Overview

We were incorporated in 1989 and are a regenerative medicine company focused on the development of innovative cell therapies to repair or regenerate damaged or diseased tissues. We are developing patient-specific, expanded multicellular therapies for use in the treatment of severe, chronic ischemic cardiovascular diseases. We believe ixmyelocel-T (the generic name for our product approved by the U.S. Food and Drug Administration (FDA) and United States Adopted Names (USAN) Council in March 2011 for our multicellular therapy) is a disease modifying therapy with multi-functional properties including: tissue remodeling, immuno-modulation and the promotion of angiogenesis. Our proprietary cell-manufacturing technology enables the manufacture of multicellular therapies, expanded from an adult patient's own bone marrow, and delivered directly to damaged tissues. Preclinical and clinical data suggest that ixmyelocel-T may be effective in treating patients with severe, chronic ischemic cardiovascular diseases such as critical limb ischemia (CLI), the most severe form of peripheral arterial disease (PAD). Preliminary data utilizing ixmyelocel-T in dilated cardiomyopathy (DCM) have provided indications of both efficacy and safety. Nearly 200 patients have been treated in recent clinical trials using ixmyelocel-T (over 400 patients safely treated since our inception). In November 2011, we released positive Phase 2b data from our RESTORE-CLI clinical trial and launched our pivotal Phase 3 REVIVE trial in CLI in February 2012. We also plan to start a randomized, placebo-controlled, double-blinded Phase 2b trial in DCM in the second half of 2012.

Our Therapy

Ixmyelocel-T is a patient-specific, expanded multicellular therapy developed using our proprietary, automated processing system. Ixmyelocel-T is a product derived from an adult patient's own bone marrow but it is significantly enhanced compared with the original bone marrow. Our process enhances the patient's bone marrow mononuclear cells by expanding the mesenchymal stromal cells and M2 anti-inflammatory macrophages while retaining many of the hematopoietic cells. The manufacture of our patient-specific, expanded multicellular therapies is done under current Good Manufacturing Practices (cGMP) and current Good Tissue Practices (cGTP) guidelines required by the FDA.

Our therapy has several features that we believe are primarily responsible for success in treating adult patients with severe, chronic cardiovascular diseases:

Patient-specific (autologous) - we start with the patient's own cells, which are accepted by the patient's immune system allowing the cells to integrate into existing functional tissues. This characteristic of our therapy, we believe, eliminates both the risk of rejection and of having to use immunosuppressive therapy pre- or post-therapy. Our data also suggests that ixmyelocel-T provides the potential for long-term engraftment and tissue repair.

Expanded - we begin with a small amount of bone marrow from the patient (up to 60 ml) and significantly expand the number of certain cell types, primarily CD90+ (mesenchymal stromal cells or MSCs) and CD14+autofluorescent+ (M2 anti-inflammatory macrophages) to far more than are present in the patient's own bone marrow (up to 200 times the number of certain cell types compared with the starting bone marrow). Ixmyelocel-T is derived from the patient's own bone marrow but it is significantly enhanced compared with the starting bone marrow.

Multicellular - we believe the multiple cell types in ixmyelocel-T, which are normally found in bone marrow - but in smaller quantities, - possess the key functions required for reducing chronic inflammation, immuno-modulation, and the promotion of angiogenesis.

Minimally invasive - our procedure for taking bone marrow (an "aspirate") can be performed in an out-patient setting and takes approximately 15 minutes. For diseases such as CLI, the administration of ixmyelocel-T

is performed in an out-patient setting (e.g. a physician's office) in a one-time, approximately 20 minute procedure.

Safe - bone marrow and bone marrow-derived therapies have been used safely and efficaciously in medicine for over three decades. Our product, ixmyelocel-T, a bone marrow-derived, patient-specific, expanded multicellular therapy leverages this body of scientific study and medical experience and appears well tolerated in patients treated to date.

Our therapy is produced at our cell manufacturing facility in the United States, located at our headquarters in Ann Arbor, Michigan.

Clinical Development Programs

Our clinical development programs are focused on addressing areas of high unmet medical needs in severe, chronic ischemic cardiovascular diseases. We have completed a successful Phase 2b clinical trial in CLI. We have reached agreement with the FDA on CMC which has allowed us to launch our pivotal Phase 3 REVIVE clinical trial in the first quarter of 2012 with a protocol approved by the FDA through the Special Protocol Assessment (SPA) process. Our CLI development program has also received Fast Track Designation from the FDA. We have completed our Phase 1/2 clinical trials in DCM and plan to begin a randomized, placebo-controlled, double-blinded Phase 2b trial in the second half of 2012. Our DCM development program has received Orphan Disease Designation from the FDA.

Results to date in our clinical trials may not be indicative of results obtained from subsequent patients enrolled in those trials or from future clinical trials. Further, our future clinical trials may not be successful or we may not be able to obtain the required Biologic License Application (BLA) approval to commercialize our products in the United States in a timely fashion, or at all. See "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Critical Limb Ischemia

Background

CLI is the most serious and advanced stage of peripheral arterial disease (PAD) resulting from chronic inflammation and lipid accumulation. PAD is a chronic atherosclerotic disease that progressively restricts blood flow in the limbs and can lead to serious medical complications. This disease is often associated with other serious clinical conditions including hypertension, cardiovascular disease, dyslipidemia, diabetes, obesity and stroke. CLI is used to describe patients with the most severe form of PAD: those with chronic ischemia-induced pain (even at rest) or tissue loss (ulcers or gangrene) in the limbs, often leading to amputation and death. Many CLI patients are considered "no option" patients as they have exhausted all other treatment options with the exception of amputation. The one-year and four-year mortality rates for no option CLI patients that progress to amputation are approximately 25% and 70%, respectively. Ixmyelocel-T, our disease modifying therapy with multiple functions, has shown significant promise in the treatment of CLI patients with existing tissue loss and no option for revascularization. Currently, there are an estimated 250,000 no option CLI patients in the U.S.

Phase 2b Clinical Program - RESTORE CLI

Our U.S. Phase 2b RESTORE-CLI program was a multi-center, randomized, double-blind, placebo-controlled clinical trial. This clinical trial was designed to evaluate the safety and efficacy of ixmyelocel-T in the treatment of patients with CLI and no option for revascularization. It was the largest multi-center, randomized, double-blind, placebo-controlled cellular therapy study ever conducted in no option CLI patients. We completed enrollment of this trial in February 2010 with a total of 86 patients at 18 sites across the United States, with the last patient treated in March 2010. These patients were followed for a period of 12 months after treatment. In addition to assessing the safety of our product, efficacy endpoints included time to first occurrence of treatment failure - the trial's primary efficacy end-point - (defined as major amputation, all-cause mortality, doubling in wound surface area and de novo gangrene), amputation-free survival (defined as major amputation and all-cause mortality), major amputation rates, level of amputation, wound healing, patient quality of life and pain scores. The primary purpose of the trial was to assess performance of our therapy and, if positive, prepare for a Phase 3 program.

Final results of the Phase 2b RESTORE-CLI clinical trial were presented at the American Heart Association Scientific Sessions in November 2011 and published in the peer-reviewed journal Molecular Therapy in April 2012. Patients in the treatment arm showed a 62% reduction in risk relative to placebo in the primary efficacy endpoint of time to first occurrence of treatment failure (p=0.0032). While the study was not powered to show statistical significance in the secondary endpoint of amputation free survival, results from a subgroup of 45 patients with wounds at baseline (the approximate profile of the Phase 3 patient population) showed a 61% reduction in risk (21% ixmyelocel-T treated versus 44% control event rate; p=0.0802). The study also met the primary safety endpoint with no meaningful differences between the treated and control groups.

Phase 3 Clinical Program - REVIVE

In February 2012, several principal investigators participating in the pivotal Phase 3 REVIVE clinical trial for patients with CLI and no option for revascularization began screening patients. The first patient was randomized and aspirated in May 2012. We had previously received Fast Track Designation from the FDA for use of ixmyelocel-T for CLI in October 2010 and reached agreement with the FDA on a Special Protocol Assessment (SPA) in July 2011. The Phase 3 REVIVE No Option Trial that we agreed to with the FDA under the SPA process includes 594 no option CLI patients with tissue loss (ulcers and gangrene) at baseline. Patients will be randomized 1:1 and followed for 12 months for the primary efficacy endpoint of amputation-free survival. Patients will be followed for an additional 6 months for safety. We anticipate that enrollment will occur at approximately 80 sites across the U.S.

Dilated Cardiomyopathy

Background

DCM is a severe, chronic cardiovascular disease that leads to enlargement of the heart, reducing the pumping function of the heart to the point that blood circulation is impaired. Patients with DCM typically present with symptoms of congestive heart failure, including limitations in physical activity and shortness of breath. DCM is now the third leading cause of heart failure in the U.S. There are two types of DCM: ischemic and non-ischemic. Ischemic DCM, the most common form representing an estimated 60% of all DCM patients, is associated with atherosclerotic cardiovascular disease. We estimate that there are approximately 125,000 ischemic DCM patients in the U.S., our target patient population for further clinical development. Patient prognosis depends on the stage and cause of the disease but is typically characterized by a very poor quality of life and a high mortality rate.

Current treatments for DCM patients include both heart transplantation and placement of left ventricular assist devices (LVADs). There are less than 2,500 heart transplantations in the U.S. each year, because many DCM patients are not eligible and transplants are expensive at an estimated cost of over $1 million. LVADs are also expensive at an estimated cost of over $175,000 and have a mortality rate of 50% at two years.

In February 2007, the FDA granted Orphan Drug Designation to ixmyelocel-T for the treatment of DCM. Our DCM development program is currently in Phase 2. We recently completed follow up on two U.S. Phase 1/2 trials investigating surgical and catheter-based delivery for our product in the treatment of DCM. The final results from these Phase 1/2 clinical trials were presented at the Society for Cardiovascular Angiography and Interventions (SCAI) meeting on May 10, 2012. We plan to initiate a randomized, placebo-controlled, double-blinded Phase 2b trial using catheter delivery in approximately 100 ischemic DCM patients in the U.S. in the second half of 2012.

Surgical Trial Program - DCM

We completed enrollment of 40 DCM patients in the IMPACT-DCM clinical trial in January 2010 and the final patient was treated in March 2010. Participants in the IMPACT-DCM clinical trial were required to have New York Heart Association (NYHA) functional class III or IV heart failure, a left ventricular ejection fraction (LVEF) of less than or equal to 30% (60-75% is typical for a healthy person), and meet other eligibility criteria, including optimized medical therapy. Patients were randomized in an approximate 3:1 ratio of treatment to control group. Patients in the treatment group received our therapy through direct injection into the heart muscle during minimally invasive-surgery (involving a chest incision of approximately 2 inches). The primary objective of this study was to assess the

safety of ixmyelocel-T in patients with DCM. Efficacy measures include cardiac dimensions and tissue mass, cardiac function (e.g. cardiac output, LVEF, cardiopulmonary exercise testing parameters), cardiac perfusion and viability, as well as other efficacy endpoints. NYHA functional class and quality of life are also assessed. Patients were followed for 12 months after treatment.

Catheter Trial Program - DCM

The Catheter-DCM clinical trial was designed to explore catheter-based direct injection delivery of ixmyelocel-T to treat DCM patients. This multi-center, randomized, controlled, prospective, open-label, Phase 2 study enrolled patients DCM at clinical sites across the United States.

We reported final 12-month results from the Catheter-DCM Phase 2 trial at the SCAI 2012 Scientific Sessions on May 10, 2012. The trial included 22 ischemic DCM (IDCM) and non-ischemic DCM (NIDCM) patients with a New York Heart Association (NYHA) heart failure class of III or IV, or moderate to severe heart failure, and a left ventricular ejection fraction of 30 percent or less, which is a measure of how much blood leaves the heart with each pump. Patients were randomized to receive an injection of the treatment into their heart muscles or to a control group, and were followed at three, six and 12 months. After 12 months, no procedural complications and no difference in adverse events were reported among patients who received the treatment and the control group. IDCM patients who received the cell treatment had a lower mean number of major adverse cardiac events (MACE) (0.22 compared to 1.67 in the control group). IDCM patients who received the treatment were more likely to see improvement in NYHA class, six-minute walking distance and ejection fraction, compared to those in the control group. No consistent trends were noted in NIDCM patients. We plan to launch a randomized, placebo-controlled, double-blind Phase 2b trial in the second half of 2012 for up to 100 ischemic DCM patients in the U.S. and using catheter administration.

Results of Operations

Research and development expenses increased to $7,069,000 for the quarter ended June 30, 2012 from $5,304,000 for the quarter ended June 30, 2011. For the six months ended June 30, 2012, research and development expense increased to $13,865,000 from $9,676,000 during the same period a year ago. The increases are due to advanced preparation and initial enrollment for the Phase 3 clinical program for ixmyelocel-T, including increased employee costs, clinical site identification and initiation, as well as certain regulatory expenses. These amounts include non-cash stock-based compensation expense of $755,000 for the quarter ended June 30, 2012, compared to expense of $674,000 for the quarter ended June 30, 2011. For the six months ended June 30, 2012, non-cash stock-based compensation expense increased to $1,199,000 from $1,035,000 for the same period a year ago. The increases in stock-based compensation expense are due primarily to an increase in the number of stock options granted which is partially offset by the decrease in the fair value per stock option for such grants.

Our major ongoing research and development programs are focused on the clinical development of ixmyelocel-T for treatment of severe, chronic cardiovascular diseases. The following table summarizes the approximate allocation of cost for our research and development projects (in thousands):

                                     Quarter Ended June 30,         Six Months Ended June 30,
                                      2011            2012            2011             2012

Critical Limb Ischemia            $      4,152    $      5,684    $      6,505    $       11,793
Dilated Cardiomyopathy                   1,147           1,385           3,145             2,072
Other                                        5               -              26                 -
Total research and development
expenses                          $      5,304    $      7,069    $      9,676    $       13,865

Selling, general and administrative expenses remained flat at $2,231,000 for the quarter ended June 30, 2012 compared to $2,203,000 for the quarter ended June 30, 2011. For the six months ended June 30, 2012, selling, general and administrative expenses decreased to $3,993,000 from $4,098,000 during the same period a year ago. Non-cash stock-based compensation expense included in selling, general and administrative expenses decreased to $469,000 for the quarter ended June 30, 2012 from $558,000 for the quarter ended June 30, 2011. For the six months ended June 30, 2012, non-cash

stock-based compensation expense remained flat at $840,000 compared to $813,000 for the same period a year ago.

The income (expense) related to the non-cash change in fair value of warrants was $1,948,000 for the quarter ended June 30, 2012 compared to ($2,465,000) for the quarter ended June 30, 2011. For the six months ended June 30, 2012, the non-cash change in the fair value of warrants was $1,048,000 compared to ($1,210,000) for the same period a year ago. The changes are due partly to the June 27, 2012 warrant exchange for the December 2010 warrants. Fluctuations in the fair value of warrants in future periods could result in significant non-cash adjustments to the condensed consolidated financial statements, however any income or expense recorded will not impact our cash and cash equivalents, operating expenses or cash flows.

Our net loss attributable to common shareholders was $8,566,000, or $0.22 per share, for the quarter ended June 30, 2012 compared to $9,957,000, or $0.26 per share, for the quarter ended June 30, 2011. For the six months ended June 30, 2012, our net loss was $18,310,000, or $0.47 per share, compared to $14,945,000, or $0.39 per share, for the same period a year ago. The changes in net loss are primarily due to the non-cash change in the fair value of warrants, increases in research and development expenses, and the increase in selling, general and administrative expenses as described above.

Liquidity and Capital Resources

We are currently focused on utilizing our technology to produce patient specific cell-based therapies for use in severe chronic ischemic cardiovascular diseases. At such time as we satisfy, if at all, applicable regulatory approval requirements, we expect the sales of our cell-based therapies to constitute nearly all of our product sales revenues.

We do not expect to generate positive cash flows from our consolidated operations for at least the next several years and then only if we achieve significant product sales. Until that time, we expect that our revenue sources from our current activities will consist of only minor sales of our cell products and manufacturing supplies to our academic collaborators, grant revenue, research funding and potential licensing fees or other financial support from potential future corporate collaborators.

We expect that we will need to raise significant additional funds or pursue strategic transactions or other strategic alternatives in order to complete our product development programs, complete clinical trials needed to market our products, and commercialize our products. To date, we have financed our operations primarily through public and private sales of our equity securities, and we expect to continue to seek to obtain the required capital in a similar manner. As a development stage company, we have never been profitable and do not anticipate having net income unless significant product sales commence. With respect to our current activities, such sales are not likely to occur until we obtain additional funding, complete the required clinical trials for regulatory approvals, and receive the necessary approvals to market our products. Through June 30, 2012, we had accumulated a net loss attributable to common shareholders of approximately $260,158,000. We cannot provide any assurance that we will be able to achieve profitability on a sustained basis, if at all, obtain the required funding, obtain the required regulatory approvals, commence product sales or complete additional corporate partnering or acquisition transactions.

We have also, but to a lesser degree, financed our operations through grant funding, payments received under research agreements and collaborations, interest earned on cash, cash equivalents, and short-term investments, stock option and warrant exercises and funding under equipment leasing agreements. These financing sources, in addition to our public and private sales of our equity securities, have generally allowed us to maintain adequate levels of cash and other liquid investments.

Our cash and cash equivalents totaled $28,666,000 at June 30, 2012, an increase of $23,136,000 from December 31, 2011. During the six months ended June 30, 2012, the primary uses of cash and cash equivalents included $14,553,000 for our operations and working capital requirements in preparation for the Phase 3 clinical program for ixmyelocel-T. As of June 30, 2012 we had $26,100,000 of cash deposited into an Insured Cash Sweep (ICS) program which is administered by Bank of New York Mellon. This program maximizes our Federal Deposit Insurance Company (FDIC) coverage by dividing our ICS funds into amounts under the standard FDIC maximum

and places these amounts with other ICS Network member banks (each an FDIC-insured institute). These funds are placed in savings accounts at the member banks earning interest while still maintaining insurance coverage.

Our future cash requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patents, competing technological and market developments, costs of possible acquisition or development of complementary business activities and the cost of product commercialization. We do not expect to generate positive cash flows from operations for at least the next several years due to the expected spending for research and development programs and the cost of commercializing our product candidates. We intend to seek additional funding through research and development agreements or grants, distribution and marketing agreements and through public or private debt or equity financing transactions. Successful future operations are subject to several technical and risk factors, including our continued ability to obtain future funding, satisfactory product development, obtaining required regulatory approvals and market acceptance for our products.

We believe that we have adequate liquidity to finance our operations, including development of our products and product candidates, via our cash and cash equivalents on hand as of June 30, 2012 until at least December 31, 2012. While our budgeted cash usage and operating plan for 2012 does not currently contemplate taking additional actions to reduce the use of cash over the next six months, we could, if necessary, delay or forego certain budgeted discretionary expenditures such as anticipated hiring plans or certain non-critical research and development expenditures, as well as slow down or delay certain clinical trial activity (without jeopardizing our Phase 3 clinical trial for CLI). While we could sell shares through an At the Market Sales Agreement (ATM) in order to raise additional capital, there are certain factors, such as volume of trading in our stock and our stock price, which could limit the amount we could raise in a short period of time. On a longer-term basis, we will need to raise additional funds in order to complete product development programs and complete clinical trials needed to market and commercialize these products. We cannot be certain that such funding will be available on favorable terms, if at all. Some of the factors that will impact our ability to raise additional capital and our overall success include: the rate and degree of progress for our product development, the rate of regulatory approval to proceed with clinical trial programs, the level of success achieved in clinical trials, the requirements for marketing authorization from regulatory bodies in the United States and other countries, the liquidity and market volatility of our equity securities, regulatory and manufacturing requirements and uncertainties, technological developments by competitors, and other factors. If we cannot raise such funds, we will not be able to develop or enhance products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which would have a material adverse impact on our business, financial condition and results of operations. As a result of the need to raise additional capital, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively over at least the next twelve months, which raises substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

At June 30, 2012, we were not party to any off-balance sheet arrangements.

Forward-Looking Statements

This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as "anticipates," "estimates," "plans," "projects," "trends," "opportunity," "comfortable," "current," "intention," "position," "assume," "potential," "outlook," "remain," "continue," "maintain," "sustain," "seek," "achieve," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" and similar words or phrases, or future or conditional verbs such as "will," "would," "should," "could," . . .