** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

** **

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** **

**FORM 10-QSB**

** **

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** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**FOR THE PERIOD ENDED SEPTEMBER30, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**FOR THE TRANSITION PERIODFROM            TO          .**

** **

**COMMISSIONFILE NUMBER: 0-50295**

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**ADVANCED CELL TECHNOLOGY, INC.**

(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED INITS CHARTER)

 

| **DELAWARE**                     |   | **87-0656515**                        |
|----------------------------------|--------|---------------------------------------|
| (STATE OR OTHER  JURISDICTION OF |   | (I.R.S. EMPLOYER  IDENTIFICATION NO.) |
| INCORPORATION OR  ORGANIZATION)  |   |                                  |

 

**1201 HARBOR BAY PARKWAY,ALAMEDA, CALIFORNIA 94502**(ADDRESS, INCLUDING ZIPCODE, OF PRINCIPAL EXECUTIVE OFFICES)

** **

REGISTRANT’S TELEPHONENUMBER, INCLUDING AREA CODE: **(510) 748-4900**

SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE ACT: **None**

SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:**Common Stock, $0.001 par value per share**

Indicate by check markwhether the small business issuer (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the smallbusiness issuer was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes x   No o

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Class:**                                |   | **Outstanding  at September 30, 2006:** |
|-------------------------------------------|--------|-----------------------------------------|
| Common Stock,  $0.001 par value per share |   | 33,414,516 shares                       |

Transitional Small Business Disclosure format (checkone)

Yes o   No x

 

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# **ADVANCED CELL TECHNOLOGY, INC.**

# **INDEX**

| PART I. FINANCIAL  INFORMATION                                     |   |   |
|-------------------------------------------------------------------------|--------|--------|
| ITEM  1. FINANCIAL STATEMENTS                                           |   |   |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN  OF OPERATION |   |   |
| ITEM 3. CONTROLS AND PROCEDURES                                         |   |   |
| PART II.  OTHER INFORMATION                                        |   |   |
| ITEM  1. LEGAL PROCEEDINGS                                              |   |   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS    |   |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                 |   |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS            |   |   |
| ITEM  5. OTHER INFORMATION                                              |   |   |
| ITEM 6.  EXHIBITS                                                       |   |   |
| SIGNATURE                                                               |   |   |

 

**CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

This Quarterly Report on Form 10-QSB andthe materials incorporated herein by reference contain forward-lookingstatements that involve risks and uncertainties. We use words such as “may,”“assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,”“estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,”“budgets,” “potential,” “continue” and variations thereof, and other statementscontained in quarterly report, and the exhibits hereto, regarding matters thatare not historical facts and are forward-looking statements. Because thesestatements involve risks and uncertainties, as well as certain assumptions,actual results may differ materially from those expressed or implied by suchforward-looking statements. Factors that could cause actual results to differmaterially include, but are not limited to risks inherent in:  our early stage of development, including alack of operating history, lack of profitable operations and the need foradditional capital; the development and commercialization of largely novel andunproven technologies and products; our ability to protect, maintain and defendour intellectual property rights; uncertainties regarding our ability to obtainthe capital resources needed to continue research and development operationsand to conduct research, preclinical development and clinical trials necessary forregulatory approvals; uncertainty regarding the outcome of clinical trials andour overall ability to compete effectively in a highly complex, rapidlydeveloping, capital intensive and competitive industry. See “RISK FACTORS THATMAY AFFECT OUR BUSINESS” set forth on page 26 herein for a morecomplete discussion of these factors. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datethat they are made. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

Forward-looking statements include our plans andobjectives for future operations, including plans and objectives relating toour products and our future economic performance. Assumptions relating to theforegoing involve judgments with respect to, among other things, futureeconomic, competitive and market conditions, future business decisions, and thetime and money required to successfully complete development andcommercialization of our technologies, all of which are difficult or impossibleto predict accurately and many of which are beyond our control. Although webelieve that the assumptions underlying the forward-looking statements containedherein are reasonable, any of those assumptions could prove inaccurate and,therefore, we cannot assure you that the results contemplated in any of theforward-looking statements contained herein will be realized. Based on thesignificant uncertainties inherent in the forward-looking statements includedherein, the inclusion of any such statement should not be regarded as arepresentation by us or any other person that our objectives or plans will beachieved.

2

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**PART I.FINANCIAL INFORMATION**

**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                    |       |                   |       |                  |       |
| Current assets:                                                                                                                           |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                 |       | $                      | 13,121,623 |                  | $          | 13,857,901 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $636,399 (unaudited) and $636,399                                         |       | 82,218                 |       | 134,876               |       |
| Prepaid expenses                                                                                                                          |       | 93,655                 |       | 173,040               |       |
| Deferred royalty fees, current portion                                                                                                    |       | 236,724                |       | 119,763               |       |
|                                                                                                                                      |       |                   |       |                  |       |
| Total current assets                                                                                                                      |       | 13,534,220             |       | 14,285,580            |       |
| Property and equipment, net                                                                                                               |       | 1,156,016              |       | 807,411               |       |
| Deferred royalty fees, less current portion                                                                                               |       | 1,118,989              |       | 598,811               |       |
| Deposits                                                                                                                                  |       | 135,841                |       | 105,192               |       |
| Deferred issuance costs, net of amortization of  $928,350 (unaudited) and $207,029                                                        |       | 5,948,255              |       | 2,277,322             |       |
|                                                                                                                                      |       |                   |       |                  |       |
| Total assets                                                                                                                              |       | $                      | 21,893,321 |                  | $          | 18,074,316 |   |
|                                                                                                                                      |       |                   |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                |       |                   |       |                  |       |
| Current liabilities:                                                                                                                      |       |                   |       |                  |       |
| Accounts payable                                                                                                                          |       | $                      | 1,470,803  |                  | $          | 2,113,983 |   |
| Accrued expenses                                                                                                                          |       | 4,199,102              |       | 1,251,946             |       |
| Deferred revenue, current portion                                                                                                         |       | 432,509                |       | 332,508               |       |
| Interest payable                                                                                                                          |       | 75,146                 |       | 87,083                |       |
| Advances payable - other                                                                                                                  |       | 130,000                |       | 130,000               |       |
| 2005 Convertible debenture and embedded derivatives,  net of discounts of $4,173,881 (unaudited) and $5,312,858                           |       | 7,253,508              |       | 5,144,896             |       |
| 2006 Convertible debenture, (fair value of  $8,070,781) (unaudited)                                                                       |       | 5,749,089              |       | —                |       |
| Warrant derivatives - current portion                                                                                                     |       | 650,711                |       | —                |       |
| Capital leases - current portion                                                                                                          |       | 77,594                 |       | —                |       |
| Notes payable - other, net of discounts of $0  (unaudited) and $314,456                                                                   |       | 638,674                |       | 858,103               |       |
|                                                                                                                                      |       |                   |       |                  |       |
| Total current liabilities                                                                                                                 |       | 20,677,136             |       | 9,918,519             |       |
| 2005 Convertible debenture and embedded derivatives,  less current portion and net of discounts of $2,812,600 (unaudited) and  $9,297,501 |       | 4,887,829              |       | 9,003,569             |       |
| 2006 Convertible debenture, less current portion (fair  value of $12,106,172) (unaudited)                                                 |       | 8,623,634              |       | —                |       |
| Warrant derivatives, less current portion                                                                                                 |       | 18,648,122             |       | 30,994,491            |       |
| Capital leases, less current portion                                                                                                      |       | 51,461                 |       | 109,924               |       |
| Deferred revenue, net of current portion                                                                                                  |       | 1,804,827              |       | 1,662,542             |       |
| Total liabilities                                                                                                                         |       | 54,693,009             |       | 51,689,045            |       |
| Commitments and contingencies                                                                                                             |       | —                 |       | —                |       |
| Stockholders’ deficit:                                                                                                               |       |                   |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized, 33,414,516 (unaudited) and 23,440,695 issued and outstanding              |       | 33,414                 |       | 23,441                |       |
| Additional paid-in capital                                                                                                                |       | 6,848,287              |       | (10,463,008           | )          |
| Deferred compensation                                                                                                                     |       | (21,585                | )          | (21,585               | )          |
| Accumulated deficit                                                                                                                       |       | (39,659,804            | )          | (23,153,577           | )          |
| Total stockholders’ deficit                                                                                                          |       | (32,799,688            | )          | (33,614,729           | )          |
| Total liabilities  and stockholders’ deficit                                                                                         |       | $                      | 21,893,321 |                  | $          | 18,074,316 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

3

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** **

**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF OPERATIONS(UNAUDITED)**
| ** **                                                               | ** ** | **Three months ended September 30,** | ** **  | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                                 | ** **  | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                                                 |       |                                                     |        |                                                    |       |   |   |   |   |
| License fees and royalties                                               |       | $                                                        | 128,960     |                                                    | $          | 83,127 |   | $ | 332,714 |   | $ | 311,880 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Cost of revenue                                                          |       | 67,617                                                   |        | 41,189                                                  |       | 221,424 |   | 145,131 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Gross profit                                                             |       | 61,343                                                   |        | 41,938                                                  |       | 111,290 |   | 166,749 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Operating  expenses:                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Research and development                                                 |       | 2,586,482                                                |        | 734,065                                                 |       | 7,012,255 |   | 1,667,684 |   |
| Grant reimbursements                                                     |       | (5,879                                                   | )           | (171,980                                                | )          | (369,446 | ) | (597,198 | ) |
| General and administrative                                               |       | 1,336,939                                                |        | 2,330,767                                               |       | 5,845,061 |   | 5,572,267 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Total operating  expenses                                                |       | 3,917,542                                                |        | 2,892,852                                               |       | 12,487,870 |   | 6,642,753 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Loss from  operations                                                    |       | (3,856,199                                               | )           | (2,850,914                                              | )          | (12,376,580 | ) | (6,476,004 | ) |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Other income  (expense):                                                 |       |                                                     |        |                                                    |       |   |   |   |   |
| Interest income                                                          |       | 90,105                                                   |        | 6,083                                                   |       | 289,953 |   | 32,042 |   |
| Gain on sale of asset                                                    |       | —                                                   |        | —                                                  |       | 767,040 |   | — |   |
| Loss on extinguishment of debt                                           |       | (263,464                                                 | )           | —                                                  |       | (263,464 | ) | — |   |
| Gain on settlement of debt                                               |       | —                                                   |        | 966,301                                                 |       | — |   | 1,052,814 |   |
| Interest expense and late fees                                           |       | (2,839,572                                               | )           | (432,077                                                | )          | (8,436,878 | ) | (500,806 | ) |
| Charges related to issuance of Convertible  Debentures                   |       | (11,168,629                                              | )           | —                                                  |       | (11,168,629 | ) | — |   |
| Charges related to repricing and issuance of  warrants                   |       | (7,501,060                                               | )           | —                                                  |       | (7,501,060 | ) | — |   |
| Interest expense - stockholder                                           |       | —                                                   |        | —                                                  |       | — |   | (60,000 | ) |
| Adjustments to fair value of derivatives                                 |       | (5,075,387                                               | )           | —                                                  |       | 22,183,391 |   | — |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Total other  income (expense)                                            |       | (26,758,007                                              | )           | 540,307                                                 |       | (4,129,647 | ) | 524,050 |   |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Net profit /  (loss)                                                     |       | $                                                        | (30,614,206 | )                                                       | $          | (2,310,607 | ) | $ | (16,506,227 | ) | $ | (5,951,954 | ) |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Basic net loss  per share                                                |       | $                                                        | (1.08       | )                                                       | $          | (0.10 | ) | $ | (0.63 | ) | $ | (0.26 | ) |
|                                                                     |       |                                                     |        |                                                    |       |   |   |   |   |
| Basic weighted  average shares used in computation of net loss per share |       | 28,257,749                                               |        | 23,191,111                                              |       | 26,209,324 |   | 23,209,742 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

4

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**ADVANCED CELLTECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF CASH FLOWSCHANGE IN CASH AND CASH EQUIVALENTS(UNAUDITED)**
| ** **                                                                                             | ** ** | **Nine Months Ended September 30,** | ** **         |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|--------------------|
| ** **                                                                                             | ** ** | **2006**                                                | ** **         | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                 |       |                                                    |               |   |   |
| Net loss                                                                                               |       | $                                                       | (16,506,227        | ) | $ | (5,951,954 | ) |
| Adjustments to  reconcile net profit / (loss) to net cash (used in) provided by operating  activities: |       |                                                    |               |   |   |
| Depreciation and amortization                                                                          |       | 175,793                                                 |               | 73,221 |   |
| Bad debt                                                                                               |       | —                                                  |               | 32,715 |   |
| Amortization of deferred charges                                                                       |       | 80,770                                                  |               | 89,821 |   |
| Amortization of deferred revenue                                                                       |       | (295,214                                                | )                  | (249,379 | ) |
| Amortization of deferred offering costs                                                                |       | 721,321                                                 |               | — |   |
| Gain on settlement of accounts payable                                                                 |       | —                                                  |               | (1,052,814 | ) |
| Shares issued for services                                                                             |       | —                                                  |               | 15,000 |   |
| Warrants issued for services                                                                           |       | 331,827                                                 |               | — |   |
| Amortization of deferred compensation                                                                  |       | —                                                  |               | 316,117 |   |
| Amortization of discounts                                                                              |       | 7,674,870                                               |               | 413,952 |   |
| Loss on extinguishment of debt                                                                         |       | 263,464                                                 |               | — |   |
| Changes in warrant and derivative liability                                                            |       | (22,183,391                                             | )                  | — |   |
| Increase and repricing of warrants                                                                     |       | 7,501,060                                               |               | — |   |
| Issuance of convertible debentures                                                                     |       | 11,168,629                                              |               | — |   |
| Non-cash compensation charge                                                                           |       | 506,648                                                 |               | — |   |
|                                                                                                   |       |                                                    |               |   |   |
| Changes in operating assets and liabilities:                                                           |       |                                                    |               |   |   |
| (Increase) decrease in:                                                                                |       |                                                    |               |   |   |
| Accounts receivable                                                                                    |       | 52,660                                                  |               | (413 | ) |
| Prepaid expenses                                                                                       |       | 79,385                                                  |               | (116,614 | ) |
| Deferred charges                                                                                       |       | —                                                  |               | (11,250 | ) |
| Deposits                                                                                               |       | (30,649                                                 | )                  | (65,000 | ) |
| Increase  (decrease) in:                                                                               |       |                                                    |               |   |   |
| Accounts payable and accrued expenses                                                                  |       | 156,793                                                 |               | 568,013 |   |
| Interest payable                                                                                       |       | (11,937                                                 | )                  | 101,394 |   |
| Advances to stockholder                                                                                |       | —                                                  |               | (327,235 | ) |
| Deferred revenue                                                                                       |       | 537,500                                                 |               | — |   |
|                                                                                                   |       |                                                    |               |   |   |
| Net cash used in  operating activities                                                                 |       | (9,776,698                                              | )                  | (6,164,426 | ) |
|                                                                                                   |       |                                                    |               |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                 |       |                                                    |               |   |   |
| Cash acquired in  acquisition                                                                          |       | —                                                  |               | 10,000 |   |
| Purchases of  property and equipment                                                                   |       | (540,193                                                | )                  | (317,826 | ) |
|                                                                                                   |       |                                                    |               |   |   |
| Net cash used in  investing activities                                                                 |       | (540,193                                                | )                  | (307,826 | ) |
|                                                                                                   |       |                                                    |               |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                 |       |                                                    |               |   |   |
| Proceeds from  preferred unit subscriptions, net of cost                                               |       | —                                                  |               | 3,735,201 |   |
| Proceeds from  exercise of warrants                                                                    |       | 4,320,687                                               |               | — |   |
| Payments of  convertible debentures                                                                    |       | (2,047,735                                              | )                  | — |   |
| Proceeds from  notes, net of offering costs                                                            |       | 7,966,125                                               |               | 16,128,042 |   |
| Payments on notes  and leases                                                                          |       | (658,464                                                | )                  | (250,000 | ) |
| Settlement payment                                                                                     |       | —                                                  |               | (332,524 | ) |
| Cash overdraft                                                                                         |       | —                                                  |               | (1,409 | ) |
|                                                                                                   |       |                                                    |               |   |   |
| Net cash provided  by (used in) financing activities                                                   |       | 9,580,613                                               |               | 19,279,310 |   |
|                                                                                                   |       |                                                    |               |   |   |
| Net increase /  (decrease) in cash                                                                     |       | (736,278                                                | )                  | 12,807,058 |   |
|                                                                                                   |       |                                                    |               |   |   |
| Cash and cash  equivalents, beginning of period                                                        |       | 13,857,901                                              |               | 3,676,000 |   |
|                                                                                                   |       |                                                    |               |   |   |
| Cash and cash  equivalents, end of period                                                              |       | $                                                       | 13,121,623         |   | $ | 16,483,058 |   |
|                                                                                                   |       |                                                    |               |   |   |
| Cash paid for:                                                                                         |       |                                                    |               |   |   |
| Interest                                                                                               |       | $                                                       | 7,532              |   | $ | — |   |
| Income taxes                                                                                           |       | $                                                       | —   |   | $ | — |   |

 

Supplementalschedule of non-cash financing activities:

During the nine monthsended September 30, 2006:

The Company issuedapproximately 3,582,000 shares of common stock in redemption of convertibledebentures with a face value of approximately $3,129,000.

The Company issuedapproximately 773,000 shares of common stock in conversion of convertibledebentures with a face value of approximately $2,496,000.

The Company issuedapproximately 163,000 shares of common stock in payment of license fees valuedat approximately $239,000.

The Company issuedapproximately 780,000 shares of common stock to employees as compensation ofapproximately $218,000.

The Company issuedapproximately 44,000 shares of common stock in payment of board fees ofapproximately $19,000.

The Company eliminated aderivative liability of $6,629,884 upon exercise of warrants.

During the nine monthsended September 30, 2005:

105,177 PreferredUnits, valued at $89,400, were issued in partial settlement of accountspayable.

616,124 shares ofcommon stock, and 306,062 common stock purchase warrants were issued uponconversion of $500,000 of notes payable and $23,708 of accrued interest.

469,247 shares ofcommon stock, and 234,629 common stock purchase warrants, valued at anaggregate of $398,860, were issued in consideration of services related to thePreferred Unit Offering.

A note for $150,000 wasissued as a part of a settlement of a note payable of $339,000 and relatedaccrued interest of $53,675.

9,411,778 shares ofpreferred stock converted to 9,411,778 shares of common stock in theMerger.

Approximately350,000 shares of common stock were retired, and net intercompany amountsof approximately $600,000 due to ACT Group, Inc were extinguished, in finalsettlement of litigation between ACT Group, Inc were extinguished, in finalsettlement of litigation between ACT Group, Inc. and third parties.

Approximately195,000 shares of common stock were issued in settlement of accountspayable of approximately $1,428,000.

Approximately260,000 warrants to purchase shares of common stock were issued to consultantsas partial compensation for consulting services.

In connection with theissuance of convertible debentures, $5,747,297 was allocated to the fair valueof warrants issued, and $9,305,014 was allocated to the beneficial conversionfeature embedded in the debentures.

In connection with issuance of notes payable relatedto the ACT Group settlement, $21,818 was allocated to the beneficial conversionfeature embedded in the notes.

The accompanying notesare an integral part of these condensed consolidated financial statements.

5

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**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENT OF STOCKHOLDERS’ DEFICITFOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 (UNAUDITED)**

| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Deferred**   | ** ** | **Accumulated**  | ** ** | **Stockholders’** | ** ** |
| ** **                                                   | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**            | ** ** | **Deficit** | ** ** |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Balance at  December 31, 2005                                |       | 23,440,695            |       | $           | 23,441     |           | $          | (10,463,008      | )          | $                      | (21,585    | )           | $          | (23,153,577 | ) | $ | (33,614,729 | ) |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Cashless exercise  of warrant                                |       | 63,208                |       | 63          |       | (63            | )          |             |       |                   |       | —      |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Stock option exercises                                       |       | 26,000                |       | 26          |       | 6,074          |       |             |       |                   |       | 6,100       |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Convertible debenture  redemption                            |       | 3,582,283             |       | 3,582       |       | 3,125,553      |       |             |       |                   |       | 3,129,135   |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Issued to  employees                                         |       | 780,000               |       | 780         |       | 217,620        |       |             |       |                   |       | 218,400     |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Exercise of warrrants                                        |       | 4,541,672             |       | 4,542       |       | 4,310,045      |       |             |       |                   |       | 4,314,587   |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Elimination of  derivative liability on exercise of warrants |       | —                |       | —      |       | 6,629,884      |       |             |       |                   |       | 6,629,884   |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Convertible debenture  conversion                            |       | 773,043               |       | 773         |       | 2,495,578      |       |             |       |                   |       | 2,496,351   |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Issuance of  stock in payment of board fees                  |       | 44,216                |       | 44          |       | 19,706         |       |             |       |                   |       | 19,750      |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Option  compensation charges                                 |       |                  |       |        |       | 268,498        |       |             |       |                   |       | 268,498     |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Issuance of  stock in payment of license fees                |       | 163,399               |       | 163         |       | 238,400        |       |             |       |                   |       | 238,563     |       |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Net loss for the  nine months ended September 30, 2006       |       |                  |       |        |       |           |       |             |       | (16,506,227            | )          | (16,506,227 | )          |
|                                                         |       |                  |       |        |       |           |       |             |       |                   |       |        |       |
| Balance at  September 30, 2006                               |       | 33,414,516            |       | $           | 33,414     |           | $          | 6,848,287        |       | $                      | (21,585    | )           | $          | (39,659,804 | ) | $ | (32,799,688 | ) |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(UNAUDITED)**

**1.**                 ORGANIZATIONALMATTERS

**Organization**

On January 31, 2005, Advanced CellTechnology, Inc. (formerly known as A.C.T. Holdings, Inc.) (the“Company”) completed a merger with Advanced Cell, Inc. (formerly known asAdvanced Cell Technology, Inc.), a Delaware corporation (“ACT”), pursuantto which a wholly-owned subsidiary of the Company merged with and into ACT, withACT remaining as the surviving corporation and a wholly-owned subsidiary of theCompany. Upon the completion of the merger, the Company ceased all of itspre-merger operations and adopted the business of ACT.

Prior to the merger, the Company had minimal business,operations, revenues and assets, and had been involved in an industry entirelyunrelated to the business of ACT. Therefore, the acquisition of ACT by theCompany represented a complete change in the nature of the Company’s businessand operations, and changed the nature of any prior investment in the Company.

The transaction has been accounted for as arecapitalization of ACT, the accounting acquirer. The historical financialstatements presented for periods prior to the merger are those of ACT.

On November 18, 2005, a majority of the Company’sstockholders approved the reincorporation of the Company from the state ofNevada to the state of Delaware pursuant to a merger of the Company with andinto a newly formed Delaware corporation, followed by a “roll up” merger tocombine the operating subsidiary with the Company.

**Nature of Business**

The Company is a biotechnology company focused ondeveloping and commercializing human stem cell technology in the emergingfields of regenerative medicine and stem cell therapy. Principal activities todate have included obtaining financing, securing operating facilities andconducting research and development. The Company has no therapeutic productscurrently available for sale and does not expect to have any therapeuticproducts commercially available for sale for a period of years, if at all.These factors indicate that the Company’s ability to continue its research anddevelopment activities is dependent upon the ability of management to obtainadditional financing as required.

**Going Concern**

As reflected in the accompanying financial statements,the Company has losses from operations, negative cash flows from operations, asubstantial stockholders’ deficit and current liabilities exceed current assets.These matters raise substantial doubt about the Company’s ability to continueas a going concern and fund cash requirements for operations through September30, 2007. Subsequent to filing the Form 10-KSB for the year ended December 31,2005, the Company obtained new information which negatively impacted cash flowsforecasted through March 31, 2007. The Company’s Board of Directors met andapproved an operating plan at current spending levels, assuming additionalcapital would be raised during the current year. In addition, the Company beganexperiencing increased cash redemptions related to 2005 Convertible Debenturesdescribed more fully in Note 4 Convertible Debentures – 2005 which continue asdescribed in Note 13 – Subsequent Events. As more fully described in Note 3 – Convertible Debentures – 2006 andNote 5 – Warrant Derivatives, the Company was able to raise cash in the quarterended September 30, 2006.  Notwithstandingsuccess in raising capital, there continues to be substantial doubt about theCompany’s ability to continue as a going concern. 

In view of the matters described in the precedingparagraph, recoverability of a major portion of the recorded asset amountsshown in the accompanying balance sheet is dependent upon continued operationsof the Company, which, in turn, is dependent upon the Company’s ability tocontinue to raise capital and ultimately generate positive cash flows from 

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operations. The financial statements do not includeany adjustments relating to the recoverability and classification of recordedasset amounts or amounts and classifications of liabilities that might benecessary should the Company be unable to continue its existence.

In the first nine months of 2006, management has takenor has made plans to take the following steps that it believes will besufficient to provide the Company with the ability to continue in existence:

·                     As describedmore fully in Note 3 – Convertible Debentures – 2006, the Company was able toraise cash during the quarter from an additional investment by 2005 convertibledebenture holders. 

·                     As describedmore fully in Note 4 – Warrant Derivatives, the Company raised cash during thequarter from the repricing and exercise of warrants issued to 2005 convertibledebenture holders.

·                     Managementanticipates raising additional future capital from its current convertibledebenture holders, or other financing sources, that will be used to fund anycapital shortfalls. The terms of any financing will likely be negotiated basedupon current market terms for similar financings. No commitments have beenreceived for additional investment and no assurances can be given that thisfinancing will ultimately be completed.

·                     Managementhas focused its scientific operations on product development in order toaccelerate the time to market of products which will ultimately generaterevenues. While the amount or timing of such revenues can not be determined,Management believes that focused development will ultimately provide a quickerpath to revenues, and an increased likelihood of raising additional financing.

***Basis ofPresentation —***The accompanying unaudited condensedconsolidated financial statements as of September 30, 2006 and for thethree and nine month periods ended September 30, 2006 and 2005 have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), including Form 10-QSB and RegulationS-B and in accordance with generally accepted accounting principles for interimfinancial information. The information furnished herein reflects alladjustments (consisting of normal recurring accruals and adjustments), whichare, in the opinion of management, necessary to fairly present the operatingresults for the respective periods. Certain information and footnote disclosuresnormally present in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations. The Company believesthat the disclosures provided are adequate to make the information presentednot misleading. These financial statements should be read in conjunction withthe audited financial statements for the year ended December 31, 2005 asdisclosed in the Company’s annual report on Form 10-KSB for thatyear as filed with the SEC. Interim results of operations are not necessarilyindicative of the results to be expected for the year ending December 31,2006.

**2.**                 SIGNIFICANT ACCOUNTING POLICIES

***Stock-BasedCompensation —***At September 30, 2006, the Companyhas two stock-based employee compensation plans, which are described more fullyin Note 8 – Options Outstanding. Prior to January 1, 2006, the Companyaccounted for those plans under the recognition and measurement provisions ofAPB Opinion No. 25, Accounting for Stock Issued to Employees, and relatedInterpretations, as permitted by FASB Statement No. 123, Accounting forStock-Based Compensation. No stock-based employee compensation cost wasrecognized in the Statement of Operations for the years ended December 31,2005, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant.

As more fully discussed in Note 8, effectiveJanuary 1, 2006, the Company adopted the fair value recognition provisionsof FASB Statement No. 123(R), Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three and nine months ended September 30,2006 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions ofStatement 123, and (b) compensation cost for all share-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of Statement 123(R). Results forprior periods have not been restated.

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***Earnings per Share***

The Company calculates basic earnings per share inaccordance with SFAS No. 128, “Earnings Per Share”. Basic loss pershare is computed by dividing net income by the weighted average number ofcommon shares outstanding. 

***Recent Accounting Pronouncements***

In September 2006, the Financial Accounting StandardsBoard, or FASB, issued SFAS No. 157, *FairValue Measurements* , or SFAS 157, which provides guidance on how tomeasure assets and liabilities that use fair value. This Statement clarifiesthe principle that fair value should be based on the assumptions marketparticipants would use when pricing an asset or liability and establishes afair value hierarchy that prioritizes the information used to develop thoseassumptions. SFAS 157 will apply whenever another generally accepted accountingprinciple requires, or permits, assets or liabilities to be measure at fairvalue but does not expand the use of fair value to any new circumstances. Thisstatement will also require additional disclosures in both annual and quarterlyreports. SFAS 157 is effective for fiscal years beginning after November 2007,and will be adopted by us beginning January 1, 2008. We are currentlyevaluating the potential impact this statement may have on our financialstatements, but do not believe the impact of adoption will be material.

In September 2006, the SEC staff issued StaffAccounting Bulletin, or SAB, No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*, or SAB 108 *.* SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. SAB 108 is effective for fiscalyears ending after November 15, 2006. We will initially apply theprovisions of SAB 108 in connection with the preparation of our annualfinancial statements for the year ending December 31, 2006. We haveevaluated the potential impact that SAB 108 may have on our financialstatements and do not believe the impact of the application of this guidancewill be material.

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans*, or SFAS 158. This Statement requirescompanies to recognize in their statement of financial position an asset for aplan’s overfunded status or a liability for a plan’s underfunded status and tomeasure a plan’s assets and its obligations that determine its funded status asof the end of the company’s fiscal year. Additionally, SFAS 158 requirescompanies to recognize changes in the funded status of a defined benefitpostretirement plan in the year that the changes occur and those changes willbe reported in comprehensive income. The provisions of SFAS 158 are effectiveas of the end of fiscal year 2006 and we are currently in the process ofquantifying the impact to the financial statements.

**3.****              CONVERTIBLEDEBENTURES – 2006**

On September 6, 2006, we entered into aSecurities Purchase Agreement with accredited investors for the issuance of anaggregate of $10,981,250 principal amount of convertible debentures with anoriginal issue discount of $2,231,250 representing approximately 20.3%. Inconnection with the closing of the sale of the debentures, we received grossproceeds of $8,750,000. These convertible debentures were issued in connectionwith certain additional investment rights granted in connection with theconvertible debentures issued in 2005, and described more fully in Note 4 –Convertible Debentures – 2005. The convertible debentures are convertible atthe option of the holders into 38,129,340 shares of Common Stock at a fixed conversion price of $0.288  per share, subject to anti-dilution and othercustomary adjustments. In connection with the Securities Purchase Agreement, wealso issued warrants to purchase an aggregate of 19,064,670 shares of ourCommon Stock. The term of the warrants is five years and the exercise price is$0.3168 per share, subject to anti-dilution and other customary adjustments.The investors have contractually agreed to restrict their ability to convertthe convertible debentures, exercise the warrants and receive shares of ourCommon Stock such that the number of shares of our Common Stock held by themand their affiliates after such conversion or exercise does not exceed 4.99% ofour then issued and outstanding shares of our Common Stock.

                The agreements entered intoprovide that the Company will pay certain cash amounts as liquidated damages inthe event that the Company does not maintain an effective registrationstatement covering the shares issuable under the debentures and the warrants,or if the Company fails to timely execute stock trading activity. 

 

                Under the terms of theagreements, principal amounts owed under the debentures become due and payablecommencing six months following closing of the transaction. At that time, andeach month thereafter, the Company is required to either repay  1¤30 of theoutstanding balance owed in cash, or convert the amount due into common stockat the lesser of $0.288 per share or 85% of the prior ten days' average closingstock price, immediately preceding the redemption. The agreements also providethat the Company may force conversion of outstanding amounts owed under thedebentures into common stock, if the Company has met certain conditions andmilestones, and, additionally, has a stock price for 20 consecutive tradingdays that exceeds 200% of the conversion price.

 

                The agreement included a numberof other embedded derivative instruments, and the Company has applied theprovisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”, torecord the fair value of the convertible debentures, and related derivatives,as of September 6, 2006.   The fair valueof the debentures and related derivative instruments was valued using acombination of Binomial and Black Scholes models, resulting in a fair value of approximately$22,200,000. The excess of this value over the transaction price of theConvertible Debentures was recorded through the results of operations as adebit to Charges Related to Issuance of Convertible Debentures.

 

The2006 convertible debentures and related derivatives outstanding at September30, 2006 were again valued at fair value using a combination of Binomial andBlack Scholes models, resulting in a decrease in the fair value of theliability of approximately $2,000,000, primarily as a result of a decline inthe Company’s stock price, which was recorded through the results of operationsas a credit to Adjustments to Fair Value of Derivatives.

 

                In connection withthis financing, we paid cash fees to a broker-dealer of $525,000 andissued a warrant to purchase 4,575,521 shares of Common Stock at an exerciseprice of $0.3168 per share. The initial fair value of the warrant was estimatedat approximately $3,600,000 using the Black Scholes pricing model. Theassumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%, (2) expected volatility of 176%, (3) risk-free interestrate of 4.81%, and (4) expected life of 5 years. Cash fees paid, andthe initial fair value of the warrant, have been capitalized as debt issuancecosts and are being amortized over 36 months using the effective interestrate method.

The followingtable summarizes the 2006 Convertible Debentures and discounts outstanding atSeptember 30, 2006:

| Convertible debentures at  fair value                                      |   | $          | 20,176,953 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
| Warrant  derivative discount                                                                                                                                                                                                                                        |   | (3,572,980 | )          |
| Original issue  discount                                                                                                                                                                                                                                            |   | (2,231,250 | )          |
| Net convertible  debentures                                                                                                                                                                                                                                         |   | 14,372,723 |       |
| Less current portion                                                                                                                                                                                                                                                |   | (5,749,089 | )          |
| Convertible  debentures and embedded derivatives-long term                                                                                                                                                                                                          |   | $          | 8,623,634  |   |

 

 

 

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**4.**                 CONVERTIBLEDEBENTURES - 2005

On September 15, 2005, we entered into aSecurities Purchase Agreement with accredited investors for the issuance of anaggregate of $22,276,250 principal amount of convertible debentures with anoriginal issue discount of $4,526,250 representing approximately 20.3%. Inconnection with the closing of the sale of the debentures, we received grossproceeds of $17,750,000. 

The agreement included a number of embedded derivativeinstruments that required separate valuation in accordance with therequirements of FAS 133, EITF 05-04 and related accountingliterature. The following summarizes the fair values of embedded derivatives atDecember 31, 2005 and September 30, 2006, followed by a description of thevaluation methodology utilized to determine fair values:
| ** **                                               | ** ** | **Fair value**             | ** ** | **Fair value**              | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| **Embedded Derivative Liability (Asset)** | ** ** | **December 31, 2005** | ** ** | **September 30, 2006** | ** ** |
| ** **                                               | ** ** | ** **                      | ** ** | **(unaudited)**                  | ** ** |
| Conversion  feature                                      |       | $                               | 6,057,088  |                             | $2,211,158 |   |
| Anti-dilution  protection                                |       | 1,755,878                       |       | 2,467,186                        |       |
| Default  provisions                                      |       | 94,886                          |       | 54,567                           |       |
| Right to provide  future financing                       |       | 185,968                         |       | —                           |       |
| Company right to  force conversion                       |       | (1,226,746                      | )          | (519,998                         | )          |
|                                                     |       | $                               | 6,867,074  |                             | $4,212,913 |   |

 

The fair value of the derivative for the conversionfeature was valued as an American call option using the Binomial Option PricingModel with the following inputs: (1) closing stock price of $0.69 atSeptember 30, 2006, (2) exercise price equal to the $2.30 conversion price,(3) volatility based upon the Company’s stock trading of 173%,(4) Treasury note rates with terms commensurate with the remaining term ofthe Notes of 4.71%, and (5) duration of the note as an amortizingdebenture of approximately 0.80 years, based upon present values.

The fair value of the derivative for anti-dilutionprotection was valued using a standard put option binomial model, adjusted forthe probability of subsequent financing at prices below the principal’sconversion option with the following inputs: (1) closing stock price as ofthe valuation date of $0.69, (2) exercise price equal to the $2.30 and $0.95conversion price, (3) volatility based upon the Company’s stock trading of173%, (4) Treasury note rates with terms commensurate with the remainingterm of the Notes of 4.71%, and (5) duration of the note as an amortizingdebenture of approximately 0.80 years based upon present values.

On August 24, 2006, the Company’s Board ofDirectors agreed to reduce the exercise price of the warrants issued inconnection with the 2005 debentures from $2.53 per share to $0.95 pershare for approximately three days. As a result of this repricing, warrantholders with an aggregate of 4,541,672 warrants exercised their rightsgenerating approximately $4,315,000 of cash proceeds. Warrant holders whoexercised their warrants were issued replacement warrants to purchase anequivalent number of shares at an exercise price of $1.60 per share. Warrantholders who did not exercise their warrants had the conversion price of theirconvertible debentures reduced to $.95. As a result of certain anti-dilutionprotection in the original warrant agreement, certain of the warrant holderswho did not exercise their warrants received anti-dilution protection and hadthe number of shares covered under the warrant agreement increased to2,135,615, and the exercise price reduced to $0.95 per share. One warrantholder waived the right to reprice their warrant for $2.53 to $0.95 and did notexercise all of their warrants. Their remaining warrants on an aggregate of581,119 common shares remain outstanding at an exercise price of $2.53 pershare.

The Company has considered the impact EITFs 96-19,02-4 and 05-7 on the accounting treatment of the change in conversion price ofa portion of the 2005 Convertible Debentures described in the paragraph above.EITF 96-19 states that a company should recognize as an extinguishment of debta significant change in the nature of a debt instrument. EITF 05-7 states thatif the change in the cash flows of the debt instrument plus the change in thefair value of the conversion derivative as a result of the change is greaterthan 10%, the change should be treated as significant and the debt isconsidered extinguished. The Company has concluded that the change in conversionprice from $2.30 to $0.95 of a portion of the outstanding Debenture does notconstitute an extinguishment of that debt.

The fair value of the derivative for contractualdefault provisions was determined by taking the monthly amortization schedule,and multiplying the result by the contractual penalty of 120%. The presentvalue of this penalty was then adjusted by the estimated probability of defaultfor each valuation date.

The fair value of the derivative for the investors’ optionto provide future financing was determined using a Black Scholes Option PricingModel with the following inputs: (1) The stock and exercise price wasbased on the maximum amount of additional investment of $125,000.(2) Volatility of 2% was based on the historical volatility of governmentand high yield bond indices. (3) Risk-free rate of 4.71% was based onTreasury notes. (4) Time to maturity was based upon the six month optionperiod. The value of this option at the year end was found to approximate tozero.

The fair value of the derivative asset related to theCompany’s right to force conversion was based upon a binomial option pricingmodel with the following inputs: (1) closing stock price at the valuationdate of $0.69, (2) exercise price of $4.60 per share which is required forthe forced conversion, (3) volatility based upon the Company’s stocktrading of 173%, (4) Treasury note rate with terms commensurate with theremaining term of the Notes of 4.71%, and (5) duration of the note as an amortizingdebenture of approximately 0.80 years based upon present values.

During the three and nine months ended September 30,2006, an increase in the fair value of the embedded derivative amounts ofapproximately $1,500,000 and a decrease of $2,000,000 respectively wererecorded through results of operations as Adjustment to Fair Value ofDerivatives.

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During the three and nine months ended September 30,2006, the Company recorded approximately $2,500,000 and $7,200,000 respectivelyas Interest Expense for amortization of discounts for original issue discount,discount for warrant derivative, and other embedded derivatives identifiedabove.

In connection with this financing, we paid cash feesto a broker-dealer of $1,065,000 and issued a warrant to purchase 1,162,239shares of Common Stock at an exercise price of $2.53 per share. The initialfair value of the warrant was estimated at approximately $1,379,000 using theBlack Scholes pricing model. The assumptions used in the Black Scholes modelare as follows: (1) dividend yield of 0%; (2) expected volatility of64%, (3) risk-free interest rate of 3.99%, and (4) expected life of5 years. Cash fees paid, and the initial fair value of the warrant, havebeen capitalized as debt issuance costs and are being amortized over36 months under the effective interest rate method. Interest expense forthe three months ended September 30, 2006 was approximately $207,000.

The following table summarizes the 2005 ConvertibleDebentures and embedded derivatives outstanding at September 30, 2006:
| Convertible  debentures at $2.30 at face                    |   | $11,775,412 |      |
|-------------------------------------------------------------|--------|-------------|-----------|
| Convertible  debentures at $0.95 at face                    |   | 3,139,493   |      |
| Convertible  debentures at face                             |   | 14,914,905  |      |
| Discounts on  debentures:                                   |   |        |      |
| Original issue discount                                     |   | (1,756,270  | )         |
| Conversion feature derivative                               |   | (2,868,883  | )         |
| Warrant derivative                                          |   | (2,251,840  | )         |
| Other derivatives                                           |   | (109,488    | )         |
| Net convertible  debentures                                 |   | 7,928,424   |      |
| Embedded  derivatives                                       |   | 4,212,913   |      |
| Convertible  debentures and embedded derivatives            |   | 12,141,337  |      |
| Less current portion                                        |   | (7,253,508  | )         |
| Convertible  debentures and embedded derivatives- long term |   | $           | 4,887,829 |   |
|                                                             |        |             |           |  |

 

**5.**                 WARRANTDERIVATIVES

As described more fully in Note 4 — ConvertibleDebentures - 2005, the provisions of our convertible debenture financingcompleted in September 2005 permit the Company to make its monthlyredemption in shares rather than cash upon satisfaction of certain conditions.Under the terms of the debenture agreement, the price per share is variabledependent upon the actual closing price of the Company’s common stock.Accordingly, the total number of shares to retire outstanding principal isvariable and the Company can not be assured that there are adequate authorizedshares to settle all contractual obligations under the debenture agreement, andother option and warrant agreements outstanding.

Accordingly, in accordance with the provisions of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to andPotentially Settled in a Company’s Own Stock” the Company has reviewed allinstruments previously recorded as permanent equity under EITF 00-19which are described in detail in Note 7—Stockholders’ Equity Transactions.As of September 15, 2005, the closing date of the convertible debenturefinancing, a $25,600,000 increase in the fair value of instruments previouslyrecorded as permanent equity with a value of zero was recorded based upon fairvalues computed under a Black Scholes model with the following assumptions:(1) dividend yield of 0%, (2) expected volatility of 64%,(3) risk-free interest rate of approximately 3.90%, and (4) expectedlife and exercise prices consistent with each individual instrument.

The accumulated fair value of these and otherinstruments at September 15, 2005 of approximately $27,700,000, after theincrease to fair value described above, was reclassified from equity to WarrantDerivative liability in accordance with the requirements of EITF 00-19.

At September 30, 2006, the fair value of eachinstrument was again computed under a Black Scholes model with the followingassumptions: (1) dividend yield of 0%, (2) expected volatility of173%, (3) risk-free interest rate of approximately 4.81%, and(4) expected life and exercise prices consistent with each individualinstrument. These calculations resulted in an

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aggregate value of derivative instruments ofapproximately $8,300,000. As a result, for the three and nine months endedSeptember 30, 2006 the Company recorded approximately $2,000,000 as a debit and$16,700,000 as a credit to Adjustment to Fair Value of Derivatives respectively.

Of the total proceeds from the issuance of the 2005 debenturesas more fully described in Note 4, approximately $5,700,000 was initiallyallocated to the freestanding warrants associated with the debentures basedupon the fair value of the Warrants. The assumptions used in the Black Scholesmodel for determining the initial fair value of the warrants were as follows: (1) dividendyield of 0%; (2) expected volatility of 64%, (3) risk-free interest rate of3.99%, and (4) expected life of 5 years. In accordance with FAS 133 “Accountingfor Derivative Instruments and Hedging Activities”, EITF 00-19 “Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in aCompany’s Own Stock” and EITF 05-04 “The Effect of a Liquidated Damages Clauseon a Freestanding Financial Instrument Subject to EITF Issue No. 00-19”, theamounts allocated to the warrant represent a derivative liability that has beenrecorded in the accompanying balance sheets.

Of the total proceeds from the issuance of the 2006debentures as more fully described in Note 3, approximately $3,000,000 wasinitially allocated to the freestanding warrants associated with the debenturesbased upon the fair value of the Warrants. The assumptions used in the BlackScholes model for determining the initial fair value of the warrants were asfollows: (1) dividend yield of 0%; (2) expected volatility of 173%, (3)risk-free interest rate of 4.75%, and (4) expected life of 5 years. Inaccordance with FAS 133 “Accounting for Derivative Instruments and HedgingActivities”, EITF 00-19 “Accounting for Derivative Financial InstrumentsIndexed to and Potentially Settled in a Company’s Own Stock” and EITF 05-04“The Effect of a Liquidated Damages Clause on a Freestanding FinancialInstrument Subject to EITF Issue No. 00-19”, the amounts allocated to thewarrant represent a derivative liability that has been recorded in theaccompanying balance sheets.

**The carrying value of outstandingwarrant derivatives from the 2005 debentures were adjusted to their fair valueat August 23, 2006 of approximately $8,000,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%,(3) risk-free interest rate of 4.81%, and (4) expected remaining life of 4.0years. This resulted in an increase in the fair value of the warrant liabilityof approximately $1,500,000 which was recorded through results of operations asa debit to adjustments to fair value of securities. The outstanding derivativesafter the repricing and exercise were then adjusted to their fair value atAugust 24, 2006 of approximately $3,500,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%,(3) risk-free interest rate of 4.81%, and (4) expected remaining life of 4.0years. This resulted in an increase in the fair value of the warrant liabilityof approximately $2,000,000 which was recorded through results of operations asa debit to charges related repricing and issuance of warrants.**

**The carrying value of outstandingwarrant derivatives from the January 2005 Preferred financing were adjusted totheir fair value at August 23, 2006 of approximately $9,400,000 based upon aBlack Scholes calculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 167%, (3) risk-free interest rate of 4.91%, and (4) expectedremaining life of 1.25 years. This resulted in an increase in the fair value ofthe warrant liability of approximately $6,200,000 which was recorded throughresults of operations as a debit to Adjustment to Fair Value of Derivatives. OnAugust 24, 2006, the Company’s Board of Directors agreed to reprice thesewarrants to $0.95 per share and to extend the life of the warrants by one year.The outstanding derivatives after the repricing were then adjusted to their fairvalue at August 24, 2006 of approximately $7,100,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%,(3) risk-free interest rate of 4.91%, and (4) expected remaining life of 2.25years. This resulted in a decrease in the fair value of the warrant liabilityof approximately $200,000 which was recorded through results of operations as acredit to charges related to repricing and issuance of warrants.**

**The fair value of warrantsexercised at August 24, 2006 was recorded as equity in Additional Paid inCapital.  The fair value of replacementwarrants issued to warrant holders who exercised their rights on August 24,2006 , which aggregated approximately $6,900,000, was calculated based upon aBlack Scholes calculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 167%, (3) risk-free interest rate of 4.81%, and (4) expectedremaining life of 5.0 years.**

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** **

**The carrying value of the remaining2005 debenture warrant derivatives at September 30, 2006 has been adjusted toreflect fair value of approximately $1,500,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expected volatility of173%, (3) risk-free interest rate of 4.62%, and (4) expected remaining life of3.75 years. This resulted in an additional decrease in the fair value of thewarrant derivative liability of approximately $2,000,000 which was recordedthrough results of operations as a credit to Adjustment to Fair Value ofDerivatives, bringing the total adjustment to approximately $4,900,000 for thethree months ended September 30, 2006.**

**The carrying value of the replacementwarrant derivatives at September 30, 2006 has been adjusted to reflect “fairvalue” of approximately $2,900,000 based upon a Black Scholes calculation asfollows: (1) dividend yield of 0% (2) expected volatility of 173%, (3)risk-free interest rate of 4.62%, and (4) expected remaining life of 3.75years. This resulted in a decrease in the fair value of the warrant derivative liabilityof approximately $4,000,000 which  wasrecorded as a debit to Adjustment to Fair Value of Derivatives in the resultsof operations for the three months ended September 30, 2006.**

**The carrying value of the January2005 financing  warrant derivatives atSeptember 30, 2006 have been adjusted to reflect fair value of approximately $2,800,000based upon a Black Scholes calculation as follows: (1) dividend yield of 0%,(2) expected volatility of 173%, (3) risk-free interest rate of 4.62%, and (4)expected remaining life of 3.75 years. This resulted in an additional decreasein the fair value of the warrant derivative liability of approximately $4,300,000which was recorded through results of operations as a credit to Adjustment toFair Value of Derivatives.**

**6.             ADJUSTMENTSTO FAIR VALUE OF DERIVATIVES**

The Company records adjustments to various derivativeliabilities described more fully in Note 3 – Convertible Debentures 2006, Note4 – Convertible Debentures 2005 and Note 5 – Warrant Derivatives.  As more fully described in Note 3, theCompany entered into a Securities Purchase Agreement on September 6, 2006, andrepriced certain warrant derivatives as described in Note 5 which resulted inadjustments to fair value of derivatives.

**                The following table summarizesthe components of the Adjustment to Fair Value of Derivatives which wererecorded as charges to results of operations in the quarter ended September 30,2006.  The table summarizes by categoryof derivative liability the impact from market changes during the quarter,impact of additional investments and repricing and exercise of certain warrants.**
| ** **                                      | ** ** | **Impact of**             | ** ** | **“Market”** | ** ** | ** **                     | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **Additional Investment** | ** ** | **Fair Value**    | ** ** | **Total Fair Value** | ** ** |
| ** **                                      | ** ** | **9.6.06**                     | ** ** | **Adjustment**         | ** ** | **Adjustment**                 | ** ** |
|                                            |       |                           |       |                   |       |                           |       |
| PIPE Hybrid  instrument September, 2006    |       | $                              | —     |                   | $          | (2,510,466                     | )          | $ | (2,510,466 | ) |
|                                            |       |                           |       |                   |       |                           |       |
| Embedded PIPE  derivatives September, 2005 |       | (18,281                        | )          | 233,042                |       | 214,761                        |       |
|                                            |       |                           |       |                   |       |                           |       |
| Embedded  derivatives - NP Other                |       | (128,216                       | )          | (2,930                 | )          | (131,146                       | )          |
|                                            |       |                           |       |                   |       |                           |       |
| Warrants PIPE September, 2005              |       | —                         |       | 4,858,960              |       | 4,858,960                      |       |
|                                            |       |                           |       |                   |       |                           |       |
| Other Warrant  derivatives                      |       | 2,213,326                      |       | 429,952                |       | 2,643,278                      |       |
|                                            |       | $                              | 2,066,829  |                   | $          | 3,008,558                      |       | $ | 5,075,387 |   |

 

 

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** **

**7.**                 STOCKHOLDERS’EQUITY TRANSACTIONS

We are authorized to issue two classes of capitalstock, to be designated, respectively, Preferred Stock and Common Stock. As ofSeptember 30, 2006, the total number of shares of Preferred Stock we areauthorized to issue is 50,000,000, par value $0.001 per share. As ofSeptember 30, 2006, the total number of shares of Common Stock we areauthorized to issue is 100,000,000, par value $0.001 per share. We had noPreferred Stock outstanding as of September 30, 2006. We had 33,414,516 sharesof Common Stock outstanding as of September 30, 2006.

In August 2006, the Company issued 780,000 sharesof Common Stock to employees. These shares are fully vested at issuance and arevalued at fair market price on date of grant of $0.28.

In August 2006, the Company issued 1,050,000 fullyvested warrants to purchase common stock at $2.54 per share with a term ofthree years in connection with consulting services provided during the quarter.The warrants were valued at approximately $174,000 using the Black Scholespricing model with the following assumptions: (1) dividend yield of 0%,(2) expected volatility of 167%, (3) risk-free interest rate of4.80%, and (4) expected life of 3.0 years. This warrant is classified as awarrant derivative.

In July 2006, the Company issued 44,216 fully vested sharesof Common Stock to Alan Shapiro in consideration for service on the Company’sBoard of Directors and Audit Committee. These shares are valued at market priceon date of grant.

In April 2006, the Company issued 320,000 fullyvested warrants to purchase common stock at $2.54 per share with a term of fiveyears in connection with consulting services provided during the quarter. Thewarrants were valued at approximately $82,000 using the Black Scholes pricingmodel with the following assumptions: (1) dividend yield of 0%,(2) expected volatility of 78%, (3) risk-free interest rate of 5.10%,and (4) expected life of 5.0 years. This warrant is classified as awarrant derivative.

In March 2006, the Company issued 250,000 fullyvested warrants to purchase common stock at $2.54 per share with a term ofthree and a half years in connection with consulting services provided duringthe quarter. The warrants were valued at $156,894, using the Black Scholespricing model with the following assumptions: (1) dividend yield of 0%,(2) expected volatility of 74%, (3) risk-free interest rate of 4.82%,and (4) expected life of 3.5 years. This warrant is classified as awarrant derivative.

**8.**                 OPTIONSOUTSTANDING

**Stock Plans**

** **

On August 12, 2004, ACT's Board of Directorsapproved the establishment of the 2004 Stock Option Plan (the "*2004 Stock Plan"*). Stockholderapproval was received on December 13, 2004. The total number of commonshares available for grant and issuance under the plan may not exceed 2,800,000shares, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by the Boardof Directors or a committee established by the Board of Directors. AtSeptember 30, 2006, ACT had granted 2,604,000 common share purchaseoptions under the plan.

On December 13, 2004, ACT's Board of Directorsand stockholders approved the establishment of the 2004 Stock Option Plan II(the "*2004 Stock Plan II*").The total number of common shares available for grant and issuance under theplan may not exceed 1,301,161 shares, subject to adjustment in the event ofcertain recapitalizations, reorganizations and similar transactions. Commonstock purchase options may be exercisable by the payment of cash or by othermeans as authorized by the Board of Directors or a committee established by theBoard of Directors. At September 30, 2006, ACT had granted 1,301,161common share purchase options under the plan.

14

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On January 31, 2005, the Company's Board ofDirectors approved the establishment of the 2005 Stock Incentive Plan (the"2005 Plan"), subject to approval of our shareholders. The totalnumber of common shares available for grant and issuance under the plan may notexceed 9 million shares, plus an annual increase on the first day of eachof the Company's fiscal years beginning in 2006 equal to 5% of the number ofshares of our common stock outstanding on the last day of the immediatelypreceding fiscal year, subject to adjustment in the event of certainrecapitalizations, reorganizations and similar transactions. Common stockpurchase options may be exercisable by the payment of cash or by other means asauthorized by the Board of Directors or a committee established by the Board ofDirectors.

Pursuant to the 2005 Plan, on August 18,2006, the term of existing common stock purchase options to an employee waschanged, resulting in a remeasurement of the fair value of those options. Theoptions granted have an exercise price of $0.85 and $2.20 per share, the marketprice of the Company’s stock on the date of grant. The fair value of theoptions was estimated at approximately $39,000 using the Black Scholes optionpricing model. The assumptions used in the Black Scholes model are as follows:(1) dividend yield of 0%; (2) expected volatility of 93%,(3) risk-free interest rate of 4.59%, and (4) expected life of6 years. The fair value was treated in accordance with FAS 123(R) andis being amortized over a period of four years. Since the Company vests optionson the graded method, the fair value is amortized on a straight line basiswhich approximates the vesting schedule.

Pursuant to the 2005 Plan, on July 11, 2006, wegranted 90,000 common stock purchase options to employees and directors. Theoptions granted have an exercise price of $0.35 per share, the market price ofthe Company's stock on the date of grant. Employee options vest monthly over aperiod of  four years and directoroptions were fully vested upon issue. The fair value of the options wasestimated at $18,128 using the Black Scholes option pricing model. Theassumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%, (2) expected volatility of 172%, (3) risk-free interestrate of 5.10%, and (4) expected life of 4 years. The fair value wastreated in accordance with FAS 123(R) and is being amortized over a periodof four years. Since the Company vests options on the graded method, the fairvalue is amortized on a straight line basis which approximates the vestingschedule.

Pursuant to the 2005 Plan, on April 20, 2006, wegranted 235,000 common stock purchase options to employees and directors. Theoptions granted have an exercise price of $1.35 per share, the market price ofthe Company's stock on the date of grant. Employee options vest monthly over aperiod of four years and director options were fully vested upon issue. Thefair value of the options was estimated at $89,343 using the Black Scholesoption pricing model. The assumptions used in the Black Scholes model are asfollows: (1) dividend yield of 0%, (2) expected volatility of 78%,(3) risk-free interest rate of 5.10%, and (4) expected life of6 years. The fair value was treated in accordance with FAS 123(R) andis being amortized over a period of four years. Since the Company vests optionson the graded method, the fair value is amortized on a straight line basiswhich approximates the vesting schedule.

Pursuant to the 2005 Plan, on January 26, 2006,we granted 230,000 common stock purchase options to employees and directors.The options granted have an exercise price of $2.04 per share, the market priceof the Company's stock on the date of grant. Employee options vest monthly overa period of four years and director options were fully vested upon issue. Thefair value of the options was estimated at $314,328 using the Black Scholesoption pricing model. The assumptions used in the Black Scholes model are as follows:(1) dividend yield of 0%, (2) expected volatility of 74%,(3) risk-free interest rate of 4.38%, and (4) expected life of6 years. The fair value was treated in accordance with FAS 123(R) andis being amortized over a period of four years. Since the Company vests optionson the graded method, the fair value is amortized on a straight line basiswhich approximates the vesting schedule.

The assumptionsused in the Black Scholes models referred to above are based upon the followingdata: (1) Expected dividends on the underlying shares over the remainingterm of the option are based upon historical dividend data. (2) Theexpected volatility of the price of the underlying shares over the expectedterm of the option is based upon historical share price data. (3) Theexpected term of the option is estimated by considering the contractual term ofthe option, the vesting period of the option, the employees' expected exercisebehavior and the post-vesting employee turnover rate.
| ** **                        | ** ** | ** **         | ** ** | ** **             | ** ** | ** **         | ** **  | **Weighted** | ** ** | ** **   | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------------|------------|--------------------|-------------|--------------|------------|--------------|------------|
| ** **                        | ** ** | **Shares**         | ** ** | ** **             | ** ** | ** **         | ** **  | **Average**  | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | **Available**      | ** ** | **Stock Options** | ** ** | **Price Per** | ** **  | **Exercise** | ** ** | **Average**  | ** ** |
| ** **                        | ** ** | **For Grant** | ** ** | **Outstanding**        | ** ** | **Share**          | ** **  | **Price**    | ** ** | **Life**     | ** ** |
| Balance at  December 31, 2005     |       | 285,269            |       | 12,703,809             |       | $                  | 0.05-$2.48  |         | $          | 0.76         |       | 8.7 years |   |
| Annual increase  pursuant to plan |       | 1,172,035          |       | —                 |       | —             |        | —       |       | —       |       |
| Options granted                   |       | (230,000           | )          | 230,000                |       | $                  | 2.04        |         | $          | 2.04         |       | 9.0 years |   |
| Options granted                   |       | (235,000           | )          | 235,000                |       | $                  | 0.65        |         | $          | 0.65         |       | 9.0 years |   |
| Options granted                   |       | (90,000            | )          | 90,000                 |       | $                  | 0.35        |         | $          | 0.35         |       | 10.0 years |   |
| Options  exercised                |       | —             |       | (20,000                | )          | $                  | 0.05        |         | $          | 0.05         |       | — |   |
| Options  exercised                |       | —             |       | (6,000                 | )          | $                  | 0.85        |         | $          | 0.85         |       | — |   |
| Options  forfeited                |       | 415,833            |       | (415,833               | )          | $                  | .85 - $2.20 |         | $          | 1.50         |       | 9.0 years |   |
| Stock awards                      |       | (780,000           | )          | 780,000                |       | —             |        | —       |       | —       |       |
| Balance at  September 30, 2006    |       | 538,137            |       | 13,596,976             |       | $                  | 0.05-$2.48  |         | $          | 0.71         |       | 8.2 years |   |

 

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Aggregate option activity for the 2004 and 2005 stockoption plans is as follows:

As of September 30, 2006 and December 31,2005, there were 6,525,004 and 6,320,961 exercisable options outstanding at aweighted average exercise price per share of $0.61 and $0.57, respectively, andwith a weighted average life of 8.40 years and 9.02 years respectively. Duringthe period, 415,833 options were forfeited. Options exercised during the periodhad no intrinsic value. The aggregate intrinsic value of all options vested andexpected to vest is approximately $1.3 million. All fully vested optionsin the Company are exercisable.

During the period, 415,833 options were forfeited.

Options exercised during the period had no intrinsicvalue. The aggregate intrinsic value of all options vested and expected to vestis approximately $1.3 million. All fully vested options in the Company areexercisable.

The fair value of all options vested during the yearended December 2005 and the nine months ended September 30, 2006 was$505,180 and $452,319 respectively.

The followingtable illustrates the effect on net income and earnings per share for theperiod ended September 30, 2005 if the Company had applied the fair valuerecognition provisions of FAS 123 to options granted under the company'sstock option plans in all periods presented. For purposes of this pro formadisclosure, the value of the options is estimated using a Black Scholescalculation and amortized to expense over the options' vesting periods.
| ** **                                      | ** ** | **For the Three  Months Ended  September 30, 2005** | ** ** | **For the Nine  Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Net loss as  reported                           |       | $                                                                            | (2,310,607 | )                                                                           | $          | (5,951,954 | ) |
| Current period  expense calculated under APB 25 |       | —                                                                       |       | —                                                                      |       |
| Stock  compensation calculated under FAS 123    |       | (341,107                                                                     | )          | (416,046                                                                    | )          |
| Pro forma net  loss                             |       | $                                                                            | (2,651,714 | )                                                                           | $          | (6,368,000 | ) |
| Basic and  diluted historical loss per share    |       | $                                                                            | (0.10      | )                                                                           | $          | (0.26 | ) |
| Pro forma basic and  diluted loss per share     |       | $                                                                            | (0.11      | )                                                                           | $          | (0.27 | ) |

 

The above pro forma disclosures are provided for 2005because employee stock options were not accounted for using the fair-valuemethod during that period.

For the three and nine months ended September 30,2006, a charge of approximately $46,000 and $133,000 respectively was recordedthrough results of operations as Research and Development expense related toshare based compensation. For the three and nine months endedSeptember 30, 2006, a charge of approximately $30,000 and $128,000respectively was recorded through results of operations as General andAdministrative expense related to share based 

16

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compensation. These amounts were calculated using apre-vesting forfeiture rate of 13%, based on historical employee turnoverand forfeiture data.

A summary of thestatus of unvested employee stock options as of September 30, 2006 andchanges during the period then ended, is presented below:
| ** **                      | ** ** | **Options** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|---------------------------------|------------|-------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at  December 31, 2005  |       | 5,489,041   |       | $                                                                       | 0.19       |   |
| Granted                         |       | 555,000     |       | $                                                                       | 0.75       |   |
| Vested                          |       | (1,778,207  | )          | $                                                                       | 0.25       |   |
| Unvested at September 30,  2006 |       | 4,265,834   |       | $                                                                       | 0.24       |   |

 

As of September 30, 2006, the total remainingunrecognized compensation cost related to unvested stock options amounted to$1.0 million, which will be amortized over the weighted-averageremaining requisite service period of four years.

**9.**                 ACT GROUPSETTLEMENT

On September 14, 2005, we entered into aSettlement Agreement (“Settlement Agreement”) with Gary D. Aronson and John S.Gorton (“Plaintiffs”) and our majority shareholder, A.C.T. Group, Inc., aDelaware corporation that has since filed a certificate of dissolution in thestate of Delaware (“ACT Group”), Advanced Cell, Inc., a DelawareCorporation, Michael D. West, Gunnar L. Engstrom, William M. Caldwell, IV,Anthem Venture Partners and Greg Bonfiglio (referred to collectively with theCompany as the “Defendants”). The Settlement Agreement resolved certaindisputes relating to the litigation entitled *Gary D.Aronson and John Gorton v. A.C.T. Group, Inc., Advanced CellTechnology, Inc., Michael D. West, and Gunnar L. Engstrom*whichwas pending in Commonwealth of Massachusetts Superior Court, Worcester, C.A.No. 040523B and two companion Contempt Complaints filed by the Plaintiffsagainst certain of the Defendants, including the Company. The SettlementAgreement extinguished in full ACT Group’s obligations and indebtedness toPlaintiffs, and Plaintiffs dismissed pending claims and actions.

We analyzed the $600,000 of convertible promissorynotes payable and related warrants issued by the Company in connection withthis settlement, and determined that the warrants should be recorded as freestanding warrant derivative liabilities, and the conversion option andanti-dilution provisions represent embedded derivative instruments under theprovisions of FAS 133, “Accounting for Derivative Instruments and HedgingActivities”. Accordingly, we separately valued these instruments and recordeddiscounts offsetting Notes Payable—Other. 

In August 2006, we repaid in full the convertiblepromissory notes payable. This cash payment, along with accrued interest andcosts, resulted in payment in full of the outstanding notes payable balancesand in a loss on extinguishment of approximately $263,000. As a result of repaying in full the outstandingnotes payable, the fair value of the embedded derivative for the conversionoption of approximately $14,000 was charged to Adjustment to Fair Value ofDerivatives.

In September 2006, the Company received notice ofexercise of the warrants issued as part of the Settlement Agreement notedabove. In accordance with anti-dilution provisions in the warrant and theissuance of 2006 convertible debentures described in Note 3, the exerciseresulted in issuance of approximately 3,200,000 shares of common stock as morefully described in Note 13 – Subsequent Events. The warrants were adjusted totheir fair value at September 5, 2006 of approximately $185,000 based upon aBlack Scholes calculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 175%, (3) risk-free interest rate of 4.71%, and (4) expectedremaining life of 2.6 years. This resulted in an increase in the fair value ofthe warrant liability of approximately $18,000 which was recorded throughresults of operations as a debit to Adjustment to Fair Value of Derivatives. Uponreceipt of notice of exercise of the warrants, the warrant liability wasextinguished and a liability was recorded to recognize the stock due to theholders of the warrants. As explained below in Note 13—Subsequent Events,the stock was delivered to the holders of these warrants on October 3,2006 and the liability was then taken to equity. 

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The fair value of the shares issued is recorded inaccrued expenses and will be recorded as equity in October 2006 after shareshave been issued. The embedded derivatives for anti-dilution protection were adjustedto their “fair value” at September 5, 2006 of approximately $114,000 based upona Binomial Pricing Model. This resulted in an increase in the fair value of thederivative value of approximately $18,000 which was recorded through results ofoperations as a debit to Adjustment to Fair Value of Derivatives. The embeddedderivatives for anti-dilution proctection were adjusted to their “fair value”at September 5, 2006 of $0 based upon a Binomial Pricing Option.  This resulted in a decrease in the fair valueof the derivative value of approximately $114,000 which was recorded throughresults of operations as a credit to Adjustment to Fair Value of Derivatives.

**10.**                               LEGAL PROCEEDINGS

University of Massachusetts and Advanced CellTechnology, Inc. v. Roslin Institute (Edinburgh), Geron Corporation andExeter Life Sciences, Inc. , U.S. District Court for theDistrict of Columbia. We filed an action on February 18, 2005 in the U.S.District Court for the District of Columbia. We brought this action under 35U.S.C. 146 to reverse the decision of the Board of Patent Appeals andInterferences regarding a patent to a method of cloning non-human animals. Thepatent, U.S. Patent No. 5,945,577, is licensed by the University ofMassachusetts exclusively to us.

University of Massachusetts and Advanced CellTechnology, Inc. v. Roslin Institute (Edinburgh), Geron Corporation andExeter Life Sciences, Inc. , U.S. District Court for theDistrict of Columbia. We filed an action on April 7, 2005 in the U.S.District Court for the District of Columbia. We brought this action under 35U.S.C. 146 to reverse the decision of the Board of Patent Appeals andInterferences regarding a patent to a method of creating embryonic stem cells.The patent, U.S. Patent No. 6,235,970, is licensed by the University ofMassachusetts exclusively to us. The parties have engaged in discovery and areawaiting a ruling from the court on the scope of permissible discovery. Theparties are actively engaged in settlement discussions. Adverse determinationsin this proceeding would likely have a materially adverse effect on ourbusiness.

On August  30, 2006, the Company entered into aLicense and Settlement Agreement between the Company, the University ofMassachusetts (the “University”) and Start Licensing, Inc. (“Start”) relatingto the settlement of the patent interference actions most recently described above(“Geron-Related Proceedings”).  The terms of the License and SettlementAgreement include an initial payment to the Company of $500,000 and milestonepayments to the Company of up to $750,000.  In addition, Start, GeronCorporation and Roslin Institute (“Roslin”) each agree not to sue the Companyunder certain patent applications owned by Roslin.  In exchange, theCompany and the University agreed to dismiss their appeal in the Geron-RelatedProceedings with prejudice, transfer control of related University patents toStart and pay certain legal fees. Under the terms of the settlement agreement,the Company retained its rights under the University patents in the humanfield.

University of Massachusetts v. James M. Robl andPhillippe Collas**, MassachusettsSuperior Court (Suffolk County). The University of Massachusetts, referred toas UMass, filed a complaint on February 22, 2004 in the Superior Court(Suffolk County) for the Commonwealth of Massachusetts. A decision adverse toUMass in this litigation could have had a materially adverse effect on ourbusiness. The complaint alleged the misappropriation by the defendants ofvaluable inventions in the fields of animal cloning and cell reprogramming,made by the defendants at UMass and with UMass support, that are exclusivelylicensed to ACT by UMass. The complaint included counts for declaratoryjudgment, breach of contract seeking specific performance, injunctive reliefand damages, intentional interference with contract and prospective contractualrelations, conversion, breach of duty, and breach of the covenant of good faithand fair dealing. During 2006, the Company successfully intervened in the litigationto protect its interests.

In order to withdraw its intervention and to settlethe above-referenced litigation, on May 9, 2006, the Company entered intotwo licensing agreements with Kirin Brewery Company, Ltd. and certain of itssubsidiaries, including Kirin SD, Inc. (collectively, “Kirin”). The Companyentered into a non-exclusive, non-royalty bearing and fully paid license withKirin. Pursuant to that license the Company has granted Kirin the use ofspecified intellectual property for use in connection with the development ofpolyclonal antibodies in non-human mammals. Additionally, the Company enteredinto an exclusive license with Kirin. Pursuant to that license, the Company hasobtained exclusive rights from Kirin to important intellectual property that isdirected at methods for the reprogramming of cells for use in connection withthe research, development and sale of therapeutic and diagnostic human cellproducts. The terms of this royalty-bearing license include an initial paymentand royalty payments based upon a percentage of net sales, with minimumroyalties commencing in 2006. As a result of this transaction, the Companyagreed to withdraw its intervention in this case and agreed to a settlement ofthe matters related to this litigation.

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**11.**          COMMITMENTS ANDCONTINGENCIES

We are a party to a license agreement with theUniversity of Massachusetts, as amended from time to time (the “UMassLicense”). Under the UMass License, we were granted certain exclusive rights tolicense and sublicense certain products and services invented as part of thecollaborative effort. The term of the UMass License extends to the expirationof the related patents, currently 2021. We are required to pay royaltiesranging from 2.5% to 4.5% of net sales of licensed products and services, asdefined. Minimum royalties of $45,000 per year must be paid to UMass. For 2005and 2004, we have paid only the minimum royalty required. Additionally, we arerequired to pay sublicense fees of 18% for sublicense income, as defined. Weare required to spend a minimum annual amount of $200,000 on research anddevelopment.

In May 2006 we entered into exclusive andnon-exclusive sublicense agreements with a company whereby we are the licenseeof certain of their technology and intellectual property for a cash payment of$300,000.  The agreement requires we payminimum annual royalties of $25,000 per annum for 2006, $37,500 for 2007 and$50,000 each year thereafter through the term of the agreement.  The initial license fees paid have beencapitalized and will be amortized over the life of the underlying intellectualproperty, estimated to be approximately ten years.

In March 2006 we enteredinto an exclusive sublicense agreement with TranXenoGen, Inc. whereby we arethe exclusive licensee of certain of TranXenoGen’s technology and intellectualproperty. Pursuant to this agreement we issued 163,399 shares of commonstock with a fair value of approximately $239,000 and made a cash paymentduring the quarter of $140,000. We had previously paid $20,000 as an optionpayment related to the TranXenoGen technology. The total value paid for thislicense agreement of $399,000 has been capitalized and will be amortized overthe life of the underlying intellectual property, estimated to be approximatelyseven years.

During 2004, we entered into license agreements withtwo parties, the terms of which provide for the initial payment of the licensefee through an aggregate of six promissory notes totaling $1,400,000. The notesmature as follows: $333,333 on December 1, 2005; $666,667 onDecember 1, 2006; and $400,000 on June 1, 2007. There is no statedinterest rate for $1,000,000 of notes, the remaining $400,000 bear interest at10% per year, but only if the notes are not paid at maturity. Because of theuncertainty of the ultimate collection of the principal amount of the notes,they have not been recorded in the financial statements and will not berecorded until their collectibility is reasonable assured.

The Company entered into a lease for office andlaboratory space in Massachusetts commencing December 2004 and expiring April2010 and for office space in California commencing November 2005 and expiringMay 2008. Annual minimum lease payments are as follows:

| 2006 |   | $       | 272,774 |   |
|------|--------|---------|---------|--------|
| 2007 |   | 568,509 |    |
| 2008 |   | 386,311 |    |
| 2009 |   | 246,146 |    |
| 2010 |   | 83,400  |    |

 

During 2005, the Company entered into a lease forlaboratory equipment commencing November 29, 2005 and expiringMay 31, 2008. Annual minimum lease payments are as follows:

| 2006                                      |   | $       | 43,986 |   |
|-------------------------------------------|--------|---------|--------|--------|
| 2007                                      |   | 87,972  |   |
| 2008                                      |   | 36,655  |   |
|                                      |   | 168,613 |   |
| Imputed interest                          |   | (22,581 | )      |
| Net asset value                           |   | 146,032 |   |
| Less current  portion                     |   | (77,584 | )      |
| Long-term commitment  under capital lease |   | $       | 68,448 |   |

 

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Rent expense recorded in the financial statements forthe nine month periods ended September 30, 2006 and 2005 was approximately$577,000 and $367,000, respectively.

We have entered into employment contracts with certainexecutives and research personnel. The contracts provide for salaries, bonusesand stock option grants, along with other employee benefits. The employmentcontracts generally have no set term and can be terminated by either party.There is a provision for payments of three months to one year of annual salaryas severance if we terminate a contract without cause, along with theacceleration of certain unvested stock option grants.

**12.**          GAIN ON SALE OF ASSET

In May 2006, the Company sold a minority interest itowned in an entity for cash proceeds of approximately $767,000, resulting in aGain on Sale of Asset as the Company had no asset value recorded for itsinvestment. As part of this sale, the Company entered into a series ofagreements that resolved certain legal matters described more fully in Note 10 —Legal Proceedings under Universityof Massachusetts v. James M. Robl and Phillippe Collas and the case was dismissed. 

**13.**          SUBSEQUENT EVENTS

In October and November 2006, the Companymade its monthly redemptions of convertible debentures described in Note 3. Theterms of the agreement provide for payment in cash, or company stock undercertain circumstances. In connection with the October redemption, the Companypaid cash of approximately $470,000 and issued approximately 431,000 shares ofcommon stock. 

At September 30, 2006, approximately 99,000 of theshares related to the October redemption had been preliminarily issued bythe transfer agent in accordance with the terms of the debenture agreement.Such shares are not reflected as issued and outstanding by the company prior tofinalizing share and cash payments in connection with the redemption in October2006. In connection with the November redemption, the Company paid cash ofapproximately $255,000 and issued approximately 727,000 shares.

In October 2006, the Company issued approximately3,200,000 shares due to holders of warrants which were exercised in September2006.

On October 13, 2006 the Company had ashareholders meeting at which shareholders approved increasing the authorizedshare count from 100 million to 500 million shares of common stock.

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**ITEM 2.**   MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION

**OVERVIEW**

This Quarterly Report on Form 10-QSBcontains forward-looking statements that involve risks and uncertainties. Weuse words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,”“strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,”“projects,” “intends,” “plans,” “budgets,” “potential,” “continue” andvariations thereof, and other statements contained in quarterly report, and theexhibits hereto, regarding matters that are not historical facts and areforward-looking statements. Because these statements involve risks anduncertainties, as well as certain assumptions, actual results may differmaterially from those expressed or implied by such forward-looking statements.Factors that could cause actual results to differ materially include, but arenot limited to risks inherent in: our early stage of development, including alack of operating history, lack of profitable operations and the need foradditional capital; the development and commercialization of largely novel andunproven technologies and products; our ability to protect, maintain, anddefend our intellectual property rights: uncertainties regarding our ability toobtain the capital resources needed to continue research and developmentoperations and to conduct research, preclinical development and clinical trialsnecessary for regulatory approvals; uncertainty regarding the outcome ofclinical trials and our overall ability to compete effectively in a highlycomplex, rapidly developing, capital intensive and competitive industry. See“RISK FACTORS THAT MAY AFFECT OUR BUSINESS”**set forth below on page 26 for a more complete discussionof these factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date that they are made.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunctionwith the financial statements and notes thereto included in Part I, Item 1of this Quarterly Report on Form 10-QSB.

We are a biotechnology company focused on developingand commercializing human stem cell technology in the emerging fields ofregenerative medicine and stem cell therapy.

**SIGNIFICANT ACCOUNTING POLICIES**

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses. Note 2 of the Notes to Condensed ConsolidatedFinancial Statements describes the significant accounting policies used in thepreparation of the financial statements. Certain of these significantaccounting policies are considered to be critical accounting policies, asdefined below. We do not believe that there have been significant changes toour accounting policies during the nine months ended September 30, 2006, ascompared to those policies disclosed in the December 31, 2005 financialstatements filed in our Annual Report on Form 10-KSB with the SEC onMarch 31, 2006.

A critical accounting policy is defined as one that isboth material to the presentation of our financial statements and requiresmanagement to make difficult, subjective or complex judgments that could have amaterial effect on our financial condition and results of operations.Specifically, critical accounting estimates have the following attributes: 1)we are required to make assumptions about matters that are highly uncertain atthe time of the estimate; and 2) different estimates we could reasonably haveused, or changes in the estimate that are reasonably likely to occur, wouldhave a material effect on our financial condition or results of operations.

Estimates and assumptions about future events andtheir effects cannot be determined with certainty. We base our estimates onhistorical experience and on various other assumptions believed to beapplicable and reasonable under the circumstances. These estimates may changeas new events occur, as additional information is obtained and as our operatingenvironment changes. These changes have historically been minor and have beenincluded in the financial statements as soon as they became known. Based on acritical assessment of our accounting policies and the underlying judgments anduncertainties affecting the application of those policies, management believesthat our financial statements are fairly stated in accordance with accountingprinciples generally accepted in the United States, and present a meaningfulpresentation of our financial

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condition and results of operations. We believe thefollowing critical accounting policies reflect our more significant estimatesand assumptions used in the preparation of our financial statements:

***Use of Estimates—***Thesefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States and, accordingly, requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.Specifically, our management has estimated the expected economic life and valueof our licensed technology, our net operating loss for tax purposes and ourstock, option and warrant expenses related to compensation to employees anddirectors, consultants and investment banks. Actual results could differ fromthose estimates.

***Fair Value ofFinancial Instruments—***For certain of our financialinstruments, including accounts receivable, accounts payable, accrued expenses,interest payable, bank overdraft, advances payable and notes payable, thecarrying amounts approximate fair value due to their relatively shortmaturities.

***Valuation ofDerivative Instruments***—These financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States and, accordingly, require management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts during the reportingperiods. Specifically, FAS 133, “Accounting for Derivative Instruments andHedging Activities” requires bifurcation of embedded derivative instruments andmeasurement of fair value for accounting purposes. In addition, FAS 155, “Accountingfor Certain Hybrid Financial Instruments” requires measurement of fair valuesof hybrid financial instruments for accounting purposes. In determining theappropriate fair value, the Company uses a variety of valuation techniques includingBlack Scholes models, Binomial Option Pricing models, Standard Put OptionBinomial models and net present value of certain penalty amounts. Derivativeliabilities are adjusted to reflect fair value at each period end, with anyincrease or decrease in the fair value being recorded in results of operationsas Adjustments to Fair Value of Derivatives. In addition, the fair value offreestanding derivative instruments such as warrant derivatives are valuedusing Black Scholes models.

***Cash and Equivalents—***Cash equivalentsare comprised of certain highly liquid investments with maturity of threemonths or less when purchased. We maintain our cash in bank deposit accounts,which at times, may exceed federally insured limits. We have not experiencedany losses in such accounts.

***Equipment—***Werecord our equipment at historical cost. We expense maintenance and repairs asincurred. Depreciation is provided for by the straight-line method over threeto six years.

***RevenueRecognition—***Our revenues are generated from license andresearch agreements with collaborators. Licensing revenue is recognized ratablyover the life of the license. Deferred revenue represents the portion of thelicense and other payments received that has not been earned. Costs associatedwith the license revenue are deferred and recognized over the same term as therevenue. Reimbursements of research expense pursuant to grants are recorded asa reduction of research and development expense once the reimbursements areapproved and the Company is assured of collectibility.

***Intangible andLong-Lived Assets—***We follow SFAS No. 144, “*Accounting for Impairment of Disposal of Long-LivedAssets*”, whichestablished a “primary asset” approach to determine the cash flow estimationperiod for a group of assets and liabilities that represents the unit ofaccounting for a long lived asset to be held and used. Long-lived assets to beheld and used are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. The carrying amount of a long-lived asset is not recoverable if itexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of the asset. Long-lived assets to be disposed of arereported at the lower of carrying amount or fair value less cost to sell.During the period ended September 30, 2006, no impairment losses wererecognized.

***Research andDevelopment Costs—***Research and development costs consistof expenditures for the research and development of patents and technology,which are not capitalizable. Our research and development costs consist mainlyof payroll and payroll related expenses, research supplies and costs incurredin connection with specific research grants.

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***Stock BasedCompensation—***SFAS No. 123, “*Accounting for Stock-Based Compensation*,”establishes and encourages the use of the fair value based method of accountingfor stock-based compensation arrangements under which compensation cost isdetermined using the fair value of stock-based compensation determined as ofthe date of the grant or the date at which the performance of the services iscompleted and is recognized over the periods in which the related services arerendered.

The Company uses the fair value method for equityinstruments granted to non-employees and uses the Black Scholes model formeasuring the fair value. The stock based fair value compensation is determinedas of the date of the grant or the date at which the performance of theservices is completed (measurement date) and is recognized over the periods inwhich the related services are rendered.

At September 30, 2006, the Company has two stock-basedemployee compensation plans, which are described more fully in Note 6. Prior toJanuary 1, 2006, the Company accounted for those plans under therecognition and measurement provisions of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations, as permitted by FASStatement No. 123, Accounting for Stock-Based Compensation. No stock-basedemployee compensation cost was recognized in the Statement of Operations forthe years ended December 31, 2005 or 2004, as all options granted underthose plans had an exercise price equal to the market value of the underlying commonstock on the date of grant.

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of FAS StatementNo. 123(R) Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the nine months ended September 30, 2006includes: (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of FAS 123, and(b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of FAS 123(R). Results for prior periods have notbeen restated.

**RESULTS OF OPERATIONS**

***Revenues***

Revenues for the three and nine months ended September,2006 and 2005 were approximately $129,000, $333,000, $83,000, and $312,000respectively. These amounts relate primarily to license fees and royaltiescollected that are being amortized over the period of the license granted. Thereduction in revenue in current periods was due to decreased revenue levelsfrom licensees’ operations.

***Research andDevelopment Expenses and Grant Reimbursements***

Research and development expenses for the three andnine months ended September 30, 2006 and 2005 were approximately $2,586,000, $7,012,000,$734,000 and $1,668,000, respectively. During the nine months endedSeptember 30, 2006, the Company has significantly increased scientificresearch and has allocated a much greater portion of expenditure and focus onResearch and Development activity than had previously been the case. Additionalexpenditure in this area includes scientific payroll and payroll relatedexpenses, facilities costs and scientific supplies as well as investment in theinfrastructure needed to support this greater scientific activity.

Our research and development expenses consistprimarily of costs associated with basic and pre-clinical research exclusivelyin the field of human stem cell therapies and regenerative medicine, with focuson development of our technologies in cellular reprogramming, reducedcomplexity applications, and stem cell differentiation. These expensesrepresent both pre-clinical development costs and costs associated withnon-clinical support activities such as quality control and regulatoryprocesses. The cost of our research and development personnel is the mostsignificant category of expense; however, we also incur expenses with thirdparties, including license agreements, sponsored research programs andconsulting expenses.

We do not segregate research and development costs byproject because our research is focused exclusively on human stem celltherapies as a unitary field of study. Although we have three principal areasof focus for our research, these areas are completely intertwined and have notyet matured to the point where they are separate and distinct projects. Theintellectual property, scientists and other resources dedicated to theseefforts are not separately allocated to individual projects, but rather areconducting our research on an integrated basis.

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We expect that research and development expenses willcontinue to increase in the foreseeable future as we add personnel, expand ourpre-clinical research, begin clinical trial activities, and increase ourregulatory compliance capabilities. The amount of these increases is difficultto predict due to the uncertainty inherent in the timing and extent of progressin our research programs, and initiation of clinical trials. In addition, theresults from our basic research and pre-clinical trials, as well as the resultsof trials of similar therapeutics under development by others, will influencethe number, size and duration of planned and unplanned trials. As our researchefforts mature, we will continue to review the direction of our research basedon an assessment of the value of possible commercial applications emerging fromthese efforts. Based on this continuing review, we expect to establish discreteresearch programs and evaluate the cost and potential for cash inflows fromcommercializing products, partnering with others in the biotechnology orpharmaceutical industry, or licensing the technologies associated with theseprograms to third parties.

We believe that it is not possible at this stage toprovide a meaningful estimate of the total cost to complete our ongoingprojects and bring any proposed products to market. The use of human embryonicstem cells as a therapy is an emerging area of medicine, and it is not knownwhat clinical trials will be required by the FDA in order to gain marketingapproval. Costs to complete could vary substantially depending upon theprojects selected for development, the number of clinical trials required andthe number of patients needed for each study. It is possible that thecompletion of these studies could be delayed for a variety of reasons,including difficulties in enrolling patients, delays in manufacturing, incompleteor inconsistent data from the pre-clinical or clinical trials, and difficultiesevaluating the trial results. Any delay in completion of a trial would increasethe cost of that trial, which would harm our results of operations. Due tothese uncertainties, we cannot reasonably estimate the size, nature nor timingof the costs to complete, or the amount or timing of the net cash inflows fromour current activities. Until we obtain further relevant pre-clinical andclinical data, we will not be able to estimate our future expenses related tothese programs or when, if ever, and to what extent we will receive cashinflows from resulting products.

Grant reimbursements for the three and nine monthsended September 30, 2006 and 2005 were approximately $6,000, $370,000, $172,000and $597,000, respectively. These amounts represent approved reimbursementspursuant the grant from NIST. This grant expired in May 2006.

***General and Administrative Expenses***

General and administrative expenses for the three and ninemonths ended September 30, 2006 and 2005 were approximately $1,337,000, $5,845,000,$2,331,000 and $5,572,000, respectively. The principal increase in expense inthe nine month period versus the same period last year is a result of additionalsalary costs related to the addition of key personnel and approximately$600,000 of costs incurred by the Company for investor relations relatedexpenses during the current period. Expenses for the three month period versusthe same period last year have decreased primarily as a result of decreasedgeneral and administrative infrastructure costs and legal fees.

***Other Income(Expense)***

Other income (expense) for the three and nine months endedSeptember 30, 2006 and 2005 were approximately ($26,800,000), ($4,100,000), $540,000and $524,000, respectively. The increase in other expense in the three and ninemonths ended September 30, 2006, compared to other income in the prior periods,relates primarily to adjustments to fair value of derivatives related to the ConvertibleDebenture financing and the Charges related to issuance of ConvertibleDebentures. The increase in interest expense in the three and nine months endedSeptember 2006, compared to interest expense in the prior periods relatesprimarily to interest recorded in connection with the convertible debentures.

Fluctuations in the Company’s stock price will resultin large changes to the valuations of the Convertible Debentures related to the2005 and 2006 financings and related derivatives. In the nine months toSeptember 30, 2006, the Company’s stock price has ranged from $0.28 pershare to $1.83 per share, which has resulted in large changes in the value ofthe derivative instruments. These changes are taken to the results of operationsthrough the Adjustments to fair Value of Securities line with resulting largeswings shown in the Other Income (Expense) line.

***Net Loss***

Net loss for the three and nine months ended September30, 2006 and 2005 was approximately ($30,600,000), ($16,500,000), ($2,311,000)and ($5,952,000), respectively. The increase in loss in the current period isthe result of changes to the fair value of derivatives, interest chargesrelated to convertible debentures and charges related to issuance ofConvertible Debentures along with increased general and administrative andresearch and development expenses.

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***Recent AccountingPronouncements***

In September 2006, the Financial Accounting StandardsBoard, or FASB, issued SFAS No. 157, *FairValue Measurements* , or SFAS 157, which provides guidance on how tomeasure assets and liabilities that use fair value. This Statement clarifiesthe principle that fair value should be based on the assumptions marketparticipants would use when pricing an asset or liability and establishes afair value hierarchy that prioritizes the information used to develop thoseassumptions. SFAS 157 will apply whenever another generally accepted accountingprinciple requires, or permits, assets or liabilities to be measure at fairvalue but does not expand the use of fair value to any new circumstances. Thisstatement will also require additional disclosures in both annual and quarterlyreports. SFAS 157 is effective for fiscal years beginning after November 2007,and will be adopted by us beginning January 1, 2008. We are currentlyevaluating the potential impact this statement may have on our financialstatements, but do not believe the impact of adoption will be material.

In September 2006, the SEC staff issued StaffAccounting Bulletin, or SAB, No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements* , or SAB 108 *.* SAB 108 provides guidance on the considerationof the effects of prior year misstatements in quantifying current yearmisstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. SAB 108 is effective for fiscalyears ending after November 15, 2006. We will initially apply theprovisions of SAB 108 in connection with the preparation of our annualfinancial statements for the year ending December 31, 2006. We haveevaluated the potential impact that SAB 108 may have on our financial statementsand do not believe the impact of the application of this guidance will bematerial.

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans* , or SFAS 158. This Statement requirescompanies to recognize in their statement of financial position an asset for aplan’s overfunded status or a liability for a plan’s underfunded status and tomeasure a plan’s assets and its obligations that determine its funded status asof the end of the company’s fiscal year. Additionally, SFAS 158 requirescompanies to recognize changes in the funded status of a defined benefitpostretirement plan in the year that the changes occur and those changes willbe reported in comprehensive income. The provisions of SFAS 158 are effectiveas of the end of fiscal year 2006 and we are currently in the process ofquantifying the impact to the financial statements.

***LIQUIDITY ANDCAPITAL RESOURCES***

We are financing our operations primarily with $8,750,000of proceeds of convertible debentures issued in September, 2006 and describedin our Current Report on Form 8-K filed with the Securities andExchange Commission and above in Note 3, Convertible Debentures 2006, and$4,314,588 of proceeds from warrant exercises as described above in Note 5 –Warrant Derivatives, and $17,750,000 of proceeds of convertible debenturesissued September 15, 2005 and described in our Current Report onForm 8-K filed with the Securities and Exchange Commission onSeptember 19, 2005. To a substantially lesser degree, financing of ouroperations is provided through grant funding, payments received under licenseagreements, and interest earned on cash and cash equivalents.

With the exception of 2002, when we sold certainassets of a subsidiary resulting in a gain for the year, we have incurredsubstantial net losses each year since inception as a result of research anddevelopment and general and administrative expenses in support of ouroperations. We anticipate incurring substantial net losses in the future.

Cash and cash equivalents at September 30, 2006 andDecember 31, 2005 were approximately $13,100,000 and $13,900,000,respectively. The decrease in the current period is primarily the result of cashreceived in for warrant exercises and in connection with issuance ofConvertible debentures, offset by cash utilized in operations, capitalexpenditures, and $600,000 of costs incurred by the Company for investorrelations related expenses in the current period.

Our cash and cash equivalents are limited. We expectto require substantial additional funding. Our future cash requirements willdepend on many factors, including the pace and scope of our research anddevelopment programs, the costs involved in filing, prosecuting, maintainingand enforcing patents and other costs associated with commercializing ourpotential products. We intend to seek additional funding primarily throughpublic or private financing transactions, and, to a lesser degree, newlicensing or scientific collaborations, grants from governmental or otherinstitutions, and other related transactions. If we are unable to raiseadditional funds, we will be forced to either scale back our business effortsor curtail our business activities entirely. We anticipate that our availablecash and expected income will be sufficient to finance most of our currentactivities for at least twelve months from the date of the financialstatements, although certain of these activities and related personnel may needto be reduced. We cannot assure you that public or private financing or grantswill be available on acceptable terms, if at all. Several factors will affectour ability to raise additional funding, including, but not limited to, thevolatility of our Common Stock.

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**RISKFACTORS THAT MAY AFFECT OUR BUSINESS**

*Our business issubject to various risks, included but not limited to those described below.You should carefully consider these factors, together with all the otherinformation disclosed in this Quarterly Report on Form 10-QSB. Anyof these risks could materially adversely affect our business, operatingresults and financial condition.*

**Risks Relating to Our Early Stage of Development**

**We have a limitedoperating history on which potential investors may evaluate our operationsand prospects for profitable operations**.   We have a limited operating history on whicha potential investor may base an evaluation of us and our prospects. If weare unable to begin and sustain profitable operations, investors may losetheir entire investment in us. We are in the pre-clinical stage, and ourprospects must be considered speculative in light of the risks, expenses anddifficulties frequently encountered by companies in their early stages ofdevelopment, particularly in light of the uncertainties relating to the new,competitive and rapidly evolving markets in which we anticipate we willoperate. To attempt to address these risks, we must, among other things,further develop our technologies, products and services, successfully implementour research, development, marketing and commercialization strategies, respondto competitive developments and attract, retain and motivate qualifiedpersonnel. A substantial risk is involved in investing in us because, as anearly stage company,

·                                          wehave fewer resources than an established company,

·                                          ourmanagement may be more likely to make mistakes at such an early stage, and

·                                          wemay be more vulnerable operationally and financially to any mistakes thatmay be made, as well as to external factors beyond our control.

These difficulties are compounded by our heavydependence on emerging and sometimes unproven technologies. In addition, someof our significant potential revenue sources involve ethically sensitive andcontroversial issues which could become the subject of legislation orregulations that could materially restrict our operations and, therefore, harmour financial condition, operating results and prospects for bringing ourinvestors a return on their investment.

**We have a history ofoperating losses, and we cannot assure you that we will achieve future revenuesor operating profits**.   Wehave generated modest revenue to date from our operations. Historically, wehave had net operating losses each year since our inception. We have limitedcurrent potential sources of revenue from license fees and product developmentrevenues, and we cannot assure you that we will be able to develop such revenuesources or that our operations will become profitable, even if we are able tocommercialize our technologies or any products or services developed from thosetechnologies. If we continue to suffer losses as we have in the past, investorsmay not receive any return on their investment and may lose theirentire investment.

Although we have revenues from license fees androyalties, we have no commercially marketable products and no immediate abilityto generate revenue from commercial products, nor any assurance of being ableto develop our technologies for commercial applications. As a result, wemay never be able to operate profitably. We are just beginning to identifyproducts available for pre-clinical trials and may not receive significantrevenues from commercial sales of our products for the next several years, ifat all, although we do generate revenues from licensing activities. We havemarketed only a limited amount of services based on our technologies and havelittle 

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experience in doing so.Our technologies and any potential products or services that wemay develop will require significant additional effort and investmentprior to material commercialization and, in the case of any biomedicalproducts, pre-clinical and clinical testing and regulatory approvals. We cannotassure you that we will be able to develop any such technologies or any productsor services, or that such technologies, products or services will prove to besafe and efficacious in clinical trials, meet applicable regulatory standards,be capable of being produced in commercial quantities at acceptable costs or besuccessfully marketed. For that reason, we may not be able to generaterevenues from commercial production or operate profitably.

We have sold the agricultural portion of our businessin order to finance operations. The agricultural applications of our technologygenerally have a more rapid realization of revenues due to more limitedregulatory requirements and testing. Our ability to generate revenue from anyagricultural applications of our technology is limited to existing licenseroyalties, if any.

**We will requiresubstantial additional funds to continue operating which may not beavailable on acceptable terms, if at all.  **We have losses from operations, negative cash flowsfrom operations and a substantial stockholders’ deficit that raise substantialdoubt about the Company’s ability to continue as a going concern. We do notbelieve that our cash from all sources, including cash, cash equivalents andanticipated revenue stream from licensing fees and sponsored research contractsis sufficient for us to continue operations through June 30, 2007 withoutraising additional financing.

Management continues to evaluate alternatives andsources for additional funding, which may include public or private investors,strategic partners, and grant programs available through specific states orfoundations, although there is no assurance that such sources will result inraising additional capital. Lack of necessary funds may require us to delay,scale back or eliminate some or all of our research and product developmentprograms and/or our capital expenditures, to license our potential products ortechnologies to third parties, to consider business combinations related toongoing business operations, or shut down some, or all, of our operations.

In addition, our cash requirements may varymaterially from those now planned because of results of research anddevelopment, potential relationships with strategic partners, changes in thefocus and direction of our research and development programs, competition,litigation required to protect our technology, technological advances, the costof pre-clinical and clinical testing, the regulatory process of the UnitedStates Food and Drug Administration, or FDA, and foreign regulators, whetherany of our products become approved or the market acceptance of any suchproducts and other factors. Our current cash reserves are not sufficient tofund our operations through the commercialization of our first products orservices.

**We have limitedclinical testing, regulatory, manufacturing, marketing, distribution and salescapabilities which may limit our ability to generate revenues**.   Because of the relatively early stage of ourresearch and development programs, we have not yet invested significantly inclinical testing, regulatory, manufacturing, or in marketing, distribution orproduct sales resources. We cannot assure you that we will be able to develop anysuch resources successfully or as quickly as may be necessary. Theinability to do so may harm our ability to generate revenues or operateprofitably.

**Risks Relating to Competition**

**Our competitionincludes both public and private organizations and collaborations amongacademic institutions and large pharmaceutical companies, most of which havesignificantly greater experience and financial resources than we do.  **The biotechnology and pharmaceutical industries arecharacterized by intense competition. We compete against numerous companies,both domestic and foreign, many of which have substantially greater experienceand financial and other resources than we have. Several such enterprises haveinitiated cell therapy research programs and/or efforts to treat the samediseases targeted by us. Companies such as Geron Corporation, GenzymeCorporation, StemCells, Inc., Aastrom Biosciences, Inc. andViacell, Inc., as well as others, many of which have substantially greaterresources and experience in our fields than we do, are well situated to competewith us effectively. Of course, any of the world’s largest pharmaceuticalcompanies represents a significant actual or potential competitor with vastlygreater resources than ours.

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**These companies hold licenses togenetic selection technologies and other technologies that are competitive withour technologies. These and other competitive enterprises have devoted, andwill continue to devote, substantial resources to the development oftechnologies and products in competition with us.**

Private and public academic and research institutionsalso compete with us in the research and development of human therapeutic oragricultural products. In the past several years, the pharmaceutical industryhas selectively entered into collaborations with both public and privateorganizations to explore the possibilities that stem cell therapiesmay present for substantive breakthroughs in the fight against disease.

In addition, many of our competitors havesignificantly greater experience than we have in the development, pre-clinicaltesting and human clinical trials of biotechnology and pharmaceutical products,in obtaining FDA and other regulatory approvals of such products and inmanufacturing and marketing such products. Accordingly, our competitorsmay succeed in obtaining FDA approval for products more rapidly oreffectively than we can. Our competitors may also be the first to discoverand obtain a valid patent to a particular stem cell which may effectivelyblock all others from doing so. It will be important for us or ourcollaborators to be the first to discover any stem cell that we are seeking todiscover. Failure to be the first could prevent us from commercializing all ofour research and development affected by that discovery. Additionally, if wecommence commercial sales of any products, we will also be competing withrespect to manufacturing efficiency and sales and marketing capabilities, areasin which we have no experience.

The United States is encountering tremendous competitionfrom many foreign countries that are providing an environment more attractivefor stem cell research. The governments of numerous foreign countries areinvesting in stem cell research, providing facilities, personnel and legalenvironments intended to attract biotechnology companies and encourage stemcell research and development of stem cell-related technologies.

These efforts by foreign countries may make itmore difficult to effectively compete in our industry and may generatecompetitors with substantially greater resources than ours.

**Risks Relating to Our Technology**

**We rely on nucleartransfer and embryonic stem cell technologies that we may not be able tosuccessfully develop, which will prevent us from generating revenues, operatingprofitably or providing investors any return on their investment**.   We have concentrated our research on ournuclear transfer and embryonic stem cell technologies, and our ability tooperate profitably will depend on being able to successfully develop thesetechnologies for human applications. These are emerging technologies with, asyet, limited human applications. We cannot guarantee that we will be able tosuccessfully develop our nuclear transfer and embryonic stem cell technologiesor that such development will result in products or services with anysignificant commercial utility. We anticipate that the commercial sale of suchproducts or services, and royalty/licensing fees related to our technology,would be our primary sources of revenues. If we are unable to develop ourtechnologies, investors will likely lose their entire investment in us.

The outcome of pre-clinical, clinical and producttesting of our products is uncertain, and if we are unable to satisfactorilycomplete such testing, or if such testing yields unsatisfactory results, wewill be unable to commercially produce our proposed products. Before obtainingregulatory approvals for the commercial sale of any potential human products,our products will be subjected to extensive pre-clinical and clinical testingto demonstrate their safety and efficacy in humans. We cannot assure you thatthe clinical trials of our products, or those of our licensees orcollaborators, will demonstrate the safety and efficacy of such products atall, or to the extent necessary to obtain appropriate regulatory approvals, orthat the testing of such products will be completed in a timely manner, if atall, or without significant increases in costs, program delays or both, all ofwhich could harm our ability to generate revenues. In addition, our prospectiveproducts may not prove to be more effective for treating disease or injurythan current therapies. Accordingly, we may have to delay or abandonefforts to research, develop or obtain regulatory approval to market ourprospective products. Many companies involved in biotechnology research anddevelopment have suffered significant setbacks in advanced clinical trials,even after promising results in earlier trials. The failure to adequatelydemonstrate the safety and efficacy of a therapeutic product under development coulddelay or prevent regulatory approval of the product and could harm our abilityto generate revenues, operate profitably or produce any return on an investmentin us.

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While the marketing of cloned or transgenic animalsdoes not currently require regulatory approval, such approval may berequired in the future. We cannot assure you that we would obtain suchapprovals or that our licensees’ products would be accepted in the marketplace.This lack of approval could reduce or preclude any royalty revenues we might receivefrom our licensees in that field.

**We may not beable to commercially develop our technologies and proposed product lines,which, in turn, would significantly harm our ability to earn revenues andresult in a loss of investment**.   Ourability to commercially develop our technologies will be dictated in largepart by forces outside our control which cannot be predicted, including,but not limited to, general economic conditions, the success of our researchand pre-clinical and field testing, the availability of collaborative partnersto finance our work in pursuing applications of nuclear transfer technology andtechnological or other developments in the biomedical field which, due toefficiencies, technological breakthroughs or greater acceptance in the biomedicalindustry, may render one or more areas of commercialization moreattractive, obsolete or competitively unattractive. It is possible that one ormore areas of commercialization will not be pursued at all if a collaborativepartner or entity willing to fund research and development cannot be located.Our decisions regarding the ultimate products and/or services we pursue couldhave a significant adverse affect on our ability to earn revenue if wemisinterpret trends, underestimate development costs and/or pursue wrongproducts or services. Any of these factors either alone or in concert couldmaterially harm our ability to earn revenues and could result in a loss of anyinvestment in us.

**If we are unableto keep up with rapid technological changes in our field or competeeffectively, we will be unable to operate profitably.  **We are engaged in activities in the biotechnologyfield, which is characterized by extensive research efforts and rapidtechnological progress. If we fail to anticipate or respond adequately totechnological developments, our ability to operate profitably could suffer. Wecannot assure you that research and discoveries by other biotechnology,agricultural, pharmaceutical or other companies will not render ourtechnologies or potential products or services uneconomical or result inproducts superior to those we develop or that any technologies, products orservices we develop will be preferred to any existing or newly-developedtechnologies, products or services.

**We may not be able toprotect our proprietary technology, which could harm our ability to operateprofitably**.   The biotechnology andpharmaceutical industries place considerable importance on obtaining patent andtrade secret protection for new technologies, products and processes. Oursuccess will depend, to a substantial degree, on our ability to obtain andenforce patent protection for our products, preserve any trade secrets andoperate without infringing the proprietary rights of others. We cannot assureyou that:

·                                          wewill succeed in obtaining any patents in a timely manner or at all, or that thebreadth or degree of protection of any such patents will protect our interests,

·                                          theuse of our technology will not infringe on the proprietary rights of others,

·                                          patentapplications relating to our potential products or technologies will result inthe issuance of any patents or that, if issued, such patents will affordadequate protection to us or not be challenged invalidated or infringed, and

·                                          patentswill not issue to other parties, which may be infringed by our potentialproducts or technologies.

We are aware of certain patents that have been grantedto others and certain patent applications that have been filed by others withrespect to nuclear transfer technologies. The fields in which we operate havebeen characterized by significant efforts by competitors to establish dominantor blocking patent rights to gain a competitive advantage, and by considerabledifferences of opinion as to the value and legal legitimacy of competitors’purported patent rights and the technologies they actually utilize in theirbusinesses.

**Our business is highlydependent upon maintaining licenses with respect to key technology**.   Several of the key patents we utilize are licensedto us by third parties. These licenses are subject to termination under certaincircumstances (including, for example, our failure to make minimum royaltypayments or to timely achieve development and commercialization benchmarks).The loss of any of such licenses, or the conversion of such licenses tonon-exclusive licenses, could harm our operations and/or enhance the prospectsof our competitors.

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**Certain of these licenses alsocontain restrictions, such as limitations on our ability to grant sublicensesthat could materially interfere with our ability to generate revenue throughthe licensing or sale to third parties of important and valuable technologiesthat we have, for strategic reasons, elected not to pursue directly. Thepossibility exists that in the future we will require further licenses tocomplete and/or commercialize our proposed products. We cannot assure you thatwe will be able to acquire any such licenses on a commercially viable basis.**

**We may not be able toadequately protect against piracy of intellectual property in foreignjurisdictions.  **Considerableresearch in the areas of stem cells, cell therapeutics and regenerativemedicine is being performed in countries outside of the United States, and anumber of our competitors are located in those countries. The laws protectingintellectual property in some of those countries may not provideprotection for our trade secrets and intellectual property adequate to preventour competitors from misappropriating our trade secrets or intellectualproperty. If our trade secrets or intellectual property are misappropriated inthose countries, we may be without adequate remedies to address the issue.

**Certain of our technology isnot protectable by patent**.   Certainparts of our know-how and technology are not patentable. To protect ourproprietary position in such know-how and technology, we intend to require allemployees, consultants, advisors and collaborators to enter intoconfidentiality and invention ownership agreements with us. We cannot assureyou, however, that these agreements will provide meaningful protection for ourtrade secrets, know-how or other proprietary information in the event of anyunauthorized use or disclosure. Further, in the absence of patent protection,competitors who independently develop substantially equivalent technologymay harm our business.

**Patentlitigation presents an ongoing threat to our business with respect to bothoutcomes and costs.**   We have previously beeninvolved in patent interference litigation, and it is possible that furtherlitigation over patent matters with one or more competitors could arise. Wecould incur substantial litigation or interference costs in defending ourselvesagainst suits brought against us or in suits in which we may assert our patentsagainst others. If the outcome of any such litigation is unfavorable, ourbusiness could be materially adversely affected. To determine the priority ofinventions, we may also have to participate in interference proceedingsdeclared by the United States Patent and Trademark Office, which could resultin substantial cost to us. Without additional capital, we may not have theresources to adequately defend or pursue this litigation.

**Risks Relating to the September 2005 andSeptember 2006 Financings**

** **

**If weare required for any reason to repay our outstanding debentures we would berequired to deplete our working capital, if available, or raise additionalfunds. Our failure to repay the convertible debentures, if required, couldresult in legal action against us, which could require the sale of substantialassets.**   We have outstanding, as ofSeptember 6, 2006, $25,897,208 aggregate original principal amount ofconvertible debentures with an original issue discount of 20.3187%. We arerequired to redeem on a monthly basis, by payment with cash or with shares ofour common stock, 1/30th of the aggregate original principal amount of thedebentures. Unless waived by the holders of the debentures, in order to redeemwith shares of our common stock we must satisfy certain conditions which haveyet to be satisfied, including such conditions as the listing of our shares ofcommon stock on either the NASDAQ National Market, the NASDAQ Small Cap Market,or the American Stock Exchange. These monthly payments will impact the amountof working capital available to us. The Debentures issued in September 2005financing (referred to as the 2005 Debentures) are due and payable onSeptember 14, 2008, unless sooner converted into shares of our commonstock, and the Debentures issued in September 2006 financing (referred to asthe 2006 Debentures) are due and payable on August 30, 2009, unless soonerconverted into shares of our common stock. Any event of default could requirethe early repayment of the convertible debentures, including the accruing ofinterest on the outstanding principal balance of the debentures if the defaultis not cured with the specified grace period. We anticipate that the fullamount of the convertible debentures will be converted into shares of ourcommon stock, in accordance with the terms of the convertible debentures. If,prior to the maturity date, we are required to repay the convertible debenturesin full, we would be required to use our limited working capital and raiseadditional funds. If we were unable to repay the notes when required, thedebenture holders could commence legal action against us to recover the amountsdue. Any such action could require us to curtail or cease operations.

**There are alarge number of shares underlying our convertible debentures in full, andwarrants that are registered and available for sale and the sale of theseshares may depress the market price of our common stock. As ofSeptember 6, 2006, we had:**

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certainoutstanding 2005 Debentures that may be converted into an estimated 3,274,608shares of common stock based on a conversion price of $0.95, and

 

certainoutstanding 2005 Debentures that may be converted into an estimated 5,132,645shares of common stock based on a conversion price of $2.30, and

 

outstanding2005 Warrants to purchase 2,716,734 shares of common stock with an exerciseprice of $0.95 that were issued in connection with the sale of the 2005Debentures, and

 

outstanding2006 Debentures that may be converted into an estimated 38,129,340 shares ofcommon stock based on a conversion price of $0.288, and

 

outstanding2006 Warrants to purchase 23,640,191 shares of common stock with an exerciseprice of $0.3168 that were issued in connection with the sale of the 2006Debentures.

 

       Sales of a substantial number of sharesof our common stock in the public market could adversely affect the marketprice for our common stock and make it more difficult for you to sell shares ofour common stock at times and prices that you feel are appropriate.

 

**Theissuance of shares upon conversion of the convertible debentures and exercise ofoutstanding warrants will cause immediate and substantial dilution to ourexisting stockholders.**   The issuance of shares uponconversion of the convertible debentures and exercise of warrants, includingthe replacement warrants, will result in substantial dilution to the interestsof other stockholders since the selling security holders may ultimately convertand sell the full amount issuable on conversion. Although no single sellingsecurity holder may convert its convertible debentures and/or exercise itswarrants if such conversion or exercise would cause it to own more than 4.99%of our outstanding common stock, this restriction does not prevent each sellingsecurity holder from converting and/or exercising some of its holdings and thenconverting the rest of its holdings. In this way, each selling security holdercould sell more than this limit while never holding more than this limit. Thereis no upper limit on the number of shares that may be issued which will havethe effect of further diluting the proportionate equity interest and votingpower of holders of our common stock, including investors in this offering. Inaddition, the issuance of the 2006 Debentures and the 2006 Warrants triggeredcertain anti-dilution rights for certain third parties currently holdingsecurities of the Company resulting in substantial dilution to the interests ofother stockholders.

**Paymentof mandatory monthly redemptions in shares of common stock will result insubstantial dilution.**   We expect to satisfy all or asignificant portion of our obligation to redeem  1¤30th of the aggregate original principal amount of debentures per monththrough issuance of additional shares of our common stock. This approach willresult in substantial dilution to the interests of other stockholders.

**Risks Relating to Government Regulation**

**Companies such asours engaged in research using nuclear transfer and embryonic stem cells arecurrently subject to strict government regulations, and our operations could beharmed by any legislative or administrative efforts impacting the use ofnuclear transfer technology or human embryonic material.  **Our business is focused on human cell therapy, whichincludes the production of human differentiated cells from stem cells andinvolves the use of nuclear transfer technology, human oocytes, and embryonicmaterial. Nuclear transfer technology, commonly known as therapeutic cloning,and research utilizing embryonic stem cells are controversial subjects, and arecurrently subject to intense scrutiny, both in the United States, the UnitedNations and throughout the world, particularly in the area of nuclear transferof human cells and the use of human embryonic material.

We cannot assure you that our operations will not beharmed by any legislative or administrative efforts by politicians or groupsopposed to the development of nuclear transfer technology generally or the useof nuclear transfer for therapeutic cloning of human cells specifically.Further, we cannot assure you that legislative or administrative restrictionsdirectly or indirectly delaying, limiting or preventing the use of nucleartransfer technology or human embryonic material or the sale, manufacture or useof products or services derived from nuclear transfer technology or humanembryonic material will not be adopted in the future.

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**Restrictions on the use of human embryonic stemcells, and the ethical, legal and social implications of that research, couldprevent us from developing or gaining acceptance for commercially viableproducts in these areas.   Some of our most important programs involve theuse of stem cells that are derived from human embryos.**   Theuse of human embryonic stem cells gives rise to ethical, legal and socialissues regarding the appropriate use of these cells. In the event that ourresearch related to human embryonic stem cells becomes the subject of adversecommentary or publicity, the market price for our common stock could besignificantly harmed. Some political and religious groups have voicedopposition to our technology and practices. We use stem cells derived fromhuman embryos that have been created for in vitro fertilization procedures butare no longer desired or suitable for that use and are donated with appropriateinformed consent for research use . Many research institutions, including someof our scientific collaborators, have adopted policies regarding the ethicaluse of human embryonic tissue. These policies may have the effect oflimiting the scope of research conducted using human embryonic stem cells,thereby impairing our ability to conduct research in this field.

Potential and actual legislation and regulation at thefederal or state level related to our technology could limit our activities andability to develop products for commercial sales, depriving us of ouranticipated source of future revenues. Legislative bills could be introduced inthe future aiming to prohibit the use or commercialization of somatic cellnuclear transfer technology or of any products resulting from it, includingthose related to human therapeutic cloning and regenerative medicine. Suchlegislation could have a significant influence on our ability to pursue ourresearch, development and commercialization plans in the United States.

Any future or additional government-imposedrestrictions in these or other jurisdictions with respect to use of embryos orhuman embryonic stem cells in research and development could have a materialadverse effect on us, by, among other things:

·              harmingour ability to establish critical partnerships and collaborations,

·              delayingor preventing progress in our research and development,

·              limitingor preventing the development, sale or use of our products, and

·              causinga decrease in the price of our stock.

**Because we or ourcollaborators must obtain regulatory approval to market our products in theUnited States and other countries, we cannot predict whether or when we will bepermitted to commercialize our products.  **Federal, state and local governments in the UnitedStates and governments in other countries have significant regulations in placethat govern many of our activities. We are or may become subject tovarious federal, state and local laws, regulations and recommendations relatingto safe working conditions, laboratory and manufacturing practices, the experimentaluse of animals and the use and disposal of hazardous or potentially hazardoussubstances used in connection with our research and development work. Thepreclinical testing and clinical trials of the products that we or ourcollaborators develop are subject to extensive government regulation thatmay prevent us from creating commercially viable products from ourdiscoveries. In addition, the sale by us or our collaborators of anycommercially viable product will be subject to government regulation fromseveral standpoints, including manufacturing, advertising and promoting,selling and marketing, labeling, and distributing.

If, and to the extent that, we are unable to complywith these regulations, our ability to earn revenues will be materially andnegatively impacted. The regulatory process, particularly in the biotechnologyfield, is uncertain, can take many years and requires the expenditure ofsubstantial resources. Biological drugs and non-biological drugs are rigorouslyregulated. In particular, proposed human pharmaceutical therapeutic productcandidates are subject to rigorous preclinical and clinical testing and otherrequirements by the FDA in the United States and similar health authorities inother countries in order to demonstrate safety and efficacy. We may neverobtain regulatory approval to market our proposed products. For additionalinformation about governmental regulations that will affect our planned andintended business operations, see the Company’s Annual Report on Form 10-KSBfiled with the SEC on March 31, 2006 under the heading “DESCRIPTION OFBUSINESS—*Government Regulation*”.

Our products may not receive FDA approval, whichwould prevent us from commercially marketing our products and producingrevenues. The FDA and comparable government agencies in foreign countriesimpose substantial regulations on 

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the manufacture andmarketing of pharmaceutical products through lengthy and detailed laboratory,pre-clinical and clinical testing procedures, sampling activities and other costlyand time-consuming procedures. Satisfaction of these regulations typicallytakes several years or more and varies substantially based upon the type,complexity and novelty of the proposed product. We cannot yet accuratelypredict when we might first submit any Investigational New Drug, or IND,application to the FDA, or whether any such IND application would be granted ona timely basis, if at all, nor can we assure you that we will successfullycomplete any clinical trials in connection with any such IND application.Further, we cannot yet accurately predict when we might first submit anyproduct license application for FDA approval or whether any such productlicense application would be granted on a timely basis, if at all. As a result,we cannot assure you that FDA approvals for any products developed by us willbe granted on a timely basis, if at all. Any such delay in obtaining, orfailure to obtain, such approvals could have a material adverse effect on themarketing of our products and our ability to generate product revenue. Foradditional information about governmental regulations that will affect ourplanned and intended business operations, see Company’s Annual Report onForm 10-KSB filed with the SEC on March 31, 2006 under theheading “DESCRIPTION OF BUSINESS—*GovernmentRegulation*”.

**For-profit entitiesmay be prohibited from benefiting from grant funding.  **There has been much publicity about grant resourcesfor stem cell research, including Proposition 71 in California, which isdescribed more fully in the Company’s Annual Report on Form 10-KSBfiled with the SEC on March 31, 2006 under the heading “DESCRIPTION OFBUSINESS —*California Proposition 71*”.There is ongoing litigation in California that may delay, or prevent thesale of State bonds that would fund the activities contemplated by Californiavoters. In addition, rules and regulations related to any funding thatmay ultimately be provided, the type of entity that will be eligible forfunding, the science to be funded, and funding details have not been finalized.As a result of these uncertainties regarding Proposition 71, we cannot assureyou that funding, if any, will be available to us, or any for-profit entity.

**The governmentmaintains certain rights in technology that we develop using government grantmoney and we may lose the revenues from such technology if we do notcommercialize and utilize the technology pursuant to established governmentguidelines.  **Certain ofour and our licensors’ research has been or is being funded in part bygovernment grants. In connection with certain grants, the U.S. governmentretains rights in the technology developed with the grant. These rights couldrestrict our ability to fully capitalize upon the value of this research.

**Risks Relating to Our Reliance on Third Parties**

**We depend on ourcollaborators to help us develop and test our proposed products, and ourability to develop and commercialize products may be impaired or delayedif collaborations are unsuccessful.  **Our strategy for the development, clinical testingand commercialization of our proposed products requires that we enter intocollaborations with corporate partners, licensors, licensees and others. We aredependent upon the subsequent success of these other parties in performingtheir respective responsibilities and the continued cooperation of ourpartners. Our collaborators may not cooperate with us orperform their obligations under our agreements with them. We cannotcontrol the amount and timing of our collaborators’ resources that will bedevoted to our research and development activities related to our collaborativeagreements with them. Our collaborators may choose to pursue existing oralternative technologies in preference to those being developed incollaboration with us.

Under agreements with collaborators, we may relysignificantly on such collaborators to, among other things:

·                                          designand conduct advanced clinical trials in the event that we reach clinicaltrials,

·                                          fundresearch and development activities with us,

·                                          payus fees upon the achievement of milestones, and

·                                          marketwith us any commercial products that result from our collaborations.

The development and commercialization of potentialproducts will be delayed if collaborators fail to conduct these activities in atimely manner or at all. In addition, our collaborators could terminate theiragreements with us and we may not 

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receive any developmentor milestone payments. If we do not achieve milestones set forth in the agreements,or if our collaborators breach or terminate their collaborative agreements withus, our business may be materially harmed.

**Our reliance onthe activities of our non-employee consultants, research institutions, andscientific contractors, whose activities are not wholly within our control,may lead to delays in development of our proposed products.  **We rely extensively upon and have relationships withscientific consultants at academic and other institutions, some of whom conductresearch at our request, and other consultants with expertise in clinicaldevelopment strategy or other matters. These consultants are not our employeesand may have commitments to, or consulting or advisory contracts with,other entities that may limit their availability to us. We have limitedcontrol over the activities of these consultants and, except as otherwiserequired by our collaboration and consulting agreements to the extent theyexist, can expect only limited amounts of their time to be dedicated to ouractivities.

In addition, we have formed research collaborationswith academic and other research institutions throughout the world. Theseresearch facilities may have commitments to other commercial andnon-commercial entities. We have limited control over the operations of theselaboratories and can expect only limited amounts of time to be dedicated to ourresearch goals.

We also rely on other companies for certain processdevelopment or other technical scientific work. We have contracts with thesecompanies that specify the work to be done and results to be achieved, but wedo not have direct control over their personnel or operations. If any of thesethird parties are unable or refuse to contribute to projects on which we needtheir help, our ability to generate advances in our technologies and developour products could be significantly harmed.

**General Risks Relating to Our Business**

**We may be subject tolitigation that will be costly to defend or pursue and uncertain in itsoutcome.  **Our businessmay bring us into conflict with our licensees, licensors, or others withwhom we have contractual or other business relationships, or with ourcompetitors or others whose interests differ from ours. If we are unable toresolve those conflicts on terms that are satisfactory to all parties, wemay become involved in litigation brought by or against us. Thatlitigation is likely to be expensive and may require a significant amountof management’s time and attention, at the expense of other aspects of ourbusiness. The outcome of litigation is always uncertain, and in some casescould include judgments against us that require us to pay damages, enjoin usfrom certain activities, or otherwise affect our legal or contractual rights,which could have a significant adverse effect on our business. 

**We may not beable to obtain third-party patient reimbursement or favorable product pricing,which would reduce our ability to operate profitably.  **Our ability to successfully commercialize certain ofour proposed products in the human therapeutic field may depend to asignificant degree on patient reimbursement of the costs of such products andrelated treatments at acceptable levels from government authorities, privatehealth insurers and other organizations, such as health maintenanceorganizations. We cannot assure you that reimbursement in the United States orforeign countries will be available for any products we may develop or, ifavailable, will not be decreased in the future, or that reimbursement amountswill not reduce the demand for, or the price of, our products with a consequentharm to our business. We cannot predict what additional regulation orlegislation relating to the health care industry or third-party coverage andreimbursement may be enacted in the future or what effect such regulationor legislation may have on our business. If additional regulations areoverly onerous or expensive, or if health care related legislation makes ourbusiness more expensive or burdensome than originally anticipated, wemay be forced to significantly downsize our business plans or completelyabandon our business model.

**Our products arelikely to be expensive to manufacture, and they may not be profitable ifwe are unable to control the costs to manufacture them.  **Our products are likely to be significantly moreexpensive to manufacture than most other drugs currently on the market today.Our present manufacturing processes produce modest quantities of productintended for use in our ongoing research activities, and we have not developedprocesses, procedures and capability to produce commercial volumes of product.We hope to substantially reduce manufacturing costs through processimprovements, development of new science, increases in manufacturing scale andoutsourcing to experienced manufacturers. If we are not able to make these orother improvements, and depending on the pricing of the product, our profitmargins may be significantly less than that of most drugs on the markettoday. In addition, we may not be able to charge a high enough price forany cell therapy product we develop, even if they are safe and effective, tomake a profit. If we are unable to realize significant profits from ourpotential product candidates, our business would be materially harmed.

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**To be successful,our proposed products must be accepted by the health care community, which canbe very slow to adopt or unreceptive to new technologies and products.  **Our proposed products and those developed by ourcollaborative partners, if approved for marketing, may not achieve marketacceptance since hospitals, physicians, patients or the medical community ingeneral may decide not to accept and utilize these products. The productsthat we are attempting to develop represent substantial departures fromestablished treatment methods and will compete with a number of moreconventional drugs and therapies manufactured and marketed by majorpharmaceutical companies. The degree of market acceptance of any of ourdeveloped products will depend on a number of factors, including:

·                                          ourestablishment and demonstration to the medical community of the clinicalefficacy and safety of our proposed products,

·                                          ourability to create products that are superior to alternatives currently on themarket,

·                                          ourability to establish in the medical community the potential advantage of ourtreatments over alternative treatment methods, and

·                                          reimbursementpolicies of government and third-party payors.

If the health care community does not accept ourproducts for any of the foregoing reasons, or for any other reason, ourbusiness would be materially harmed.

**Our current source ofrevenues depends on the stability and performance of our sublicensees.  **Our ability to collect royalties on product salesfrom our sublicensees will depend on the financial and operational success ofthe companies operating under a sublicense.  Revenues from those licensees will depend uponthe financial and operational success of those third parties. We cannot assureyou that these licensees will be successful in obtaining requisite financing orin developing and successfully marketing their products. These licenseesmay experience unanticipated obstacles including regulatory hurdles, andscientific or technical challenges, which could have the effect of reducingtheir ability to generate revenues and pay us royalties.

**We depend on keypersonnel for our continued operations and future success, and a loss ofcertain key personnel could significantly hinder our ability to move forwardwith our business plan.  **Becauseof the specialized nature of our business, we are highly dependent on ourability to identify, hire, train and retain highly qualified scientific andtechnical personnel for the research and development activities we conduct orsponsor. The loss of one or more certain key executive officers, or scientificofficers, would be significantly detrimental to us. In addition, recruiting andretaining qualified scientific personnel to perform research anddevelopment work is critical to our success. Our anticipated growth andexpansion into areas and activities requiring additional expertise, such asclinical testing, regulatory compliance, manufacturing and marketing, willrequire the addition of new management personnel and the development ofadditional expertise by existing management personnel. There is intensecompetition for qualified personnel in the areas of our present and plannedactivities, and there can be no assurance that we will be able to continue toattract and retain the qualified personnel necessary for the development of ourbusiness. The failure to attract and retain such personnel or to develop suchexpertise would adversely affect our business.

**Our credibility asa business operating in the field of human embryonic stem cells is largelydependent upon the support of our Ethics Advisory Board.  **Because the use of human embryonic stem cells givesrise to ethical, legal and social issues, we have instituted an Ethics AdvisoryBoard. Our Ethics Advisory Board is made up of highly qualified individualswith expertise in the field of human embryonic stem cells. We cannot assure youthat these members will continue to serve on our Ethics Advisory Board, and theloss of any such member may affect the credibility and effectiveness ofthe Board. As a result, our business may be materially harmed in the eventof any such loss.

**Our insurance policiesmay be inadequate and potentially expose us to unrecoverable risks.  **We have limited director and officer insurance andcommercial insurance policies. Any significant insurance claims would have amaterial adverse effect on our business, financial condition and results ofoperations. Insurance availability, coverage terms and pricing continue to varywith market conditions. We endeavor to obtain appropriate insurance coveragefor insurable risks that we identify, however, we may fail to correctlyanticipate or quantify insurable risks, we may not be able to obtainappropriate insurance coverage, and insurers may not respond as we intendto cover insurable events that may occur. We 

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**haveobserved rapidly changing conditions in the insurance markets relating tonearly all areas of traditional corporate insurance. Such conditions haveresulted in higher premium costs, higher policy deductibles, and lower coveragelimits. For some risks, we may not have or maintain insurance coveragebecause of cost or availability.**

**We have no product liabilityinsurance, which may leave us vulnerable to future claims we will beunable to satisfy.  **Thetesting, manufacturing, marketing and sale of human therapeutic products entailan inherent risk of product liability claims, and we cannot assure you thatsubstantial product liability claims will not be asserted against us. We haveno product liability insurance. In the event we are forced to expendsignificant funds on defending product liability actions, and in the eventthose funds come from operating capital, we will be required to reduce ourbusiness activities, which could lead to significant losses.

We cannot assure you that adequate insurance coveragewill be available in the future on acceptable terms, if at all, or that, ifavailable, we will be able to maintain any such insurance at sufficient levelsof coverage or that any such insurance will provide adequate protection againstpotential liabilities. Whether or not a product liability insurance policy isobtained or maintained in the future, any product liability claim could harmour business or financial condition.

**We need to improve our financialcontrol procedures.  **Sincethe January 31, 2005 merger, we have determined that there aredeficiencies in the operating effectiveness of our internal controls overfinancial reporting that we believe would collectively constitute significantdeficiencies and material weaknesses under standards established by theAmerican Institute of Certified Public Accountants, resulting in more than aremote likelihood that a material misstatement of our annual or interimfinancial statements will not be prevented or detected. Since the merger,additional management processes and procedures have been added to supplementthe underlying systems of internal accounting control to allow timelypreparation and filing of required financial reports.

In our opinion, we have not established and did notmaintain effective internal control over financial reporting as of September 30,2006. We also believe that because of the effect of the material weakness wehave identified, we have not maintained effective internal control overfinancial reporting as of September 30, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. We have taken initial remedial steps,and will continue our on-going evaluation of internal controls and expect toimprove our internal controls over financial reporting as necessary to assuretheir effectiveness, but there can be no assurance that we will succeed or thatother deficiencies will not be identified.

**We presently havemembers of management and other key employees located in various locationsthroughout the country which adds complexities to the operation of thebusiness.  **Presently,we have members of management and other key employees located in bothCalifornia and Massachusetts, which adds complexities to the operation of ourbusiness. We intend to maintain our research facilities in Massachusetts and wehave established corporate offices and an additional research facility inCalifornia. We will likely continue to incur significant costs associated withmaintaining multiple locations.

**We face risks related tocompliance with corporate governance laws and financial reporting standards.  **The Sarbanes-Oxley Act of 2002, as well as relatednew rules and regulations implemented by the Securities and ExchangeCommission and the Public Company Accounting Oversight Board, require changesin the corporate governance practices and financial reporting standards forpublic companies. These new laws, rules and regulations, includingcompliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating tointernal control over financial reporting, referred to as Section 404,have materially increased our legal and financial compliance costs and madesome activities more time-consuming and more burdensome.  Section 404 requires that by 2007 ourmanagement assess our internal control over financial reporting annually andinclude a report on its assessment in our annual report. Our independentregistered public accounting firm may be required to audit both the design andoperating effectiveness of our internal controls and management’s assessment ofthe design and the operating effectiveness of our internal controls. Thereexist material weaknesses and deficiencies at this time in our internalcontrols. These weaknesses and deficiencies could have a material adverseeffect on our business and operations.

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**Risks Relating to Our Common Stock**

**Stock prices for biotechnologycompanies have historically tended to be very volatile.**   Stock prices and tradingvolumes for many biotechnology companies fluctuate widely for a number ofreasons, including but not limited to the following factors, some of whichmay be unrelated to their businesses or results of operations:

·                                          clinicaltrial results

·                                          theamount of cash resources and ability to obtain additional funding

·                                          announcementsof research activities, business developments, technological innovations or newproducts by companies or their competitors

·                                          enteringinto or terminating strategic relationships

·                                          changesin government regulation

·                                          disputesconcerning patents or proprietary rights

·                                          changesin revenues or expense levels

·                                          publicconcern regarding the safety, efficacy or other aspects of the products ormethodologies being developed

·                                          reportsby securities analysts

·                                          activitiesof various interest groups or organizations

·                                          mediacoverage

·                                          statusof the investment markets

This market volatility, as well as general domestic orinternational economic, market and political conditions, could materially andadversely affect the market price of our common stock and the return on yourinvestment.

**A significantnumber of shares of our common stock became available for sale in January of2006 and their sale could depress the price of our common stock.**  OnJanuary 31, 2006, a significant number of our outstanding securities thatwere previously restricted became eligible for sale under Rule 144 of theSecurities Act.

Not including the shares ofcommon stock underlying the 2005 Debentures (and the warrants issued inconnection therewith), the 2006 Debentures (and the warrants issued inconnection therewith), and the warrants issued in connection with the warrantrepricing (which are further described in our Current Report onForm 8-K filed with the Securities and Exchange Commission on September6, 2006) , there are presently approximately26,500,000 outstanding options, warrants and other securities convertible orexercisable into shares of our common stock.

We may also sell a substantialnumber of additional shares of our common stock in connection with a privateplacement or public offering of shares of our common stock (or other series orclass of capital stock to be designated in the future). The terms of any suchprivate placement would likely require us to register the resale of any sharesof capital stock issued or issuable in the transaction. We have also issuedcommon stock to certain parties, such as vendors and service providers, aspayment for products and services. Under these arrangements, we may agree toregister the shares for resale soon after their issuance. We may also continueto pay for certain goods and services with equity, which would dilute yourinterest in the company.

 

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Sales of a substantial number of shares of our commonstock under any of the circumstances described above could adversely affect themarket price for our common stock and make it more difficult for you to sellshares of our common stock at times and prices that you feel are appropriate.

Sales of a substantial number of shares of our commonstock under any of the circumstances described above could adversely affect themarket price for our common stock and make it more difficult for you to sellshares of our common stock at times and prices that you feel are appropriate.

**We do not intend to pay cashdividends on our common stock in the foreseeable future.  **Any payment of cash dividends will depend upon ourfinancial condition, results of operations, capital requirements and otherfactors and will be at the discretion of our board of directors. We do notanticipate paying cash dividends on our common stock in the foreseeable future.Furthermore, we may incur additional indebtedness that may severelyrestrict or prohibit the payment of dividends.

**Our securities arequoted on the OTC Bulletin Board, which may limit the liquidity and priceof our securities more than if our securities were quoted or listed on theNasdaq Stock Market or a national exchange.  **Our securities are currently quoted on the OTCBulletin Board, an NASD-sponsored and operated inter-dealer automated quotationsystem for equity securities not included in the Nasdaq Stock Market. Quotationof our securities on the OTC Bulletin Board may limit the liquidity andprice of our securities more than if our securities were quoted or listed onThe Nasdaq Stock Market or a national exchange. Some investorsmay perceive our securities to be less attractive because they are tradedin the over-the-counter market. In addition, as an OTC Bulletin Board listedcompany, we do not attract the extensive analyst coverage that accompaniescompanies listed on Nasdaq or any other regional or national exchange. Further,institutional and other investors may have investment guidelines thatrestrict or prohibit investing in securities traded in the over-the-countermarket. These factors may have an adverse impact on the trading and priceof our securities.

**Our common stock is subjectto “penny stock” regulations and restrictions on initial and secondarybroker-dealer sales.  **TheSecurities and Exchange Commission has adopted regulations which generallydefine “penny stock” to be any listed, trading equity security that has amarket price less than $5.00 per share or an exercise price of less than $5.00per share, subject to certain exemptions. Penny stocks are subject to certainadditional oversight and regulatory requirements. Brokers and dealers affectingtransactions in our common stock in many circumstances must obtain the writtenconsent of a customer prior to purchasing our common stock, must obtaininformation from the customer and must provide disclosures to the customer.These requirements may restrict the ability of broker-dealers to sell ourcommon stock and may affect your ability to sell your shares of our commonstock in the secondary market.

**ITEM 3.**   CONTROLSAND PROCEDURES

(a)           *Evaluation of disclosure controls and procedures.*Ourmanagement, with the participation of our principal executive officer, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the period covered by this Quarterly Report on Form 10-QSB. Basedon such evaluation, due to the material weaknesses in our internal controlsover financial reporting further described below, our principal executiveofficer has concluded that such disclosure controls and procedures were noteffective in providing reasonable assurance that information required to bedisclosed by us in the reports we file or submitted by us under the ExchangeAct is recorded, processed, summarized and reported, within the time periodsspecified in the SEC’s rules and forms. We have implemented, and are inthe process of implementing, new disclosure controls and procedures to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwith the time periods specified in applicable SEC rules and forms areeffective.

(b)           *Changes in internal controls.*Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Our internal control system is intended toprovide reasonable assurance to our management and board of directors regardingthe preparation and fair presentation of published financial statements. Ourmanagement assessed the effectiveness of our internal control over financialreporting as of September 30, 2006. In making its assessment of internalcontrol over financial reporting, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.

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Management’s assessment identified materialdeficiencies in our internal control over financial reporting. Thesedeficiencies include lack of segregation of duties, limited capability tointerpret and apply United States generally accepted accounting principles,lack of adequate documentation of our system of internal controls, lack offormal accounting policy and procedures and related documentation, deficienciesin our information technology systems and lack of a formal budgeting process.We also have not yet instituted new internal control processes related to ouridentified material weaknesses, significant deficiencies and deficiencies, ashas been characteristic of companies that have completed their review ofinternal controls and have had to report on the effect of such review.Accordingly, our internal control over financial reporting may be subjectto additional material weaknesses and deficiencies that we have not identified.Management has determined that these significant deficiencies, in theaggregate, constituted a material weakness in the design and operation of ourinternal controls in effect prior to September 30, 2006. We hired a chieffinancial officer on April 1, 2005, and we are in the process ofimplementing new controls; however, these controls were not fully in operationduring the third quarter of 2006. As a result of the material weaknessesdescribed in the preceding paragraph, we believe that, as of September 30,2006, our internal control over financial reporting was not effective based onthe COSO criteria.

**PART II.OTHER INFORMATION**

**ITEM 1.**   LEGALPROCEEDINGS

None.

**ITEM 2.**   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The issuances of the equity securities described belowwere made in reliance upon the exemption from registration underSection 4(2) of the Securities Act of 1933, as amended, relating tosales by an issuer not involving a public offering, and/or pursuant to therequirements of one or more of the safe harbors provided in Regulation Dunder the Securities Act or, in the case of equity compensation to employees,directors and eligible consultants, Rule 701 therewith.

On September 6, 2006, inconnection with the closing of the exercise of the additional investment rightdescribed in our Current Report on Form 8-K filed with theSecurities and Exchange Commission on September 6, 2006, we issued to certain accredited investors anaggregate of $10,981,250 principal amount convertible debentures with anoriginal issue discount of 20.3187%. In connection with the closing of theissuance and sale of convertible debentures, we received gross proceeds of$8,750,000. The convertible debentures are due and payable three years from thedate of issuance, unless sooner converted into shares of our common stock. Theconversion price of the debentures is $0.288, subject to anti-dilution andother customary adjustments. In connection with the securities purchaseagreement, we also issued warrants to purchase an aggregate of 19,064,670shares of our common stock. The term of the warrants is five years and theexercise price is $0.3168 per share, subject to anti-dilution and othercustomary adjustments.

On August 28, 2006, inconnection with the warrant repricing transaction described in ourCurrent Report on Form 8-K filed with the Securities and ExchangeCommission on September 6, 2006, we issuedto certain purchasers warrants to purchase an aggregate of 4,541,672 shares ofour common stock. The term of the warrants is five years and the exercise priceis $1.60 per share, subject to anti-dilution and other customary adjustments.

On August 23, 2006, inconnection with certain consulting services provided to us, we issued toTrilogy Capital Partners, Inc. a warrant to purchase 1,050,000 shares of ourcommon stock, of which 550,000 are immediately vested and exercisable and500,000 will vest and become exercisable after six months.  The term of the warrants is three years andthe exercise price is $2.54 per share, subject to anti-dilution and othercustomary adjustments.

**ITEM 3.**   DEFAULTSUPON SENIOR SECURITIES

None.

**ITEM 4.**   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

A special meeting of ourstockholders was held on October 13, 2006, for the purpose describedbelow.  The voting record for the matterpresented to the stockholders is as set forth immediately following thedescription of the matter.  

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To amendthe Company's Certificate of Incorporation to increase the number of authorizedshares of the Company’s common stock, par value $0.001 per share ("CommonStock"), from 100,000,000 to 500,000,000, with no change in the par value. 

Number ofVotes FOR: 18,192,411

Number ofVotes AGAINST: 686,211

Number ofVotes ABSTAINING: 48,004

Number ofBroker Non-Votes: 0

 

**ITEM 5.**   OTHERINFORMATION

None.

**ITEM 6.**   EXHIBITS
| Exhibit No. | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                            |
| 3.1              |       | Certificate of Amendment to Certificate of  Incorporation dated October 13, 2006 (previously filed as Exhibit 3.1 to  the Registrant's Current Report on Form 8-K filed on October 13, 2006  (File No. 000-50295) and incorporated by reference herein).                    |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.1             |       | Consulting Agreement between Advanced Cell  Technology, Inc. and James G. Stewart dated August 17, 2006 (previously filed  as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on  August 18, 2006 (File No. 000-50295) and incorporated by reference  herein). |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.2             |       | Securities Purchase Agreement dated August 30, 2006  (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form  8-K filed on September 8, 2006 (File No. 000-50295) and  incorporated by reference herein).                                                   |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.3             |       | Registration Rights Agreement dated September 15,  2005 (previously filed as Exhibit 10.1 to the Registrant's Current Report on  Form 8-K filed on September 8, 2006 (File No. 000-50295) and  incorporated by reference herein).                                                |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.4             |       | Form of Common Stock Purchase Warrant (previously  filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K  filed on September 8, 2006 (File No. 000-50295) and incorporated  by reference herein).                                                                 |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.5             |       | Form of Amortizing Convertible Debenture (previously  filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K  filed on September 8, 2006 (File No. 000-50295) and incorporated  by reference herein).                                                              |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.6             |       | Form of Lock-up Agreement (previously filed as  Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed  on September 8, 2006 (File No. 000-50295) and incorporated by  reference herein).                                                                        |
|             |       |                                                                                                                                                                                                                                                                                  |
| 10.7             |       | License and Settlement Agreement between the  Company, the University of Massachusetts and Start Licensing, Inc.*                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                  |
| 31.1             |       | Section 302  Certification of Chief Executive Officer.*                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                  |
| 31.2             |       | Section 302  Certification of Chief Accounting Officer.*                                                                                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                  |
| 32.1             |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*                                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                  |
| 32.2             |       | Certification  of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350.*                                                                                                                                                                                                  |

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*                    Filedherewith

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                          | ** ** | **ADVANCED CELL TECHNOLOGY, INC.** |
|--------------------------|------------|------------------------------------|
| ** **               | ** ** | ** **                         |
|                     |       | By:                                |  /s/ William  M. Caldwell, IV |   |
|                     |       |                               | William M. Caldwell, IV |
|                     |       |                               | Chief Executive Officer |
| Dated: November 16, 2006 |       |                               |

 

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**Exhibit Index**
| **Exhibit No.** | ** ** | **Exhibit Description** |
|----------------------|------------|-------------------------|
| ** **           | ** ** | ** **              |
|                 | 3.1        |                    |   | Certificate of Amendment to Certificate of  Incorporation dated October 13, 2006 (previously filed as Exhibit 3.1 to the  Registrant's Current Report on Form 8-K filed on October 13, 2006 (File  No. 000-50295) and incorporated by reference herein). |
|                 | 10.1       |                    |   | Consulting Agreement  between Advanced Cell Technology, Inc. and James G. Stewart dated August 17,  2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on  Form 8-K filed on August 18, 2006 (File No. 000-50295) and  incorporated by reference herein). |
|                 | 10.2       |                    |   | Securities Purchase  Agreement dated August 30, 2006 (previously filed as Exhibit 10.1 to the  Registrant's Current Report on Form 8-K filed on September 8, 2006  (File No. 000-50295) and incorporated by reference herein). |
|                 | 10.3       |                    |   | Registration Rights  Agreement dated September 15, 2005 (previously filed as Exhibit 10.1 to the  Registrant's Current Report on Form 8-K filed on September 8, 2006  (File No. 000-50295) and incorporated by reference herein). |
|                 | 10.4       |                    |   | Form of Common Stock  Purchase Warrant (previously filed as Exhibit 10.1 to the Registrant's  Current Report on Form 8-K filed on September 8, 2006 (File  No. 000-50295) and incorporated by reference herein). |
|                 | 10.5       |                    |   | Form of Amortizing  Convertible Debenture (previously filed as Exhibit 10.4 to the Registrant's  Current Report on Form 8-K filed on September 8, 2006 (File  No. 000-50295) and incorporated by reference herein). |
|                 | 10.6       |                    |   | Form of Lock-up  Agreement (previously filed as Exhibit 10.5 to the Registrant's Current  Report on Form 8-K filed on September 8, 2006 (File No. 000-50295)  and incorporated by reference herein). |
|                 | 10.7       |                    |   | License and Settlement  Agreement between the Company, the University of Massachusetts and Start  Licensing, Inc.* |
|                 | 31.1       |                    |   | Section 302 Certification of Chief Executive Officer.* |
|                 | 31.2       |                    |   | Section 302 Certification of Chief Accounting  Officer.* |
|                 | 32.1       |                    |   | Certification of Chief Executive Officer pursuant to 18  U.S.C. Section 1350.* |
|                 | 32.2       |                    |   | Certification of Chief Accounting Officer pursuant to 18  U.S.C. Section 1350.* |

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*                    Filedherewith

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