Dear Shareholders:

It is with great enthusiasm that I share our recent achievements and near term goals. We are at an exciting inflection point - the commercial introduction of our Celution™ System for two major applications: reconstructive surgery and stem cell banking.

The Celution™ System was designed as a bedside device to separate and concentrate a patient's own stem and regenerative cells trapped within fat tissue so they may be re-administered in the same procedure. The commercial model will be based on system sales and recurring revenue from single-use, per-procedure consumables.

We encourage investors to measure Cytori's performance based on our achievement of the following near term milestones:

• Market introduction of the Celution™ System for plastic and reconstructive surgery in Europe
• Install the first Celution™ System-based StemSource Cell Banks in Japan
• Initiate a multi-center breast reconstruction study in Europe in patients following partial mastectomy
• Report the outcome of an investigator-initiated breast reconstruction safety and feasibility study in Japan
• Expand the Celution™ System development pipeline with initiation of a clinical trial in heart attack patients
• Complete enrollment of our chronic heart disease clinical trial, a major part of our development pipeline

Two Planned Market Introductions in Early 2008

1. In the first quarter of 2008, we intend to launch the Celution™ System in Europe for use in reconstructive surgery, which includes breast reconstruction after partial mastectomy in breast cancer patients. Cells processed with the Celution™ System are believed to enable surgeons to restore the natural volume and contour lost in a partial mastectomy. The patient's stem and regenerative cells are combined with fat from another part of the patient's body. Next, the mixture of fat and cells is injected into the affected area, in what is referred to as a 'cell enhanced tissue transfer.'
2. By the first quarter of 2008, we anticipate launching the Celution™ System-based StemSource™ Cell Bank in hospitals across Japan with our new partner Green Hospital Supply. The StemSource™ Cell Bank allows patients, for the first time, to store regenerative cells residing in their fat tissue for future medical use. The motivation for hospitals to buy and install these cell banks is that they represent a potential profit center and the opportunity to become a regenerative medicine center of excellence.

Reconstructive Surgery

Celution™ PRS Therapeutic Pack includes all consumable products required to harvest, wash and process adipose tissue.

Preparations for the market introduction of the Celution™ System for reconstructive surgery in Europe are nearly complete. We achieved European regulatory clearance in 2006, commenced validation of our manufacturing process, appointed distributors in more than seven European countries, and set up a technical training and sales team. We are now looking ahead to Asia Pacific and the Middle East, where we recently appointed distributors to support our future market introductions in these regions as well.

As more studies are conducted with the Celution™ System to evaluate specific applications within the field of reconstructive surgery, Cytori will seek to expand the initial market introductions into a significant product launch in reconstructive surgery. We identified breast reconstruction, post partial mastectomy as the ideal application to pursue first.

Today, no reconstructive options exist for breast cancer patients who undergo a partial mastectomy. Results from RESTORE I, a breast reconstruction safety and feasibility study conducted last year, were accepted for presentation at the 30th Annual San Antonio Breast Cancer Symposium this December. This represents the first glimpse into the potential of the Celution™ System to address this unmet medical need, which affects hundreds of thousands of patients each year across Europe.

The importance to Cytori is that it sets the stage to initiate RESTORE II, a larger study in Europe intended to support reimbursement for this procedure by European payors. We expect to begin this 70 patient study across five or more hospitals before the end of the year. We have named the lead investigator, identified the first five clinical trial centers, and completed the protocol. The next step is to receive approval from the regulatory authorities to initiate the study.

StemSource™ Cell Bank

Packaging for the Celution™ Harvest Kit includes all of the reusable instrumentation required to extract adipose. Cytori has optimized these products for high cell yield and viability.

StemSource™ marketing materials, including patient and physician website, are being finalized by Green Hospital Supply

Another significant market for which we can apply the Celution™ System is stem cell banking. The Celution™ System automates a complex process that enables cost-effective processing of cells so they may be frozen and stored for future use.

Last month we entered a commercialization partnership with Green Hospital Supply who will sell our Celution™ System-based StemSource™ Cell Banks to hospitals in Japan. Cytori benefits from Green Hospital Supply who specializes in hospital facilities management and high-end equipment sales among other products and services and currently has a network of more than 350 hospitals in Japan.

StemSource™ Cell Bank revenues will come from two sources: the institutional sale of the StemSource™ Cell Bank to the hospital; and recurring consumable revenues each time a patient stores their cells. Cytori and Green Hospital Supply will share revenue equally.

It is estimated that each hospital bank installation will be a high value institutional sale. For each installation, Cytori will provide all of the equipment necessary to operate the bank, manufacture the Celution™ System, and provide the forms, procedures and integrated data system. We anticipate significant gross profit to Cytori for each cell bank installation.

StemSource™ installations will be the most visible component of revenue during the first five years. We expect that over time, the annuity sale of the consumable products grow to become the major source of revenue.

Cardiovascular Disease

Advancing through our Celution™ System development pipeline are two cardiovascular disease applications: chronic heart disease and heart attack. Cellular therapy represents a potential new class of therapeutics for these conditions, which affect millions of patients each year.

PRECISE, a safety and feasibility clinical trial, is underway in Europe to investigate cells processed with the Celution™ System for the treatment of a severe form of chronic heart disease. This is a 36 patient, double-blind, dose escalating study, for which the first of three doses has been enrolled. We continue to enroll patients and anticipate reporting results in the second half of 2008.

In addition, we are preparing to begin APOLLO, a 48-patient double blind, dose escalating safety and feasibility trial in heart attack patients in Europe. The protocol and clinical sites have already been finalized and regulatory approval to begin is expected shortly.

Manufacturing Strength

We expanded our manufacturing capitability to meet the anticipated product demand for the Celution™ System for the reconstructive surgery and stem cell banking launches until the Olympus-Cytori Joint Venture begins production of the next-generation Celution™ System.

One lot of micro-chambers - a key component of the consumable per patient use cartridge

Seven in-process systems are pictured above

We are actively manufacturing Celution™ Systems through a pre-production process, which is a required step toward fully validated production.  Validated production is expected to be complete by the end of the third quarter. Our current capacity is approximately one system per week and can be increased, if required, by expanding our production team.

The Celution™ System consumable production is equally on schedule. At present, we can produce approximately 100 full sets per week. We are increasing our efficiency and capacity by streamlining our production process and injection molding some of the key components. If needed, capacity for the consumables can also be increased.

Outlook

2007 is an exciting year for Cytori as we have already met many of our milestones and have several more important value driving achievements coming. We are making substantial progress across many fronts that bring the company closer to   commercialization and fulfilling our goal of becoming the leading and first profitable stem cell and regenerative medicine company.

Thanks to all of our employees for their dedication, and thank you to our partners and shareholders for your continued confidence and participation in our growth.

Christopher J. Calhoun
Chief Executive Officer