executives at our peer group companies.

Compensation Process

     Our compensation committee is responsible for establishing our compensation philosophy and setting the compensation levels for our executives, including base salaries, target performance-based cash bonus awards and stock-based incentive awards. The compensation committee is responsible for approving the corporate goals and individual performance goals for each of our executive officers for purposes of the performance-based cash bonus awards. To assist the compensation committee, our executive chairman, our chief executive officer and our senior director of human resources prepare a report at the beginning of each fiscal year recommending base salaries, stock-based incentive awards, corporate goals for the fiscal year and individual performance goals for each executive officer. In addition to this report, our compensation committee considers relevant market compensation data. The compensation committee in its sole discretion may accept or adjust the compensation recommendations it is provided by our executive chairman, our chief executive officer and our senior director of human resources. No executive officer is allowed to be present at the time his or her compensation is being discussed or determined by the compensation committee.

     After the end of each fiscal year, our compensation committee also determines the performance-based cash bonus awards our executive officers should be paid for the prior fiscal year. In making this determination, our compensation committee evaluates our success in achieving our corporate goals during the past fiscal year and evaluates each executive officer’s contributions and success in achieving their individual performance goals during the past fiscal year. To assist in this process, our executive chairman, our chief executive officer and our senior director of human resources evaluate and prepare a report for the compensation committee regarding the individual performance of each of our executive officers, other than our executive chairman and our chief executive officer who are evaluated directly by the compensation committee. Based on this information, our compensation committee determines what percentage of the individual cash bonus targets each of our executive officers should receive for the past fiscal year.

Market Compensation Data

     Our compensation committee considers relevant market data in setting the compensation for our executive officers. Our compensation committee engaged the services of an executive compensation consulting firm, Compensia, Inc., to evaluate each element of the compensation we paid to our executive officers during fiscal year 2007 and fiscal year 2008. Compensia prepared an analysis of competitive market data for our compensation committee using the Radford Global Life Sciences Survey and three industry peer group surveys prepared by Compensia.

     Based on Compensia’s recommendation, our compensation committee determined that one of the peer group surveys, the “Revenue/Market Cap Peers” survey, was the most appropriate survey to consider in evaluating the salary of our chief executive officer. Our compensation committee, again based on Compensia’s recommendation, determined that it should consider both the Radford Global Life Sciences Survey and the Revenue/Market Cap Peers survey in evaluating the salaries of our other executives.

     The Radford Global Life Sciences Survey provides executive compensation data for companies in the following industries: biotechnology, pharmaceutical, medical device, diagnostic and clinical research organizations. The Revenue/Market Cap Peers survey includes compensation data from the following 18 medical device companies. These companies averaged less than $61 million in annual revenues and had average market valuations of less than $310 million when the survey was prepared during the first quarter of 2007.

•		Abiomed, Inc.		•		Aspect Medical Systems, Inc.		•		Biolase Technology, Inc.
•		Candela Corporation		•		Cepheid		•		Cholestech Corporation
•		Cutera, Inc.		•		Cynosure, Inc.		•		Isolagen, Inc.
•		Micrus Endovascular Corporation		•		Nanogen, Inc.		•		Natus Medical Incorporated
•		NeuroMetrix, Inc.		•		Orthovita, Inc.		•		Photomedex, Inc.
•		Rita Medical Systems, Inc.		•		Staar Surgical Company		•		Thermage, Inc.

Components of Executive Compensation

     As indicated above, we compensate our executives through a combination of short-term and long-term incentives that are designed to motivate our executives to help us achieve our key financial, operational and strategic goals and build long-term value for our stockholders.

Base Salary

     We provide our executive officers with a base salary to compensate them for services provided to us during the fiscal year. In setting base salaries for our executive officers, our compensation committee considers the executive’s position, our success in achieving our corporate goals, the individual’s contribution and performance during the prior fiscal year and relevant market data. The compensation committee also considers the evaluations and recommendations proposed by our executive chairman, our chief executive officer and our senior director of human resources. The compensation committee evaluates and sets the base salaries for our executives on an annual basis following annual performance reviews, as well as upon a promotion or other change in responsibility.

     Fiscal Year 2007. In setting the base salaries for our executives for fiscal year 2007, our compensation committee considered the executive’s position, our success in achieving our corporate goals during fiscal year 2006, the individual performance and contribution of the executive during fiscal year 2006 and the evaluations and recommendations proposed by our executive chairman, our chief executive officer and our senior director of human resources. It also reviewed the market survey data provided by Compensia. This data showed that the base salaries for our executive officers, other than the two vice presidents hired during fiscal year 2006, were significantly below the 50th percentile of our peer companies. In February 2007, our compensation committee decided that the base salaries for our executive officers should be increased so that they would approximate the 50th percentile of our peer companies.

     Fiscal Year 2008. For fiscal year 2008, the compensation committee considered that in fiscal 2007 the salaries of our executive officers had been increased to approximately the 50th percentile of our peer companies, the Company’s performance during fiscal 2007 and the Company’s stock price and financial status. The compensation committed also considered the individual performance and contribution of each executive during fiscal year 2007 and the evaluations and recommendations proposed by our executive chairman, our chief executive officer and our senior director of human resources. Based on these factors, the compensation committee elected not to make any changes to the salaries of our named executive officers for fiscal year 2008. The base salaries for our named executive officers for fiscal year 2008 are as follows:

Name and Title		Base Salary
Christopher J. Reinhard,		$	150,000
Executive Chairman of the Board
Diane S. Goostree (1)		$	325,000
Former Chief Executive Officer and President
Peter C. Wulff (2)		$	250,000
Former Executive Vice President and Chief Financial Officer
Susan A. Brodsky-Thalken,		$	235,000
Vice President — U.S. Sales and Training
Frank M. Fazio,		$	242,000
Vice President — Marketing

     On May 6, 2008, the board of directors of the Company appointed Michael K. Green as the Company’s chief financial officer. Under the terms of his offer letter, Mr. Green receives a base salary of $300,000 per year.

Performance-Based Cash Bonus Awards

     In April 2007, our compensation committee established a written Annual Bonus Incentive Plan (the “Bonus Plan”) for our executive officers and other eligible employees. The Bonus Plan is designed to align each eligible employee’s efforts with our financial, operational and strategic goals by providing an opportunity for the employee to earn an annual cash bonus with amounts determined by overall achievement of corporate goals and individual goals. The Bonus Plan is governed by the compensation committee. Our chief executive officer, with assistance from our senior director of human resources and executive chairman, is responsible for administrating the Bonus Plan. All employees, including our executives, are eligible to participate in the Bonus Plan if they have been a full-time employee for three consecutive months prior to the end the fiscal year, had an acceptable performance rating on their most recent performance review and are not on a performance improvement plan.

     Our compensation committee is responsible for setting the target bonus amounts for our executives and other eligible employees, and approving the overall target bonus amounts that are available under the Bonus Plan. The target bonus amounts for each eligible employee will generally be set at a percentage of his or her base salary. The bonus payments an eligible employee receives will be based on two equally weighted performance measures, corporate goals and individual goals. Our chief executive officer is responsible for establishing specific written corporate goals for the Bonus Plan year, which goals are subject to approval by our compensation committee. Our senior executives will establish departmental goals for each of their respective departments, which goals are subject to approval by our chief executive officer. Our department heads will work with their departments to set the appropriate objectives for their team and individual goals for each eligible employee.

     After the end of each fiscal year, the compensation committee is responsible for setting the actual bonus amounts to be awarded. To assist our compensation committee, each year: (i) our chief executive officer provides the compensation committee with documentation regarding full or partial achievement of each corporate goal, along with a recommended percentage reflecting our overall achievement of the corporate goals, (ii) each employee provides a written summary of their success in achieving their individual goals, including a proposed overall percentage accomplishment and (iii) the employee’s supervisor writes a final

assessment and determines the overall percent accomplishment (the supervisor’s evaluation is reviewed by a human resources officer and approved by our chief executive officer). The average of the corporate goals success percentage and the individual goals success percentage is multiplied by the employee’s target bonus amount to determine the actual bonus amount paid to an employee. Actual amounts payable can range from 0 to 100% of the target amounts, based upon the extent to which performance under each criterion meets, exceeds or is below target. To reward exceptional performance in certain circumstances, the compensation committee may determine that a supplemental bonus in excess of the target bonus is appropriate and justified. However, individual incentive payments are not an entitlement and may be decreased at the sole discretion of the compensation committee. We may terminate the Bonus Plan at any time, and may alter the terms and conditions under which the bonus awards are set, calculated or paid.

     Fiscal Year 2007. Our board approved nine corporate goals for fiscal year 2007. These goals involved financial, operational and strategic objectives including, but not limited to: our financial performance during fiscal year 2007, enhancing the product labeling for ArteFill, increasing our manufacturing capabilities, expanding our product offerings and exploiting the non-strategic applications for ArteFill and our related microsphere technology platform and adding additional qualified directors to our board. In February 2008, our compensation committee evaluated the Company’s achievement of the corporate goals and individual goals, and determined that our named executive officers should not receive any cash bonuses for fiscal year 2007.

     Fiscal Year 2008. For fiscal year 2008, our board approved goals that include: achieving our sales targets, managing our operating costs in accordance with our plan, and increasing the number of physician customers and their use of ArteFill in their practices. Although the corporate and individual performance goals are intended to be achievable, an award of the full target cash bonus amount will require very high levels of both individual and company performance. For fiscal year 2008, the target bonus amounts for our named executive officers are as follows:

		Target as a				Target
		Percentage of				Bonus
Name and Title		Base Salary				Amount
Christopher J. Reinhard,			50	%		$	75,000
Executive Chairman of the Board
Diane S. Goostree (1)			50	%		$	162,500
Former Chief Executive Officer and President
Peter C. Wulff (2)			35	%		$	87,500
Former Executive Vice President and Chief Financial Officer
Susan A. Brodsky-Thalken,			30	%		$	70,500
Vice President — U.S. Sales and Training
Frank M. Fazio,			30	%		$	72,600
Vice President — Marketing

     On May 6, 2008, the board of directors of the Company appointed Michael K. Green as the Company’s chief financial officer. Mr. Green is eligible to receive a performance-based cash bonus award equal to up to 50% of his base salary.

Stock-Based Incentive Awards

     In addition to our performance-based cash bonus awards, we provide long-term stock-based incentive awards to our executive officers. These stock-based incentive awards generally consist of options to purchase shares of our common stock. We believe that stock option awards help further our compensation objectives by encouraging our executives to remain with us through at least the vesting period for these awards and providing them with an incentive to continue to focus on our long-term financial performance and increasing stockholder value.

     Our executive officers receive a stock option award in connection with their initial hire and following promotions. Our executives may also receive stock option awards on an annual basis. To assist the compensation committee, we have developed guidelines for initial and annual stock option awards. The guidelines for initial grants are based on the executive’s position and the guidelines for annual grants are generally designed to replace the number of options initially granted to the executive at hiring that vest after one year, or 25% of the hiring grant award for the executive. The actual number of options for an executive may be higher or lower than these guidelines, based on their individual performance or extraordinary achievements.

     Fiscal Year 2007. In analyzing whether to make additional stock option awards to our executive officers for fiscal year 2007, our compensation committee considered the executive’s position, our success in achieving our corporate goals during fiscal year 2006, the individual performance and contributions of the executive during fiscal year 2006 and the base salary and other compensation payable to the executive. It also reviewed the market data provided by Compensia, which indicated that the equity awards held by our executive officers (other than our chief executive officer) were generally at the 50th percentile of our peer companies.

     In February 2007, our compensation committee issued Diane S. Goostree, our former chief executive officer, a stock option under our 2006 Plan to purchase up to 300,000 shares of common stock at an exercise price of $9.96 per share.

     In addition, we granted stock options to our executive officers, excluding our chief executive officer, in June 2007, as part of our annual grant program for all employees.

     Fiscal Year 2008. The compensation committee approved stock option awards to our executive officers in February 2008. In making these awards, the compensation committee considered the Company’s guidelines for annual grants based on the executive’s title, the executive’s performance during fiscal year 2007 and the compensation committee’s decision not to award our executive officers any performance-based cash bonus awards for fiscal year 2007. Our named executive officers received the following stock option awards for fiscal year 2008:

		Number of
		Shares of
Name and Title		Common Stock
Christopher J. Reinhard,			—
Executive Chairman of the Board
Diane S. Goostree, (1)			93,024
Former Chief Executive Officer, President and Director
Peter C. Wulff, (2)			26,391
Former Executive Vice President and Chief Financial Officer
Susan A. Brodsky-Thalken,			43,102
Vice President — U.S. Sales and Training
Frank M. Fazio,			43,949
Vice President — Marketing

     These stock options have an exercise price of $2.20 per share, the closing sale price of our common stock as reported on the Nasdaq Global Market on the grant date. The stock options vest over four years, with 25% of the option shares vesting 12 months after the grant date, and the remaining 75% of the option shares vesting in 36 equal monthly installments thereafter. The stock options will automatically terminate on February 27, 2009, without any vesting, if the Company fails to satisfy a revenue milestone set by the compensation committee for fiscal year 2008. The stock options may be accelerated in the event of certain corporate transactions as provided in the 2006 Plan.

     On May 6, 2008, the board of directors of the Company appointed Michael K. Green as the Company’s chief financial officer. The Compensation Committee issued Mr. Green an option to purchase 165,000 shares of the Company’s common stock with an exercise price of $1.17 per share, the closing bid price of the Company’s common stock as reported on the NASDAQ Global Market on May 6, 2008, the date of grant. The option shares vest and become exercisable in accordance with the following schedule: 12.5% of the option shares vest on November 6, 2008, and the remainder of the option shares vest in 42 equal monthly installments thereafter.

Stock and Option Grant Practices

          Our compensation committee adopted a policy by which all stock and option awards to new and current employees, including our executive officers, are granted on a quarterly basis at pre-determined meeting dates of the compensation committee. Our compensation committee grants the equity awards in accordance with the dates fixed by this policy whether or not we are aware of any material non-public information (whether positive or negative) at the time of grant. Because the equity awards typically do not vest or have any realizable value for at least 12 months, we do not believe it is important whether we are aware of any material non-public information on the date of grant. The amount of realizable value related to such awards will be determined by our stock price on the date the awards vest and therefore will be determined by our financial performance in the time prior to vesting. Whether the stock price moves up or down shortly after the grant date is largely irrelevant for purposes of the equity awards.

          The exercise price of any option grant is determined by reference to the fair market value of such shares, which the 2006 Plan defines as the closing price of our common stock on the Nasdaq Global Market on the date of grant. Prior to completing our initial public offering, the exercise price for a stock option was determined by our board. However, because options granted both before and after the completion of our initial public offering have been granted at fair market value, such options only have cash value to the holder to the extent that the stock price of our common stock increases during the term of the option. The majority of our option grants vest over forty-eight months.

Other Benefits

     In order to attract, retain and pay market levels of compensation, we provide our executives with the following benefits:

     Health Insurance. We provide each of our executives and their spouses and children the same health, dental and vision insurance coverage we make available to our other eligible employees.

     Life and Disability Insurance. We provide each of our executives with the same disability and/or life insurance as we make available to our other eligible employees.

     Pension Benefits. We do not provide pension arrangements or post-retirement health coverage for our executives or employees. Our executives and other eligible employees are eligible to participate in our 401(k) contributory defined contribution plan. We do not currently make matching contributions to participants in the 401(k) plan.

     Nonqualified Deferred Compensation. We do not provide any nonqualified defined contribution or other deferred compensation plans to any of our employees.

     Perquisites. We limit the perquisites that we make available to our executive officers. Our executives are entitled to few benefits such as relocation expenses on their initial hire and other benefits with de minimis value that are not otherwise available to all of our employees.

Sales Incentives Plan

     We have established a sales incentives plan for employees in our sales organization. None of our executive officers are eligible to participate in this plan.

Employment Agreements and Potential Payments Upon Termination or Change of Control

     Former Chief Executive Officer: We entered into a Severance Protection Agreement, dated August 7, 2007, with Ms. Goostree. The Severance Protection Agreement was terminated as part of the Separation Agreement and General Release entered into with Ms. Goostree on May 14, 2008. See “Certain Relationships and Related Transactions — Separation Agreement with Diane S. Goostree.”

     Other Named Executive Officers: We entered into Change of Control Agreements with our named executive officers, including: Christopher J. Reinhard, Peter C. Wulff, Susan A. Brodsky-Thalken and Frank M. Fazio. Our board determined that entering into these agreements was in our and our stockholders best interests to provide an incentive to each of these executives to continue in the service of us and to aid in any future change of control event. The Change of Control Agreement with Mr. Wulff was terminated as part of the Separation Agreement and General Release entered into with Mr. Wulff on May 4, 2008. See “Certain Relationships and Related Transactions — Separation Agreement with Peter C. Wulff.”

     The Change of Control Agreements provide that in the event of a change of control, 50% of the employee’s then unvested option shares will automatically vest, if (i) the employee provides services to us as an employee or a consultant continuously through the closing date of such change of control or (ii) employee’s employment with us ends by reason of an involuntary termination within three months prior to the closing date of such change of control. All remaining unvested option shares will automatically vest should employee’s employment be terminated by reason of an involuntary termination on or within 24 months following the closing date of the change of control.

     The Agreement also provides that if employee’s employment with us or the surviving company ends by reason of an involuntary termination within three months prior to the closing date of a change of control or within 24 months following the closing date of the change of control, we will pay the employee severance equal to: (i) six months of the employee’s base salary, plus (ii) any earned, but not yet paid, pending bonus from a completed calendar year, plus (iii) the product of (A) the average amount of the bonus, if any, employee received from us in connection with employee’s services to us during the last three fiscal years prior to the effective date of the involuntary termination and (B) the number of days between the last day of the fiscal year preceding the involuntary termination and the effective date of the involuntary termination divided by 365 days.

     Additionally, if the employee timely makes an election to continue coverage under our or the surviving company’s group health plan pursuant to COBRA, we or the surviving company will pay the employee’s COBRA premiums for a maximum period of six months following the effective date of employee’s involuntary termination. In addition, if employee’s spouse and/or dependents were enrolled in our or the surviving company’s group health plan on the effective date of employee’s involuntary termination, we will pay the COBRA premiums for employee’s eligible dependents during the same six month period, but only to the same extent that such dependents’ premiums under such plan were paid by user the surviving company prior to the effective date of employee’s involuntary termination.

     The following table summarizes potential change in control and severance benefits payable to each named executive officer who was employed by us on December 31, 2007. The right-hand columns describe the payments that would apply in two different potential scenarios — 1) the severance payments, if any, an executive officer would have been eligible to receive if the executive officer was terminated without cause, or resigned for good reason, or was involuntarily terminated on December 31, 2007 and 2) the change in control benefits the executive officer would have been eligible to receive if the executive officer was terminated without cause in connection with a change in control that occurred on December 31, 2007. For purposes of estimating the value of amounts of equity compensation to be received in the event of a termination of employment or change in control, we have assumed a price per share of our common stock of $2.27, which represents the closing market price of our common stock as reported on the Nasdaq Global Market on December 31, 2007.

								Change in Control
				Severance				with Termination of
Name and Principal Position				Payments				Employment
Christopher J. Reinhard —		Salary continuation			—			$	75,000
Executive Chairman of the Board		Bonus payout			—			$	25,000
		COBRA payments			—				—
		Option vesting			—				—
Diane S. Goostree (1) —		Salary continuation		$	243,750			$	243,750
Former President and Chief Executive Officer		Bonus payout		$	50,000			$	50,000
		COBRA payments		$	13,098			$	13,098
		Option vesting			—				—
Peter C. Wulff (2) —		Salary continuation			—				125,000
Former Executive Vice President and		Bonus payout			—			$	37,500
Chief Financial Officer		COBRA payments			—			$	8,732
		Option vesting			—				—
Susan A. Brodsky-Thalken —		Salary continuation			—			$	117,500
Vice President — U.S. Sales and Training		Bonus payout			—			$	15,000
		COBRA payments			—			$	2,817
		Option vesting			—				—
Frank M. Fazio —		Salary continuation			—			$	121,000
Vice President — Marketing		Bonus payout			—			$	15,000
		COBRA payments			—			$	8,732
		Option vesting			—				—

     On May 6, 2008, the Board of Directors of the Company appointed Michael K. Green as the Company’s chief financial officer. In connection with his offer letter, the Company and Mr. Green entered into a Change of Control Agreement. The Change of Control Agreement provides that in the event of a change of control, 50% of Mr. Green’s then unvested option shares will automatically vest, if (i) he provides services to the Company as an employee or a consultant continuously through the closing date of the change of control or (ii) his employment with the Company ends by reason of an involuntary termination within three months prior to the closing date of the change of control. All remaining unvested option shares will automatically vest should Mr. Green’s employment be terminated by reason of an involuntary termination on or within 24 months following the closing date of the change of control.

     The Change of Control Agreement also provides that if Mr. Green’s employment with the Company or the surviving company ends by reason of an involuntary termination within three months prior to the closing date of a change of control or within 24 months following the closing date of the change of control, the Company will pay Mr. Green severance equal to: (i) nine months of his base salary, plus (ii) any earned, but not yet paid, pending bonus from a completed calendar year, plus (iii) the product of (A) the average amount of the bonus, if any, he received from the Company in connection with his services to the Company during the last three fiscal years prior to the effective date of the involuntary termination and (B) the number of days between the last day of the fiscal year preceding the involuntary termination and the effective date of the involuntary termination divided by 365 days.

     Additionally, if Mr. Green timely makes an election to continue coverage under the Company’s or the surviving company’s group health plan pursuant to COBRA, the Company or the surviving company will pay the COBRA premiums for Mr. Green and his eligible dependents for a maximum period of nine months following the effective date of his involuntary termination.

     In the absence of a change of control, or more than 24 months after a change of control, if Mr. Green’s employment is terminated other than for cause, or upon his election for good reason, he will receive severance payments equal to: (i) nine months base salary, plus (ii) any earned, but not yet paid, pending bonus from a completed calendar year plus (iii) the product of (A) the average amount of the bonus, if any, Mr. Green received from the Company in connection with his services to the Company during the last three fiscal years prior to the effective date of the termination or resignation and (B) the number of days between the last day of the fiscal year preceding the termination or resignation and the effective date of the termination or resignation divided by 365 days. The Company will also provide Mr. Green and his eligible dependents with the COBRA benefits described in the preceding paragraph for nine months.

Tax and Accounting Considerations

     Deductibility of Executive Compensation.  Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits the deductibility of certain compensation in excess of $1,000,000 paid in any one year to our chief executive officer and our other four highest paid executive officers. Qualifying performance-based compensation will not be subject to this deduction limit if certain requirements are met. The non-performance based compensation paid in cash to our executive officers in 2007 did not exceed the $1 million limit per officer, and the compensation committee does not anticipate that the non-performance based compensation to be paid to our executive officers for 2008 will exceed that limit.

     The compensation committee has and will continue to periodically review and consider the deductibility of executive compensation under Section 162(m) in designing our compensation programs and arrangements. The compensation committee reserves the right to use its judgment to authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer’s performance.

     Accounting for Stock-Based Compensation.  We adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” on January 1, 2006, which requires that we recognize as compensation expense the fair value of all stock-based awards, including stock options, granted to employees and others in exchange for services over the requisite service period. For more information regarding our application of SFAS No. 123(R), please refer to “Note 1. Organization and Summary of Significant Accounting Policies — Stock Based Compensation” in the Notes to our Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on March 14, 2008.

Summary Compensation Table

     The following table sets forth information regarding the compensation earned by our principal executive officer, our principal financial officer and our next three most highly compensated executive officers for the fiscal year ended December 31, 2007. These five individuals are referred to as our “named executive officers” in this proxy statement. We generally pay bonuses in the year following the year in which the bonus was earned. This table does not include medical, group life insurance or other benefits which we make available to all of our employees.

														Option				All Other
						Salary				Bonus				Awards				Compensation				Total
Name and Principal Position		Year				($)				($)				($)(1)				($)				($)
Diane S. Goostree —			2007			$	326,346				—			$	680,234				—			$	1,006,580
Former President and			2006				252,693			$	228,891				247,500				—				729,084
Chief Executive Officer (2)
Peter C. Wulff —			2007				247,115				—				179,435				—				426,550
Former Executive Vice			2006				225,000				78,891				85,313				—				389,204
President and Chief Financial Officer (3)
Susan A. Brodsky-Thalken —			2007				243,750				—				151,981			$	12,861				408,592
Vice President — U.S.			2006				118,314				30,000				61,926				—				210,240
Sales and Training(4)
Frank M. Fazio —			2007				241,192				—				151,354				—				392,546
Vice President —			2006				129,526				30,000				81,966				—				241,492
Marketing(5)
Christopher J. Reinhard —			2007				150,000				—				179,027				—				329,027
Executive Chairman of			2006				181,699				50,000				367,875				—				599,574
the Board(6)

Grant of Plan-Based Awards

     The following table sets forth information regarding grants of stock option awards made to our named executive officers during the fiscal year ended December 31, 2007.

						All Other Option
						Awards; Number of				Exercise or Base				Grant Date Fair
						Securities Underlying				Price of Option				Value of Option
Name		Grant Date				Options (#)				Awards ($/Sh)				Awards ($)(1)
Diane S. Goostree (2)			2/02/2007				300,000			$	9.96			$	1,559,490
Peter C. Wulff (3)			6/12/2007				17,000			$	7.37				65,391
Susan A. Brodsky-Thalken			6/12/2007				17,000			$	7.37				65,391
Frank M. Fazio			6/12/2007				15,000			$	7.37				57,697
Christopher J. Reinhard			—				—				—				—

Outstanding Equity Awards at Fiscal Year-End

          The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2007.

		Option Awards
		Number of				Number of
		Securities				Securities
		Underlying				Underlying
		Unexercised				Unexercised				Option				Option
		Options				Options				Exercise				Expiration
Name		Exercisable (#)				Unexercisable (#)				Price ($)				Date
Diane S. Goostree (1)			51,468				66,179			$	5.31				3/24/2016
			17,646				29,412			$	7.86				6/30/2016
			20,833				279,167			$	9.96				2/02/2017
Total:			89,947				374,758
Peter C. Wulff (2)			34,313				12,745			$	5.31				4/22/2015
			11,764				11,765			$	5.31				12/15/2015
			28,673				47,796			$	7.86				6/30/2016
			2,125				14,875			$	7.37				6/12/2017
Total:			76,875				87,181
Susan A. Brodsky-Thalken			13,234				18,530			$	7.86				6/09/2016
			1,324				2,205			$	7.86				6/30/2016
			9,558				25,735			$	10.63				11/22/2016
			2,125				14,875			$	7.37				6/12/2017
Total:			26,241				61,345
Frank M. Fazio			15,441				25,735			$	7.86				6/09/2016
			9,250				14,278			$	7.86				6/30/2016
			1,875				13,125			$	7.37				6/12/2017
Total:			26,566				53,138
Christopher J. Reinhard			152,941				—			$	5.31				6/7/2009
			35,294				—			$	5.31				1/3/2011
			30,881				51,471			$	7.86				6/30/2016
Total:			219,116				51,471

Option Exercises and Stock Vested

     There were no options exercised and no shares of common stock acquired upon vesting by our named executive officers during the fiscal year ended December 31, 2007.

DIRECTOR COMPENSATION

          Our compensation committee is responsible for evaluating and recommending to the full board the compensation paid to the non-employee members of our board for their board service. No compensation is paid to any director who is also an employee of our company, including our executive chairman.

          In early 2008, our compensation committee engaged the services of Compensia, Inc. to evaluate each element of the compensation we offer to our non-employee directors. Compensia compared the compensation we offer to our non-employee directors to the director compensation data for the same industry peer group survey, the Revenue/Market Cap Peers survey, used to evaluate the compensation of our executive officers. Based on this survey, Compensia determined that the annual director fee we offered to our board was at approximately the 50th percentile. Compensia also determined that the fees we paid for committee service and the equity compensation we offered to our non-employees directors were both below the 50th percentile of the compensation received by the non-employee directors in the peer group.

Director Fees

     During fiscal 2007, we paid each of our non-employee directors an annual retainer of up to $24,000, payable in amounts of $5,000 on a quarterly basis, plus an additional $1,000 for each quarterly board meeting a director attended. We also paid an additional $12,000 per year to each member of the audit committee, payable on a quarterly basis. No additional compensation was paid to our non-employee board members for their participation on our compensation committee and our nominating and corporate governance committee. We reimbursed each non-employee director for out-of-pocket expenses incurred in connection with attending our board and committee meetings.

     Under the Director Compensation Program adopted by the compensation committee in February 2008, we will pay each non-employee director an annual retainer of $28,000. We will also pay: (i) the chair of the audit committee an annual retainer of $15,500 and each other non-employee member of the audit committee an annual retainer of $7,250, (ii) the chair of the compensation committee an annual retainer of $8,750 and each other non-employee member of the compensation committee an annual retainer of $5,000 and (iii) the chair of the nominating and corporate governance committee an annual retainer of $3,500 and each other non-employee member of the nominating and corporate governance committee an annual retainer of $2,000. In addition, we will reimburse each non-employee director for their out-of-pocket expenses incurred in connection with attending board and board committee meetings. Non-employee directors will not receive any additional compensation for attending board or board committee meetings.

Equity Awards

          Pursuant to the Director Compensation Program, upon initial election to the Board, non-employee directors will receive a stock option to purchase 12,500 shares of common stock and a restricted stock unit (“RSU”) award for 6,250 shares of common stock. The initial stock option grant will vest monthly over a 12 month period, and will have an exercise price equal to the closing sale price of our common stock on the date of grant. The initial RSU award will vest on the one year anniversary of the date of grant. Immediately following each annual meeting of stockholders beginning at the 2008 annual meeting of stockholders, each continuing non-employee director will receive a stock option to purchase 5,000 shares of common stock and a RSU award for 2,500 shares of common stock. The annual stock option grant will vest monthly over a 12 month period ending at the next annual meeting of stockholders, and will have an exercise price equal to the closing sale price of our common stock on the date of grant. The annual RSU award will vest at the earlier of the one year anniversary of the date of grant or the next annual meeting of stockholders. The stock options and RSUs will vest in full upon a fundamental transaction, as this term is defined in the 2006 Plan.

          Under this program, Mr. Davis was granted a stock option to purchase 12,500 shares of common stock, at an exercise price of $2.20 per share. These options vest over 12 months. Mr. Davis was also granted an RSU award for 6,250 shares of common stock on February 28, 2008, which will vest on February 28, 2009. In addition, Mr. Abel was granted a stock option to purchase 12,500 shares of common stock, at an exercise price of $0.97 per share. These options also vest over 12 months. Mr. Abel was also granted an RSU award for 6,250 shares of common stock on May 29, 2008, which will vest on May 29, 2009. Our other non-employee directors will receive an RSU award for 6,250 shares of common stock immediately following the 2008 annual meeting of stockholders.

          In the past we granted to our directors options to purchase shares of common stock under our Amended and Restated 2001 Stock Option Plan, or the 2001 Plan, or issued them warrants to purchase shares of our common stock. We are party to a director’s agreement with Mr. Reinhard, pursuant to which, among other things, we issued him a warrant to purchase 152,941 shares of our common stock. In January 2006, we issued Mr. Reinhard an additional warrant to purchase 35,294 shares of our common stock, in consideration for services as Executive Chairman during fiscal 2005. These warrants are fully vested. In March 2006, our board approved the grant of an option to Lon E. Otremba to purchase up to 23,529 shares of common stock, at an exercise price of $5.31 per share, in connection with his service as a director on our board. These options are fully vested. In June 2006, we issued Mr. Reinhard options to purchase up to 82,352 shares of common stock, at an exercise price of $7.86 per share. In November 2006, our board granted Mr. Costantino an option to purchase up to 31,796 shares of common stock, at an exercise price of $10.63 per share, in connection with Mr. Costantino’s service as a director on our board. These options are fully vested. Ms. Huss and Mr. Sherman were each granted options to purchase 23,529 shares of common stock, at an exercise price of $3.16, in November 2007, in connection with their election as directors on our board.

Limitation of Liability and Indemnification of Officers and Directors

     Our amended and restated certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that a corporation may eliminate the personal liability of its directors for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following acts:

	•		breach of their duty of loyalty to us or our stockholders;
	•		acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
	•		unlawful payments of dividends or unlawful stock repurchases or redemptions; and
	•		any transaction from which the director derived an improper personal benefit.

     Our amended and restated certificate of incorporation also provides that we will indemnify our directors, officers, employees and other agents to the fullest extent permitted by the Delaware General Corporation Law.

     Our amended and restated bylaws provide that (i) we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, (ii) we are required to advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions and (iii) the rights conferred in the amended and restated bylaws are not exclusive.

     We have entered into indemnification agreements with each of our directors and executive officers to give these individuals additional contractual assurances regarding the scope of the indemnification set forth in our amended and restated certificate of incorporation and bylaws and to provide additional procedural protections. We intend to enter into indemnification agreements with any new directors and executive officers in the future. We have obtained directors’ and officers’ insurance providing coverage for all of our directors and officers for certain liabilities. We believe that these provisions and this insurance are necessary to attract and retain qualified directors and officers.

Director Summary Compensation Table

     The following table summarizes director compensation during the fiscal year ended December 31, 2007.

		Fees Earned or				Option
		Paid in Cash				Awards				Total
Name		($)				($)(1)				($)
Christopher J. Reinhard			—				—				—
Diane S. Goostree(2)			—				—				—
Daren J. Barone(3)		$	31,000			$	3,286			$	34,286
Lon E. Otremba			42,000				3,286				45,286
John R. Costantino(4)			42,000				3,286				45,286
Beverly A. Huss(5)			10,000				1,369				11,369
Robert B. Sherman(6)			9,000				1,369				10,369
Todd C. Davis(7)			—				—				—
Douglas Abel(8)			—				—				—

Compensation Committee Interlocks and Insider Participation

     No member of our compensation committee is an officer, former officer or employee of our company. No interlocking relationship exists between any of our executive officers or compensation committee members, on the one hand, and the executive officers or compensation committee members of any other entity, on the other hand, nor has any such interlocking relationship existed in the past.

REPORT OF THE COMPENSATION COMMITTEE

          The compensation committee has reviewed and discussed the compensation discussion and analysis required by Item 402(b) of Regulation S-K with management and included in this Item 11. Based on these reviews and discussions, the compensation committee recommended to the Board that the compensation discussion and analysis be included in our Annual Report on Form 10-K and/or the annual meeting proxy statement on Schedule 14A.

Lon E. Otremba (Chair)
John R. Costantino
Beverly Huss
Robert Sherman

REPORT OF THE AUDIT COMMITTEE

          Under the guidance of a written charter adopted by our board, the purposes of the audit committee are to oversee the accounting and financial reporting processes of our company and audits of our financial statements and the effectiveness of our internal controls over financial reporting. The responsibilities of the audit committee include appointing and providing for the compensation of our independent registered public accounting firm. The audit committee consists of three members, each of whom meets the independence and qualification standards for audit committee membership set forth in the listing standards provided by Nasdaq. In addition, our board has determined that Mr. Costantino is an audit committee financial expert.

          Management has primary responsibility for the system of internal controls and the financial reporting process. Our independent registered public accounting firm has the responsibility to express an opinion on the financial statements based on an audit conducted in accordance with generally accepted auditing standards. The audit committee appointed Ernst & Young LLP to audit our financial statements for the fiscal year 2007. The audit committee holds regular private sessions with Ernst & Young LLP to discuss their audit plan for the year, the financial statements and risks of fraud. The audit committee is not responsible for planning or conducting audits, or determining whether our financial statements are complete and accurate or in accordance with generally accepted accounting principles.

          The audit committee pre-approves all services to be provided by our independent registered public accounting firm, Ernst & Young LLP. Pre-approval is required for audit services, audit-related services, tax services and other services. In some cases, the full audit committee provides pre-approval for up to a year, related to a particular defined task or scope of work and subject to a specific budget. In other cases, a designated member of the audit committee may have delegated authority from the audit committee to pre-approve additional services, and such pre-approval is later reported to the full audit committee.

          In this context and in connection with the audited financial statements contained in our Annual Report on Form 10-K, the audit committee:

	•		reviewed and discussed the audited financial statements as of and for the fiscal year ended December 31, 2007 with our management and Ernst & Young LLP, our independent registered public accounting firm;
	•		discussed with Ernst & Young LLP the matters required to be discussed by Statement of Auditing Standards No. 61, Communication with Audit Committees, as amended by Statement of Auditing Standards No. 90, Audit Committee Communications;

	•		reviewed the written disclosures and the letter from Ernst & Young LLP required by the Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, discussed with the auditors their independence, and concluded that the non-audit services performed by Ernst & Young LLP are compatible with maintaining their independence;
	•		based on the foregoing reviews and discussions, recommended to our board that the audited financial statements be included in our 2007 Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC; and
	•		instructed Ernst & Young LLP that the audit committee expects to be advised if there are any subjects that require special attention.

          The audit committee met 9 times in during fiscal year 2007. This report for fiscal year 2007 is provided by the undersigned members of the audit committee.

Robert B. Sherman, Chairman
John R. Costantino
Lon E. Otremba

PROPOSAL 2—APPROVAL OF FINANCING PROPOSAL

General

          As discussed in its public filings, the Company intends to raise additional funds to support its operations. The Company recently received a notice from The Nasdaq Stock Market (“Nasdaq”) indicating that its stockholders’ equity at June 30, 2008 was less than the $10 million in stockholders’ equity required for continued listing on The Nasdaq Global Market. The Company intends to submit a plan on or before September 3, 2008 addressing how it plans to achieve and sustain compliance with Nasdaq’s continued listing requirements. A central part of this plan is to complete one or more financing transactions as soon as practical to raise funds to increase the Company’s stockholders’ equity to levels required to maintain its Nasdaq listing.

          Accordingly, the Company proposes to sell up to $                     of its securities to investors from time to time pursuant to one or more financing transactions occurring prior to January 31, 2009 (the “Financing Proposal”). The Company might issue common stock, warrants to purchase common stock or a new series of preferred stock, or a combination of any of these securities, all as determined by the Company’s Board of Directors. Each sale of these securities is referred to as a “Financing,” and collectively as the “Financings.”

          Nasdaq requires the Company to obtain approval from its stockholders for any financing or series of related financing transactions in which the Company issues 20% or more of its outstanding common stock. Obtaining stockholder approval of the Financing will facilitate the Company’s efforts to raise funds on a timely basis to support its continued listing on Nasdaq and allow the Company to raise the funds necessary to support its operations and product expansion plans. Nasdaq also requires shareholder approval if the financings result in a “change in control” under Nasdaq’s rules.

The Common Stock

          Regardless of the $                     limit, the Company will not issue in the Financing(s) an amount of common stock and preferred stock convertible into common stock, but not including any warrants that might be issued in the Financing, that exceeds ___% of the sum of (1) the shares of common stock outstanding immediately prior to the Financing, plus (2) the shares of common stock and preferred stock convertible into common stock (on an as converted basis) issued in the Financing. As noted, the issuance of any warrants in the Financing is excluded from this ___% limitation.

          The price at which the Company would sell any of its securities will be negotiated by the Company and one or more investors and would be subject to the approval of the Company’s Board of Directors. On                     , 2008, the closing price of the Company common stock was $___ as reported on The Nasdaq Global Market. As an example, based on that price, if the Company sold                      shares of common stock at $                    , the Company would receive gross proceeds of approximately $                     million, which would represent ___% of the Company’s common stock that would then be outstanding after the sale.

          In addition, warrants convertible into shares of common stock also could be issued by the Company in the Financing(s). The Company will limit the amount of warrants issued in the Financing(s) to not more than ___% of the common or preferred stock issued in the Financing(s), but the issuance of warrants is not subject to the ___% limitation discussed above. The Company might not issue any warrants in the Financing(s). Consequently, if stockholders approve the Financing Proposal, the existing holders of the Company common stock could face substantial dilution of their voting power, earnings per share and percentage ownership in the Company.

The Preferred Stock

          The board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more additional series and to fix the powers, preferences, rights, qualifications, limitations and restrictions and the number of shares constituting any series and the designations of such series, without any further vote or action by the holders of common stock.

          The Company’s board of directors will determine, in its discretion, the particular terms of any series of preferred stock to be sold in the Financing(s). Those terms might include:

	•		the designation, number of shares and stated value per share;
	•		the amount of liquidation preference;
	•		the price at which shares of such series of preferred stock will be sold;
	•		the dividend rate or rates (or method of determining the dividend rate);
	•		the dates on which dividends shall be payable, the date from which dividends shall accrue and the record dates for determining the holder entitled to such dividends;
	•		any redemption or sinking fund provisions;
	•		any voting rights;
	•		any conversion or exchange provisions, including conversion into common stock; and
	•		any additional dividend, redemption, liquidation or other preferences or rights and qualifications, limitations or restrictions thereof.

The Warrants

          The Company may sell and issue warrants to any purchaser in the Financing(s). The warrants may be sold separately or sold together with the common stock or the preferred stock. The Company will limit the number of warrants that it may issue in the Financing(s) to not more than ___% of the common or preferred stock issued in the Financing(s). The Company might not issue any warrants in the Financing(s). The warrants may be issued at any purchase price and with any exercise price that the Company determines is appropriate. Typically, warrants are issued for minimal consideration as an inducement to the investor to purchase the securities. The warrants are expected to contain provisions that protect the purchaser against dilution by adjustment of the exercise price and the number of shares issuable thereunder upon the occurrence of specified events, such as a merger, stock split, stock dividend or recapitalization. The exercise price for the warrant shares will be payable in cash or by deducting the purchase price from the shares issued upon exercise of the warrant.

          The warrants will be evidenced by warrant agreements. Unless otherwise specified, the warrant agreements may be traded separately from the common or preferred stock, if any, with which the warrant agreements were issued. Until a warrant is exercised, the holder of a warrant will not have any of the rights of a stockholder.

          The board of directors of the Company, in its discretion, may determine the terms of the warrants, including:

	•		the title and the aggregate number of warrants;
	•		the date or dates on which the warrants will expire;
	•		the price or prices at which the warrants are exercisable;
	•		the periods during which the warrants are exercisable;
	•		the terms of any mandatory or optional call provisions; and
	•		the price or prices, if any, at which the warrants may be redeemed at the option of the holder or will be redeemed upon expiration.

Manner of Sale

          The Company may sell its securities through agents, underwriters, dealers or directly to purchasers. The Company will receive the proceeds from the sale of its securities, less any commissions or other selling expenses of agents, underwriters or dealers.

Nasdaq Stockholder Approval Requirements

          This proposal is submitted for stockholder approval pursuant to Nasdaq Marketplace Rule 4350(i), which the Company is required to comply with to maintain its Nasdaq listing. Two of the events that necessitate prior stockholder approval pursuant to Rule 4350(i) are as follows and are referred to as the “Nasdaq Share Limitations”:

	•		In connection with a transaction other than a public offering involving the sale or issuance by the issuer of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
	•		When the issuance or potential issuance will result in a change of control of the issuer.

          Because the proposed Financing(s) involve the potential issuance by the Company of common stock greater than 20% of its currently outstanding common stock at below market value, the portion of the proposed Financing(s) that could exceed the 20% level is subject to Rule 4350(i) and, therefore, requires your approval. Absent such approval, we could be limited to issuing, at a discount to market value, no more than as few as approximately                      shares of common stock, or securities convertible into or exercisable for common stock, based on the common stock outstanding on                           , 2008.

          Nasdaq has not adopted any rule on what constitutes a “change of control”. Nasdaq has indicated that, generally, it views an issuance of more than 30% of the issuer’s outstanding voting securities as a change of control. Because the proposed Financing(s) involves the potential issuance by the Company of common stock, and securities potentially convertible into or exercisable for common stock, greater than 30% of the Company’s currently outstanding common stock, the portion of the Financing(s) that could exceed the 30% Nasdaq Share Limitation is subject to Rule 4350(i) and, therefore, requires your approval. Absent such approval, we could be limited to issuing no more than as few as approximately                      shares of common stock, or securities convertible into or exercisable for common stock, based on the common stock outstanding on the Record Date.

          In addition, if the Company wished to enter into other financing arrangements that require the issuance of our common stock, preferred stock or securities, such as warrants, convertible into common or preferred stock, Nasdaq possibly could integrate such additional financing arrangements with the Financing(s) and subject all such financing arrangements to stockholder approval, if the issuance of the Company’s common stock or preferred stock in all such integrated financing arrangements, including the Financing(s), exceeds the Nasdaq Share Limitations. The Board of Directors believes it is important for the Company to have flexibility in seeking new financings without having to delay such financing arrangements to obtain stockholder approval and, therefore, is submitting the Financing Proposal to stockholders for approval. In this manner, if the Company finds a satisfactory source of new financing prior to January 31, 2009 that requires the Company to issue significant amounts of its common stock or preferred stock, no stockholder approval of such new financing arrangement would be required. Absent stockholder approval of the Financing Proposal, the Company will not be able to maintain its Nasdaq listing if it issued an amount of securities (on an as converted basis, if applicable) that exceeds the Nasdaq Share Limitations.

          If the Financing Proposal is not approved by the Company’s stockholders at the Annual Meeting, the consequences could have a material adverse effect on the Company’s business, results of operations and financial condition. If the Company is unable to obtain adequate new funding, the Company will be delisted from Nasdaq and will be forced to cease its operations.

          Additionally, if the Company is unsuccessful in obtaining approval from its stockholders for the Financing Proposal, but the Company nonetheless issues securities which exceed the Nasdaq Share Limitations or enters into another equity-based financing arrangement that is integrated with the Financing, Nasdaq could delist the Company’s common stock on the Nasdaq Global Market. In such an event, the market price of the common stock might be adversely impacted and stockholders might find it difficult to dispose, or obtain accurate quotations as to the market value, of their shares of common stock. In addition, the Company could find it more difficult to obtain future financing.

          THE BOARD OF DIRECTORS BELIEVES THAT THE FINANCING PROPOSAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE “FOR” APPROVAL OF THE FINANCING PROPOSAL.

          It is the intention of the persons named in the accompanying form of Proxy to vote the shares represented thereby in favor of the Financing Proposal unless otherwise instructed in such Proxy.

OTHER MATTERS

          As of the time of preparation of this proxy statement, neither our board nor management intends to bring before the annual meeting any business other than the matters referred to in the notice of annual meeting and this proxy statement. If any other business should properly come before the meeting, or any adjournments or postponements thereof, the persons named in the proxy will vote on such matters according to their best judgment.

DELIVERY OF PROXY MATERIALS AND ANNUAL REPORTS

          We may satisfy SEC rules regarding delivery of proxy statements and annual reports by delivering a single proxy statement to an address shared by two or more stockholders. This process is known as “householding.” This delivery method can result in meaningful cost savings for us. In order to take advantage of this opportunity, we have delivered only one proxy statement and annual report to multiple stockholders who share an address, unless contrary instructions were received prior to the mailing date. Accordingly, for many stockholders who hold their shares through a bank, brokerage firm or other holder of record (i.e., in “street name”) and share a single address, only one annual report and proxy statement is being delivered to that address unless contrary instructions from any stockholder at that address were received.

          We undertake to deliver promptly upon written or oral request a separate copy of the proxy statement and/or annual report, as requested, to a stockholder at a shared address to which a single copy of these documents was delivered. If you hold stock as a record stockholder and prefer to receive separate copies of a proxy statement or annual report either now or in the future, please contact our corporate secretary at 5870 Pacific Center Boulevard, San Diego, California 92121. If your stock is held by a brokerage firm or bank and you prefer to receive separate copies of a proxy statement or annual report either now or in the future, please contact your brokerage or bank. The voting instruction sent to a street-name stockholder should provide information on how to request (i) householding of future company materials or (ii) separate materials if only one set of documents is being sent to a household. If it does not, a stockholder who would like to make one of these requests should contact us as indicated above

STOCKHOLDER PROPOSALS FOR 2009 ANNUAL MEETING

          Our amended and restated bylaws provide that advance notice of a stockholder’s proposal must be delivered to our corporate secretary at our principal executive offices not later than 120 days prior to the anniversary of the mailing date of the proxy materials for the previous year’s annual meeting. However, the amended and restated bylaws also provide that in the event that no annual meeting was held in the previous year or the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the date contemplated at the time of the previous year’s proxy statement, this advance notice must be 10 days prior to the date following the date on which the Company announces its annual meeting. Each stockholder’s notice must contain the following information as to each matter the stockholder proposes to bring before the annual meeting: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and appropriate biographical information and a statement as to the qualification of the nominee; (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on our books, and of such beneficial owner and (B) the number of shares of our common stock which are owned beneficially and of record by such stockholder and such beneficial owner.

          A copy of the full text of the provisions of our amended and restated bylaws dealing with stockholder nominations and proposals is available to stockholders from our corporate secretary upon written request.

By Order of Our Board of Directors

Christopher J. Reinhard
Executive Chairman of the Board
San Diego, California
September _, 2008

APPENDIX 1

Financial Information

     The following is certain financial information that was originally filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2008 as part of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the “Form 10-K”). We have not undertaken any updates or revision to such information since the date it was originally filed with the SEC. Accordingly, you are encouraged to review such financial information together with any subsequent information we have filed with the SEC and other publicly available information.

     This financial information contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in the financial information. 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 Appendix I, and in particular, the risks discussed under Item 1A. “Risk Factors” in our Form 10-K 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 our Form 10-K. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this Appendix I to reflect future events or circumstances.

     This financial information 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.

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

Market Information for Common Stock

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

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

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

Dividend Policy

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

Stock Performance Graph

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

COMPARISON OF 1 YEAR CUMULATIVE TOTAL RETURN*
Among Artes Medical Inc., The NASDAQ Composite Index
And The NASDAQ Medical Equipment Index

Recent Sales of Unregistered Securities

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

	•		In April 2007, we issued a warrant exercisable for 25,000 shares of common stock at an exercise price of $8.07 to a former executive of the Company, in connection with a settlement agreement.
	•		In February 2008, we issued warrants for an aggregate of 1,675,000 shares of our common stock to CHRP. 1,300,000 warrants have an exercise price of $5.00 while 375,000 warrants have an exercise price of $3.13.

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

Use of Proceeds

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

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

	•		approximately $2.2 million in underwriters discounts, fees and commissions; and
	•		approximately $4.2 million in legal, accounting and printing fees and miscellaneous expenses.

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

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

Purchases of Equity Securities

     There were no share repurchases during the year of 2007.

Selected Consolidated Financial Data.

     The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below and our audited consolidated financial statements and related notes included in the Form 10-K. We derived the consolidated statements of operations data for the years ended December 31, 2007, 2006 and 2005, as well as the consolidated balance sheet data as of December 31, 2007 and 2006, from our audited consolidated financial statements included elsewhere in this Appendix I. Our historical results are not necessarily indicative of operating results to be expected in future periods.

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

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

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

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 Appendix I. 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” in our Form 10-K and those discussed in other documents we file with the SEC. 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 our Form 10-K. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this Appendix I to reflect future events or circumstances.

Overview

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

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

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

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

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

Financial Operations Overview

Product Sales

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

License Revenues

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

Cost of Product Sales

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

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

Selling, General and Administrative Expenses

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

	•		sales and marketing expenses, which primarily consist of the personnel and related costs of our U.S. sales force, customer service, marketing and brand management functions, including direct costs for advertising and promotion of our product; and
	•		general and administrative costs, which primarily consist of corporate executive, finance, legal, human resources, information systems, investor relations and general administrative functions.

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

Research and Development Expenses

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

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

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

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

Amortization of Acquired Intangible Assets

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

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

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

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

Allowance for Doubtful Accounts

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

Valuation of Inventory

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

Impairment of Long-Lived Assets

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

Intangible Assets

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

Deferred Taxes

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

Deferred Tax Liability

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

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

Stock-Based Compensation Expense

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

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

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

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

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

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

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

Deferred Stock-Based Compensation

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

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

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

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

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

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

Results of Operations

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

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

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

     Cost of product sales.  Cost of sales increased by $10.7 million to $10.7 million for the year ended December 31, 2007, from no cost of sales for year ended December 31, 2006. The increase was attributable to the commercial launch of ArteFill during the first quarter of 2007, as well as increases to our excess and obsolete inventory reserve of $3.8 million and an excess capacity charge of $1.1 million for the year ended December 31, 2007. The excess and obsolete expenses are primarily related to product produced in 2006 and 2007 that was not utilized or may not be utilized in the future. The excess capacity expenses are related to lower production levels in 2007 compared to our normal plant capacity, which required us to expense more manufacturing expenses to cost of product sales rather than capitalize such expenses to inventory.

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

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

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

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

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

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

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

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

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

December 31, 2005. Also included in research and development expenses for the year ended December 31, 2006 is a one-time warrant modification charge of $0.1 million.

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

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

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

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

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

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

Liquidity and Capital Resources

Sources of Liquidity

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

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

     A successful transition to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill our planned expenses and achieving a level of revenues adequate to support our cost structure. In addition to the net amounts raised from Cowen Healthcare Royalty Partners, L.P., or CHRP, in January 2008, we intend to seek additional debt or equity financing until we become cash flow positive. There can be no assurances that there will be adequate financing available to us on acceptable terms, or at all. If we are unable to obtain additional financing during 2008, we would need to significantly curtail or reorient our operations during 2008.

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

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

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

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

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

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

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

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

Cash Flow

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

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

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

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

Funding Requirements

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

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

	•		growth in sales and related collections;
	•		the costs of maintaining and expanding the sales and marketing organization required for successful commercialization of ArteFill;
	•		the costs and effectiveness of our sales, marketing, advertising and promotion activities related to ArteFill, including physician training and education;
	•		the costs related to maintaining and expanding our manufacturing and distribution capabilities;
	•		the clinical trial costs required to meet FDA post-market study requirements and to investigate the removal of the skin test requirement:

	•		the costs relating to changes in regulatory policies or laws that affect our operations;
	•		the level of investment in research and development to maintain and improve our competitive position, as well as to maintain and expand our technology platform;
	•		the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
	•		the costs of, and our ability to enter into, foreign distribution agreements in certain concentrated international markets; and
	•		our need or determination to acquire or license complementary products, technologies or businesses.

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

Contractual Obligations

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

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

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

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

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

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

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

Related Party Transactions

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

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

Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

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

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

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

Impact of Inflation

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

Consolidated Financial Statements and Supplementary Data.

     Reference is made to the consolidated financial statements, the notes thereto, and the report thereon, commencing on page A-18 of this Appendix I, which financial statements, notes, and Appendix I are incorporated herein by reference.

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

None.

Controls And Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

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

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

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

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

Changes in Internal Control over Financial Reporting:

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

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Artes Medical, Inc.

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

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

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

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

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

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

/s/ Ernst & Young LLP
San Diego, California
March 13, 2008

Artes Medical, Inc.
Consolidated Balance Sheets

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

See accompanying notes.

Artes Medical, Inc.
Consolidated Statements of Operations

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