**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTOND.C. 20549**

----

**FORM 10-QSB**

----

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

**FORTHE PERIOD ENDED June 30, 2007**

**OR**

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

**FORTHE TRANSITION PERIOD FROM           TO          .**

**COMMISSIONFILE NUMBER: 0-50295**

----

**ADVANCED CELL TECHNOLOGY, INC.**

(EXACT NAME OF SMALLBUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

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

 

**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 August 6, 2007:** |
|-------------------------------------------|------------|-----------------------------------------|
| Common Stock,  $0.001 par value per share |       | 62,621,037 shares                       |

 

Transitional SmallBusiness Disclosure format (check one)

Yes  o  No  x

 

----

**ADVANCED CELLTECHNOLOGY, INC.INDEX**
| PART I. FINANCIAL  INFORMATION                                      |   |   |   |
|--------------------------------------------------------------------------|--------|--------|--------|
| ITEM 1. FINANCIAL STATEMENTS                                             |   |   |   |
| ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF  OPERATION |   | 24     |   |
| ITEM  3. CONTROLS AND PROCEDURES                                         |   | 42     |   |
| PART II.  OTHER INFORMATION                                         |   |   |   |
| ITEM 1.  LEGAL PROCEEDINGS                                               |   | 44     |   |
| ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS    |   | 44     |   |
| ITEM  3. DEFAULTS UPON SENIOR SECURITIES                                 |   | 44     |   |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             |   | 44     |   |
| ITEM 5.  OTHER INFORMATION                                               |   | 44     |   |
| ITEM 6. EXHIBITS                                                         |   | 44     |   |
| SIGNATURE                                                                |   | 45     |   |

 

2

----

**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 statements contained in quarterlyreport, and the exhibits hereto, regarding matters that are not historicalfacts and are forward-looking statements. Because these statements involverisks and uncertainties, as well as certain assumptions, actual results maydiffer materially from those expressed or implied by such forward-lookingstatements. Factors that could cause actual results to differ materiallyinclude, but are not limited to risks inherent in: our early stage ofdevelopment, including a lack of operating history, lack of profitableoperations and the need for additional capital; the development andcommercialization of largely novel and unproven technologies and products; ourability to protect, maintain and defend our intellectual property rights;uncertainties regarding our ability to obtain the capital resources needed tocontinue research and development operations and to conduct research,preclinical development and clinical trials necessary for regulatory approvals;uncertainty regarding the outcome of clinical trials and our overall ability tocompete effectively in a highly complex, rapidly developing, capital intensiveand competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS”set forth on page 28 herein for a more complete discussion of thesefactors. 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.

Forward-looking statements include our plans and objectivesfor future operations, including plans and objectives relating to our productsand our future economic performance. Assumptions relating to the foregoinginvolve judgments with respect to, among other things, future economic,competitive and market conditions, future business decisions, and the time andmoney required to successfully complete development and commercialization ofour technologies, all of which are difficult or impossible to predictaccurately and many of which are beyond our control. Although we believe thatthe assumptions underlying the forward-looking statements contained herein arereasonable, any of those assumptions could prove inaccurate and, therefore, wecannot assure you that the results contemplated in any of the forward-lookingstatements contained herein will be realized. Based on the significantuncertainties inherent in the forward-looking statements included herein, theinclusion of any such statement should not be regarded as a representation byus or any other person that our objectives or plans will be achieved.

3

----

**PART I.**

**FINANCIAL INFORMATION**

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYBALANCE SHEET**
| ** **                                                                                                                          | ** ** | **June 30,  2007**    | ** ** | **December 31,  2006** | ** **        |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|-------------------|
| ** **                                                                                                                          | ** ** | **(unaudited)**            | ** ** | ** **                  | ** **        |
| ASSETS                                                                                                                              |       |                       |       |                        |              |   |   |
| Current assets:                                                                                                                     |       |                       |       |                        |              |   |   |
| Cash and cash  equivalents                                                                                                          |       | $   769,587 |       |                        | $ 8,689,336  |   |   |
| Accounts receivable,  net of allowance for doubtful accounts of $0 and $236,399                                                     |       | 28,397                     |       |                        | 66,319            |   |   |
| Prepaid expenses                                                                                                                    |       | 127,947                    |       |                        | 111,229           |   |   |
| Deferred royalty  fees, current portion                                                                                             |       | 327,525                    |       |                        | 225,475           |   |   |
| Total current assets                                                                                                                |       | 1,253,455                  |       |                        | 9,092,359         |   |   |
| Property and equipment, net                                                                                                         |       | 931,006                    |       |                        | 1,081,680         |   |   |
| Deferred royalty fees, less current portion                                                                                         |       | 1,386,816                  |       |                        | 1,062,620         |   |   |
| Deposits                                                                                                                            |       | 143,841                    |       |                        | 133,841           |   |   |
| Deferred issuance costs, net of amortization of $3,400,005  and $1,035,120                                                          |       | 3,476,600                  |       |                        | 5,619,218         |   |   |
| Total assets                                                                                                                        |       | $ 7,191,718           |       |                        | $ 16,989,718 |   |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                         |       |                       |       |                        |              |   |   |
| Current  liabilities:                                                                                                               |       |                       |       |                        |              |   |   |
| Accounts payable                                                                                                                    |       | $ 3,253,479           |       |                        | $ 3,067,825  |   |   |
| Accrued expenses                                                                                                                    |       | 1,120,920                  |       |                        | 1,023,583         |   |   |
| Deferred revenue,  current portion                                                                                                  |       | 497,374                    |       |                        | 432,509           |   |   |
| Interest payable                                                                                                                    |       | 0                          |       |                        | 75,833            |   |   |
| Advances  payable—other                                                                                                        |       | 130,000                    |       |                        | 130,000           |   |   |
| 2005 Convertible  debenture and embedded derivatives, net of discounts of $1,377,274 and $3,713,554                                 |       | 2,968,064                  |       |                        | 7,354,706         |   |   |
| 2006 Convertible  debenture and embedded derivatives (fair value $4,157,646 and $5,472,177)                                         |       | 3,273,470                  |       |                        | 3,971,543         |   |   |
| Warrant and Option  Derivatives—current portion                                                                                |       | 3,707,606                  |       |                        | 2,264,175         |   |   |
| Capital  leases—current portion                                                                                                |       | 70,585                     |       |                        | 77,594            |   |   |
| Notes  payable—other                                                                                                           |       | 468,425                    |       |                        | 638,674           |   |   |
| Total current  liabilities                                                                                                          |       | 15,489,923                 |       |                        | 19,036,442        |   |   |
| 2005 Convertible  debenture and embedded derivatives, less current portion and net of discounts  of $124,334 and $1,571,332         |       | 267,943                    |       |                        | 3,112,029         |   |   |
| 2006 Convertible  debenture and embedded derivatives, less current portion (fair value  $8,315,293—unaudited, and $12,768,413) |       | 6,546,939                  |       |                        | 9,266,933         |   |   |
| Warrant and Option  Derivatives, less current portion                                                                               |       | 6,391,096                  |       |                        | 12,987,967        |   |   |
| Capital leases,  less current portion                                                                                               |       | 0                          |       |                        | 31,971            |   |   |
| Deferred revenue,  less current portion                                                                                             |       | 1,783,167                  |       |                        | 2,096,700         |   |   |
| Total liabilities                                                                                                                   |       | 30,479,068                 |       |                        | 46,532,042        |   |   |
| Commitments and contingencies                                                                                                       |       | —                     |       |                        | —            |   |   |
| Stockholders’ deficit:                                                                                                         |       |                       |       |                        |              |   |   |
| Preferred stock,  $0.001 par value; 50,000,000 shares authorized, 0 issued and outstanding                                          |       | —                     |       |                        | —            |   |   |
| Common stock, $0.001  par value; 500,000,000 shares authorized, 59,974,205 issued and outstanding                                   |       | 59,975                     |       |                        | 39,318            |   |   |
| Additional paid-in  capital                                                                                                         |       | 27,288,124                 |       |                        | 12,291,873        |   |   |
| Accumulated  deficit                                                                                                                |       | (50,635,448                | )          |                        | (41,873,515       | ) |   |
| Total stockholders’ deficit                                                                                                    |       | (23,287,349                | )          |                        | (29,542,324       | ) |   |
| Total liabilities  and stockholders’ deficit                                                                                   |       | $ 7,191,718           |       |                        | $ 16,989,718 |   |   |

 

The accompanying notes are an integral part of these financial statements

4

----

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF OPERATIONS(UNAUDITED)**

| ** **                                                                       | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| License fees and royalties                                                       |       | $                                                   | 274,326    |                                              | $          | 120,627 |   | $ | 398,669 |   | $ | 203,754 |   |
| Cost of revenue                                                                  |       | 110,318                                             |       | 92,618                                            |       | 171,754 |   | 153,807 |   |
| Gross profit                                                                     |       | 164,008                                             |       | 28,009                                            |       | 226,915 |   | 49,947 |   |
| Operating  expenses:                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Research and development                                                         |       | 2,828,842                                           |       | 2,617,207                                         |       | 6,477,930 |   | 4,425,773 |   |
| Grant reimbursements                                                             |       | (9,597                                              | )          | (162,662                                          | )          | (67,179 | ) | (363,567 | ) |
| General and administrative                                                       |       | 1,246,180                                           |       | 1,878,085                                         |       | 2,987,284 |   | 4,508,122 |   |
| Total operating expenses                                                         |       | 4,065,425                                           |       | 4,332,630                                         |       | 9,398,035 |   | 8,570,328 |   |
| Loss from operations                                                             |       | (3,901,417                                          | )          | (4,304,621                                        | )          | (9,171,120 | ) | (8,520,381 | ) |
| Other income (expense):                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Interest income                                                                  |       | 24,960                                              |       | 81,382                                            |       | 103,007 |   | 199,848 |   |
| Gain on sale of asset                                                            |       | —                                              |       | 767,040                                           |       |   |   | 767,040 |   |
| Gain on settlement of debt                                                       |       | 193,862                                             |       | —                                            |       | 193,862 |   | — |   |
| Interest expense and late fees                                                   |       | (3,390,678                                          | )          | (2,516,292                                        | )          | (8,367,818 | ) | (5,597,306 | ) |
| Charges related to repricing of 2005 Convertible  Debentures & Warrants |       | —                                              |       | —                                            |       | (843,277 | ) | — |   |
| Adjustments to fair value of derivatives                                         |       | 18,242,544                                          |       | 15,267,101                                        |       | 9,323,413 |   | 27,258,778 |   |
| Total other income (expense)                                                     |       | 15,070,688                                          |       | 13,599,231                                        |       | 409,187 |   | 22,628,360 |   |
| Net income / (Loss)                                                              |       | $                                                   | 11,169,271 |                                              | $          | 9,294,610 |   | $ | (8,761,933 | ) | $ | 14,107,979 |   |
| Basic earnings per share                                                         |       | $                                                   | 0.22       |                                              | $          | 0.38 |   | $ | (0.18 | ) | $ | 0.57 |   |
| Diluted earnings per share                                                       |       | $                                                   | 0.17       |                                              | $          | 0.16 |   | $ | (0.18 | ) | $ | 0.25 |   |
| Weighted average  shares used in computation of earnings per share               |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                            |       | 51,114,251                                          |       | 24,478,469                                        |       | 48,925,339 |   | 24,830,321 |   |
| Diluted                                                                          |       | 67,410,984                                          |       | 56,487,483                                        |       | 48,925,339 |   | 56,839,335 |   |

 

The accompanying notes are an integral part of these financial statements

5

----

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF CASH FLOWS(UNAUDITED)**

| ** **                                                                   | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                                                                |       |   |   |
| Net loss                                                                     |       | $                                                                   | (8,761,933 | ) | $ | 14,107,979 |   |
| Adjustments to reconcile net loss to net cash used in  operating activities: |       |                                                                |       |   |   |
| Depreciation and  amortization                                               |       | 189,813                                                             |       | 101,998 |   |
| Amortization of deferred  charges                                            |       | 146,753                                                             |       | 108,807 |   |
| Amortization of deferred  revenue                                            |       | (248,669                                                            | )          | (166,253 | ) |
| Stock based compensation                                                     |       | 324,219                                                             |       | 192,485 |   |
| Amortization of deferred  issuance costs                                     |       | 2,142,618                                                           |       | 414,059 |   |
| Warrants issued for  services                                                |       | —                                                              |       | 331,827 |   |
| Amortization of deferred  compensation                                       |       | —                                                              |       | 48,290 |   |
| Amortization of discounts                                                    |       | 6,132,861                                                           |       | 5,330,649 |   |
| Gain (Loss) on  extinguishment of debt                                       |       | 193,862                                                             |       |   |   |
| Adjustments to Fair Value  of Derivatives                                    |       | (9,323,414                                                          | )          | (27,258,778 | ) |
| Repricing of 2005  Convertible Debentures and Warrants                       |       | 843,277                                                             |       |   |   |
| Shares issued for legal  fees                                                |       | 68,000                                                              |       | — |   |
| Shares issued for license  fees                                              |       | 608,000                                                             |       | — |   |
| Shares issued for board  fees                                                |       | 20,752                                                              |       | — |   |
| Shares issued to consultants                                                 |       | 273,240                                                             |       | — |   |
| Shares issued to employees                                                   |       | 406,850                                                             |       | — |   |
| Changes in operating assets and liabilities:                                 |       |                                                                |       |   |   |
| (Increase) decrease in:                                                      |       |                                                                |       |   |   |
| Accounts receivable                                                          |       | 37,922                                                              |       | 86,627 |   |
| Prepaid expenses                                                             |       | (16,718                                                             | )          | 58,052 |   |
| Deferred charges                                                             |       | (573,000                                                            | )          | (485,000 | ) |
| Deposits                                                                     |       | —                                                              |       | (27,149 | ) |
| Increase (decrease) in:                                                      |       |                                                                |       |   |   |
| Accounts payable and  accrued expenses                                       |       | 89,142                                                              |       | (175,957 | ) |
| Interest payable                                                             |       | (75,833                                                             | )          | 22,500 |   |
| Deferred revenue                                                             |       | —                                                              |       | 37,500 |   |
| Net cash used in  operating activities                                       |       | (7,522,258                                                          | )          | (7,272,364 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                                                                |       |   |   |
| Purchases of property and  equipment                                         |       | (39,139                                                             | )          | (478,126 | ) |
| Payment of deposits                                                          |       | (10,000                                                             | )          | — |   |
| Net cash used in  investing activities                                       |       | (49,139                                                             | )          | (478,126 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                                                                |       |   |   |
| Proceeds from exercise of  warrants                                          |       | —                                                              |       | 6,100 |   |
| Payments on Convertible  Debentures                                          |       | (139,123                                                            | )          | (767,639 | ) |
| Payments on notes and  leases                                                |       | (38,980                                                             | )          | (38,975 | ) |
| Settlement payment                                                           |       | (170,249                                                            | )          | — |   |
| Net cash paid by  financing activities                                       |       | (348,352                                                            | )          | (800,514 | ) |
| Net increase / (decrease)  in cash                                           |       | (7,919,749                                                          | )          | (8,551,004 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 8,689,336                                                           |       | 13,857,901 |   |
| Cash and cash  equivalents, end of period                                    |       | 769,587                                                             |       | 5,306,897 |   |
| Cash paid for:                                                               |       |                                                                |       |   |   |
| Interest                                                                     |       | $                                                                   | 5,008      |   | $ | 5,013 |   |
| Income taxes                                                                 |       | $                                                                   | —     |   | $ | — |   |

 

The accompanying notes are an integral part of these financial statements

6

----

***Supplemental schedule of non-cash financingactivities:***

**During the sixmonths ended June 30, 2007:**

The Company issued approximately 5,209,598 shares ofcommon stock in redemption of convertible debentures with a face value of approximately$3,290,000.

The Company issued approximately 14,010,870 shares ofcommon stock in conversion of convertible debentures with a face value of approximately$7,638,000.

The Company issued approximately 36,000 shares ofcommon stock in payment of board fees of approximately $21,000.

The Company issued approximately 800,00 shares ofcommon stock in payment of license fees of $608,000.

The Company issued approximately 515,000 shares ofcommon stock in payment of employee bonuses of $407,000.

The Company issued approximately 85,000 shares ofcommon stock in settlement of legal fees of apporximately $68,000.

The Company also paid cash in $50,000. $311,381 worthof liabilities were settled, resulting in a gain of $193,862.

7

----

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENT OF STOCKHOLDERS’ DEFICITFOR THE SIX MONTH PERIOD ENDED JUNE 30, 2007 (UNAUDITED)**

|                                                       | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-In**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                            | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Deficit** | ** ** |
| Balance at December 31,  2006                    |       | 39,318,070            |       | $              | 39,318     |            | $          | 12,291,873             |       | $ | (41,873,515 | ) | $ | (29,542,324 | ) |
| Convertible debenture redemption                      |       | 5,209,598             |       | 5,210          |       | 3,284,297       |       | —                 |       | 3,289,507 |   |
| Convertible debenture conversion                      |       | 14,010,628            |       | 14,011         |       | 10,285,569      |       | —                 |       | 10,299,580 |   |
| Issuance of stock in payment of board fees       |       | 35,909                |       | 36             |       | 20,716          |       | 0                      |       | 20,752 |   |
| Stock based compensation                              |       | —                |       | —         |       | 324,219         |       | —                 |       | 324,219 |   |
| Issuance of stock in payment of license fees     |       | 800,000               |       | 800            |       | 607,200         |       | —                 |       | 608,000 |   |
| Issuance of stock in payment  of employee bonuses     |       | 515,000               |       | 515            |       | 406,335         |       | —                 |       | 406,850 |   |
| Issuance of stock in payment of legal fees            |       | 85,000                |       | 85             |       | 67,915          |       | —                 |       | 68,000 |   |
| Net loss for the six months  ended June 30, 2007 |       | —                |       | —         |       | 0               |       | $                      | (8,761,933 | ) | (8,761,933 | ) |
| Balance at  June 30, 2007                        |       | 59,974,205            |       | $              | 59,975     |            | $          | 27,288,124             |       | $ | (50,635,448 | ) | $ | (23,287,349 | ) |
|                                                  |       |                  |       |           |       |            |       |                   |       |   |   |

 

The accompanying notes are an integral part of these financial statements

8

----

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYNOTES TO FINANCIAL STATEMENTSJune 30, 2007(UNAUDITED)**

**1.**                 ORGANIZATIONALMATTERS

**Organization**

On January 31, 2005,Advanced Cell Technology, Inc. (formerly known as A.C.T. Holdings, Inc.)(the “Company”) completed the Merger with Advanced Cell, Inc. (formerlyknown as Advanced Cell Technology, Inc.), a Delaware corporation (“ACT”),pursuant to which a wholly-owned subsidiary of the Company merged with and intoACT, with ACT remaining as the surviving corporation and a wholly-ownedsubsidiary of the Company. Upon the completion of the merger, the Companyceased all of its pre-merger operations and adopted the business of ACT.

Prior to the merger, theCompany had minimal business, operations, revenues and assets, and had beeninvolved in an industry entirely unrelated to the business of ACT. Therefore,the acquisition of ACT by the Company represented a complete change in thenature of the Company’s business and operations, and changed the nature of anyprior investment in the Company.

The transaction has beenaccounted for as a recapitalization of ACT, the accounting acquirer. Thehistorical financial statements presented for periods prior to the merger arethose of ACT.

On November 18, 2005,a majority of the Company’s stockholders approved the reincorporation of theCompany from the state of Nevada to the state of Delaware pursuant to a mergerof the Company with and into a newly formed Delaware corporation, followed by a“roll up” merger to combine the operating subsidiary with the Company.

**Nature of Business**

The Company is abiotechnology company focused on developing and commercializing human stem celltechnology in the emerging fields of regenerative medicine and stem celltherapy. Principal activities to date have included obtaining financing,securing operating facilities and conducting research and development. TheCompany has no therapeutic products currently available for sale and does notexpect to have any therapeutic products commercially available for sale for aperiod of years, if at all. These factors indicate that the Company’s abilityto continue its research and development activities is dependent upon theability of management to obtain additional financing as required.

**Going Concern**

As reflected in theaccompanying financial statements, the Company has losses from operations,negative cash flows from operations, a substantial stockholders’ deficit andcurrent liabilities exceed current assets. The Company will thus be able tocontinue as a going concern and fund cash requirements for operations through September30, 2007, with current cash reserves, including the proceeds of the bridgefinancing described in Note 13—Subsequent Events. Notwithstanding success inraising capital, there continues to be substantial doubt about the Company’sability to continue as a going concern.

In view of the mattersdescribed in the preceding paragraph, recoverability of a major portion of therecorded asset amounts shown in the accompanying consolidated balance sheet isdependent upon continued operations of the Company, which, in turn, isdependent upon the Company’s ability to continue to raise capital andultimately generate positive cash flows from operations. The financialstatements do 

9

----

notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or amounts and classifications of liabilities that mightbe necessary should the Company be unable to continue its existence.

In thefirst six months of 2007, management has taken or plans to take the followingsteps that it believes will be sufficient to provide the Company with theability to continue in existence:

·       Managementanticipates raising additional future short-term and/or long-term capital fromits current convertible debenture holders, or other financing sources, thatwill be used to fund any capital shortfalls. The terms of any financing willlikely be negotiated based upon current market terms for similar financings. Exceptfor the interim bridge financing disclosed in Note 13—Subsequent Events, nocommitments have been received for additional investment and no assurances canbe given that this financing will ultimately be completed.

·       Management has focused itsscientific operations on product development in order to accelerate the time tomarket of products which will ultimately generate revenues. While the amount ortiming of such revenues can not be determined, Management believes that focuseddevelopment will ultimately provide a quicker path to revenues, and anincreased likelihood of raising additional financing.

**2.**                 SIGNIFICANTACCOUNTING POLICIES

***Basis of Presentation—******The***accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America and tothe rules and regulations of the Securities and Exchange Commission forform 10-QSB.

***Use of Estimates—******These*******consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesand, accordingly, require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Specifically, our management has estimated variables usedto calculate the Black Scholes and binomial lattice model calculations used tovalue derivative instruments discussed below under “Valuation of DerivativeInstruments”. In addition, management has estimated the expected economic lifeand value of our licensed technology, our net operating loss for tax purposes,share-based payments to compensation to employees, directors, consultants andinvestment banks, the useful lives of our fixed assets and our allowance forbad debts. Actual results could differ from those estimates.

***Reclassifications—******Certain*** prioryear financial statement balances have been reclassified to conform to thecurrent year presentation. These reclassifications have no effect on therecorded net loss.

***Cash and Cash Equivalents—******Cash*** equivalentsare comprised of certain highly liquid investments with maturities 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 related to this concentration of risk.

***Accounts Receivable—******We*** periodicallyassess our accounts receivable for collectibility on a specific identificationbasis. If collectibility of an account becomes unlikely, we record an allowancefor that doubtful account. Once we have exhausted efforts to collect, we writeoff the account receivable against the allowance we have already created. We donot require collateral for our trade accounts receivable.

***Equipment—******We*** recordour equipment at historical cost. We expense maintenance and repairs asincurred. Depreciation is provided for on the straight-line method over threeto six years. Upon disposition of equipment, the gross cost and accumulateddepreciation are written off and the difference between the proceeds and thenet book value is recorded as a gain or loss on sale of assets. In the case ofcertain assets 

10

----

acquired under Capital Leases, the assets are recordednet of imputed interest, based upon the net present value of future payments.Assets under capital lease are pledged as collateral for the related lease.

***Deferred Issuance Costs—******Payments,*** eitherin cash or share-based payments, made in connection with the sale of debenturesare recorded as deferred debt issuance costs and amortized using the effectiveinterest method over the lives of the related debentures. The weighted averageamortization period for deferred debt issuance costs is 36 months, and asredemptions occur the Company writes off the proportional amount of theoriginal deferred issuance cost to interest expense.

***Intangible and Long-Lived Assets—******We*** followStatement of Financial Accounting Standards (“FAS”) No. 144, “Accountingfor Impairment of Disposal of Long-Lived Assets,” which established a “primaryasset” approach to determine the cash flow estimation period for a group ofassets and liabilities that represents the unit of accounting for a long-livedasset to be held and used. Long-lived assets to be held and used are reviewedfor impairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. The carrying amount of a long-livedasset is not recoverable if it exceeds the sum of the undiscounted cash flowsexpected to result from the use and eventual disposition of the asset.Long-lived assets to be disposed of are reported at the lower of carryingamount or fair value less cost to sell. During the years ended December 31,2006 and 2005, no impairment loss was recognized.

***Fair Value of Financial Instruments—******For*** certainof our financial instruments, including accounts receivable, account payable,accrued expenses, interest payable, bank overdraft, advances payable and notespayable, the carrying amounts approximate fair value due to their relativelyshort maturities.

***Valuation of Derivative Instruments—******FAS***133, “Accountingfor Derivative Instruments and Hedging Activities” requires bifurcation ofembedded derivative instruments and measurement of fair value for accountingpurposes. In addition, FAS 155, “Accounting for Certain Hybrid FinancialInstruments” requires measurement of fair values of hybrid financialinstruments for accounting purposes. We applied the accounting proscribed inFAS 155 to account for the 2006 Convertible Debentures described below in Note 3—ConvertibleDebentures 2006. In determining the appropriate fair value, the Company uses avariety of valuation techniques including Black Scholes models, Binomial OptionPricing models, Standard Put Option Binomial models and net present value ofcertain penalty amounts. Derivative liabilities are adjusted to reflect fairvalue at each period end, with any increase or decrease in the fair value beingrecorded in results of operations as Adjustments to Fair Value of Derivatives.The effects of interactions between embedded derivatives are calculated andaccounted for in arriving at the overall fair value of the financialinstruments. In addition, the fair values of freestanding derivativeinstruments such as warrant derivatives are valued using Black Scholes models.

***Revenue Recognition—******Our*** revenuesare generated from license and research agreements with collaborators.Licensing revenue is recognized on a straight-line basis over the shorter ofthe life of the license or the estimated economic life of the patents relatedto the license. Deferred revenue represents the portion of the license andother payments received that has not been earned. Costs associated with thelicense revenue are deferred and recognized over same term as the revenue.Reimbursements of research expense pursuant to grants are recorded in theperiod during which collection of the reimbursement becomes assured, becausethe reimbursements are subject to approval.

***Research and Development Costs—******Research***anddevelopment costs consist of expenditures for the research and development ofpatents and technology, which are not capitalizable. Our research anddevelopment costs consist mainly of payroll and payroll related expenses,research supplies and research grants. Reimbursements of research expensepursuant to grants are recorded in the period during which collection of thereimbursement becomes assured, because the reimbursements are subject toapproval. Research and development costs are expensed as incurred.

11

----

***Stock Based Compensation—******At*** June 30,2007 we had two stock-based employee compensation plans, which are describedmore fully in Note 9—Stock Based Compensation.

Effective January 1,2006, the Company adopted the fair value recognition provisions of SFAS 123R,using the modified prospective transition method. Under this transition method,stock-based compensation expense is recognized in the consolidated financialstatements for granted, modified or settled stock options based on estimatedfair values. Results for prior periods have not been restated, as provided forunder the modified prospective transition method.

Prior to the adoption ofSFAS 123R, the Company presented all tax benefits resulting from the exerciseof stock options as operating cash inflows in the consolidated statements ofcash flows, in accordance with the provisions of the Emerging Issues Task Force(“EITF”) Issue No. 00-15, “Classification in the Statement of CashFlows of the Income Tax Benefit Received by a Company upon Exercise of aNonqualified Employee Stock Option.” SFAS 123R requires the benefits of taxdeductions in excess of the compensation cost recognized for those options tobe classified as financing cash inflows rather than operating cash inflows, ona prospective basis. The impact of this change was not material to the Company.

***Net Loss Per Share—******We***use FAS No. 128,“Earnings Per Share” for calculating the basic and diluted loss per share. Wecompute basic loss per share by dividing net loss and net loss attributable tocommon shareholders by the weighted average number of common shares outstanding.Diluted loss per share is computed similar to basic loss per share except thatthe denominator is increased to include the number of additional common sharesthat would have been outstanding if the potential shares had been issued and ifthe additional shares were dilutive. Common equivalent shares are excluded fromthe computation of net loss per share if their effect is anti-dilutive.

For the three months endedJune 30, 2007, approximately 58,000,000 potentially dilutive shares wereexcluded from the shares used to calculate diluted earnings per share as theirinclusion would be anti-dilutive.

***Income Taxes—***Deferredincome taxes are provided using the liability method whereby deferred taxassets are recognized for deductible temporary differences and operating lossand tax credit carryforwards and deferred tax liabilities are recognized fortaxable temporary differences. Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their tax bases. Deferredtax assets are reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion or all of the deferredtax assets will not be realized. Deferred tax assets and liabilities areadjusted for the effects of the changes in tax laws and rates of the date ofenactment.

When tax returns are filed, it is highly certain thatsome positions taken would be sustained upon examination by the taxing authorities,while others are subject to uncertainty about the merits of the position takenor the amount of the position that would be ultimately sustained. The benefitof a tax position is recognized in the financial statements in the periodduring which, based on all available evidence, management believes it is morelikely than not that the position will be sustained upon examination, includingthe resolution of appeals or litigation processes, if any. Tax positions takenare not offset or aggregated with other positions. Tax positions that meet themore-likely-than-not recognition threshold are measured as the largest amountof tax benefit that is more than 50 percent likely of being realized uponsettlement with the applicable taxing authority. The portion of the benefitsassociated with tax positions taken that exceeds the amount measured asdescribed above is reflected as a liability for unrecognized tax benefits inthe accompanying balance sheet along with any associated interest and penaltiesthat would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognizedtax benefits are classified as additional income taxes in the statement ofincome.

12

----

***Concentrations and Other Risks******—***Currently, theCompany’s revenues and accounts receivable are concentrated on one customer.There is also a geographic concentration of the Company’s primary activities inNorthern California and Massachusetts. Other risks include the uncertainty ofthe regulatory environment and the effect of future regulations on the Company’sbusiness activities. As we are a biotechnology research and developmentcompany, there is also the attendant risk that someone could commence legalproceedings over our discoveries. Acts of God could also adversely affect ourbusiness.

***Recent AccountingPronouncements***

On February 15, 2007,the Financial Accounting Standards Board, or FASB, issued FAS No. 159, “TheFair Value Option for Financial Assets and Liabilities—Including an Amendmentof FAS 115.” This standard permits an entity to choose to measure manyfinancial instruments and certain other items at fair value. This option isavailable to all entities. Most of the provisions in FAS 159 are elective;however, an amendment to FAS 115 “Accounting for Certain Investments in Debtand Equity Securities” applies to all entities with available for sale or tradingsecurities. Some requirements apply differently to entities that do not reportnet income. FAS 159 is effective as of the beginning of an entities firstfiscal year that begins after November 15, 2007. Early adoption ispermitted as of the beginning of the previous fiscal year provided that theentity makes that choice in the first 120 days of that fiscal year and alsoelects to apply the provisions of FAS 157 “Fair Value Measurements.” We willadopt FAS 159 beginning January 1, 2008 and we are currently evaluatingthe potential impact the adoption of this pronouncement will have on ourfinancial statements.

Effective January 1,2007, Advanced Cell Technology adopted FSP No. FIN 48-1, “Definitionof Settlement in FASB Interpretation No. 48,” (FSP FIN 48-1), whichwas issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 toprovide guidance on how an entity should determine whether a tax position iseffectively settled for the purpose of recognizing previously unrecognized taxbenefits. The term “effectively settled” replaces the term “ultimately settled”when used to describe recognition, and the terms “settlement” or “settled”replace the terms “ultimate settlement” or “ultimately settled” when used todescribe measurement of a tax position under FIN 48. FSP FIN 48-1clarifies that a tax position can be effectively settled upon the completion ofan examination by a taxing authority without being legally extinguished. Fortax positions considered effectively settled, an entity would recognize thefull amount of tax benefit, even if the tax position is not considered morelikely than not to be sustained based solely on the basis of its technicalmerits and the statute of limitations remains open. The adoption of FSP FIN 48-1did not have an impact on the accompanying Financial Statements.

**3.**                 CONVERTIBLEDEBENTURES—2006

On September 6, 2006,we entered into a Securities Purchase Agreement with accredited investors forthe issuance of an aggregate of $10,981,250 principal amount of convertibledebentures with an original issue discount of $2,231,250 representingapproximately 20.3%. In connection with the closing of the sale of thedebentures, we received gross proceeds of $8,750,000. These convertibledebentures were issued in connection with certain additional investment rightsgranted in connection with the convertible debentures issued in 2005, anddescribed more fully in Note 4—Convertible Debentures—2005. The convertible debenturesare convertible at the option of the holders into 38,129,340 shares of CommonStock at a fixed conversion price of $0.288 per share, subject to anti-dilutionand other 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. The investors have contractually agreed to restricttheir ability to convert the convertible debentures, exercise the warrants andexercise the additional investment right and receive shares of our Common Stocksuch that the number of shares of our Common Stock held by them and theiraffiliates after such conversion or exercise does not exceed 4.99% of our thenissued and outstanding shares of our Common Stock.

13

----

The agreements enteredinto provide that the Company will pay certain cash amounts as liquidateddamages in the event that the Company does not maintain an effectiveregistration statement, or if the Company fails to timely execute stock tradingactivity.

Under the terms of theagreements, principal amounts owed under the debentures became due and payablecommencing six months following closing of the transaction. This term waschanged to twelve months under the terms of the an amendment signed in January 2007.At that time, and each month thereafter, the Company is required to eitherrepay 1¤30 of the outstanding balance owed in cash, orconvert the amount due into common stock at the lesser of $0.288 per share or 70%of the prior ten days’ average closing stock price, immediately preceding theredemption. The agreements also provide that the Company may force conversionof outstanding amounts owed under the debentures into common stock, if theCompany has met conditions and milestones identified above, and, additionally,has a stock price for 20 consecutive trading days that exceeds 200% of theconversion price.

The agreement included anumber of other embedded derivative instruments, and the Company has compliedwith the provisions of FAS 155 “Accounting for Certain Hybrid FinancialInstruments”, and recorded the fair value of the convertible debentures, andrelated embedded derivatives, as of September 6, 2006. The fair value ofthe debentures and related derivative instruments was valued using a combinationof Binomial and Black Scholes models, resulting in a fair value of $22,200,000.The excess of this value over the face value of the Convertible Debentures wasrecorded through the results of operations as a debit to Charges Related toIssuance of Convertible Debentures.

The 2006 Convertibledebentures and related embedded derivatives outstanding at June 30, 2007were again valued at fair value using a combination of Binomial and BlackScholes models, resulting in a decrease in the fair value of the liability ofapproximately $8,162,000 which was recorded through the results of operationsas a credit to Adjustments to Fair Value of Derivatives.

In connection with thisfinancing, we paid cash fees to a broker-dealer of $525,000 and issued awarrant to purchase 4,575,521 shares of Common Stock at an exercise price of$0.3168 per share. The initial fair value of the warrant was estimated atapproximately $3,600,000 using the Black Scholes pricing model. The assumptionsused in the Black Scholes model are as follows: (1) dividend yield of 0%;(2) expected volatility of 176%, (3) risk-free interest rate of4.81%, and (4) expected life of 5 years. Cash fees paid, and theinitial fair value of the warrant, have been capitalized as debt issuance costsand are being amortized over 36 months, and as redemptions occur theCompany writes off the proportional amount of the original deferred issuancecost to interest expense.

Thefollowing table summarizes the 2006 Convertible Debentures and discountsoutstanding at June 30, 2007 (unaudited):

| 2006 Convertible  debentures at fair value                      |   | $          | 12,472,940 |   |
|-----------------------------------------------------------------|--------|------------|------------|--------|
| Warrant  derivative discount                                    |   | (1,739,346 | )          |
| Original issue  discount                                        |   | (913,185   | )          |
| Net convertible  debentures                                     |   | 9,820,409  |       |
| Less current portion                                            |   | (3,273,470 | )          |
| 2006 Convertible  debentures and embedded derivatives-long term |   | $          | 6,546,939  |   |

 

As of June 30, 2007,the outstanding principle amount for the 2006 Convertible Debentures is$8,485,034.

**4.**                 CONVERTIBLEDEBENTURES—2005

On September 15,2005, we entered into a Securities Purchase Agreement with accredited investorsfor the issuance of an aggregate of $22,276,250 principal amount of convertibledebentures with an original issue discount of $4,526,250 representingapproximately 20.3%. In connection with the closing of the sale of thedebentures, we received gross proceeds of $17,750,000.

14

----

Theagreement included a number of embedded derivative instruments that requiredseparate valuation in accordance with the requirements of FAS 133, EITF 05-04and related accounting literature. The following summarizes the fair values ofembedded derivatives at December 31, 2006 and June 30, 2007, followedby a description of the valuation methodology utilized to determine fairvalues:

| **Embedded Derivative Liability (Asset)** | ** ** | ** ** | ** ** | **Fair value  December 31, 2006** | ** ** | **Fair value  June 30, 2007** | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | **(unaudited)**                                  | ** ** |
| Conversion feature                                       |       |       | $          | 1,104,414                                        |       |                                         |       | $ | 298,064 |   |   |
| Anti-dilution  protection                                |       |       | 2,107,767  |                                             |       |                                         | 524,459    |   |   |
| Default  provisions                                      |       |       | 46,692     |                                             |       |                                         | 7,959      |   |   |
| Right to provide  future financing                       |       |       | 0          |                                             |       |                                         | 0          |   |   |
| Company right to  force conversion                       |       |       | (185,091   | )                                                |       |                                         | (45,964    | ) |   |
|                                                     |       |       | $          | 3,070,782                                        |       |                                         |       | $ | 784,518 |   |   |

 

The fair value of thederivative for the conversion feature was valued as an American call optionusing the Binomial Option Pricing Model with the following inputs: (1) closingstock price of $0.43 at June 30, 2007 (2) exercise price equal to the$0.90 conversion price (3) volatility based upon the Company’s stocktrading of 198% (4) Treasury note rates with terms commensurate with theremaining term of the Notes of 4.91%, and (5) duration of the note as anamortizing debenture of approximately 0.22 years, based upon presentvalues.

The fair value of thederivative for anti-dilution protection was valued using a standard put optionbinomial model, adjusted for the probability of subsequent financing at pricesbelow the principal’s conversion option with the following inputs: (1) closingstock price as of the valuation date of $0.43 (2) exercise price equal tothe $0.90 conversion price (3) volatility based upon the Company’s stocktrading of 198% (4) Treasury note rates with terms commensurate with theremaining term of the Notes of 4.91% and (5) duration of the note as anamortizing debenture of approximately 0.22 years based upon presentvalues.

The fair value of thederivative for contractual default provisions was determined by taking themonthly amortization schedule, and multiplying the result by the contractualpenalty of 120%. The present value of this penalty was then adjusted by theestimated probability of default for each valuation date.

The fair value of thederivative asset related to the Company’s right to force conversion was based upona binomial option pricing model with the following inputs: (1) closingstock price at the valuation date of $0.43 (2) exercise price of $1.80 pershare which is required for the forced conversion (3) volatility basedupon the Company’s stock trading of 198% (4) Treasury note rate with termscommensurate with the remaining term of the Notes of 4.91% and (5) durationof the note as an amortizing debenture of approximately 0.22 years basedupon present values.

During the three monthsended June 30, 2007 , a decrease in the fair value of the embeddedderivative amounts of approximately $1,025,000 was recorded through results ofoperations as Adjustment to Fair Value of Derivatives.

During the three monthsended June 30, 2007 , the Company recorded approximately $682,000 asInterest Expense for amortization of discounts for original issue discount,discount for warrant derivative, and other embedded derivatives identifiedabove.

In connection with thisfinancing, we paid cash fees to a broker-dealer of $1,065,000 and issued awarrant to purchase 1,162,239 shares of Common Stock at an exercise price of$2.53 per share. The initial fair value of the warrant was estimated atapproximately $1,379,000 using the Black Scholes pricing model. The assumptionsused in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 64%, (3) risk-free interest rate of 3.99%, and (4) expectedlife of 5 years. Cash fees paid, and the initial fair value of thewarrant, have been capitalized as debt issuance costs and are being amortized 

15

----

over36 months under the effective interest rate method. Interest expense forthe three months ended June 30, 2007 was approximately $110,000.

In January 2007, theCompany’s Board of Directors agreed to reduce the exercise price of thewarrants issued in connection with the 2005 debentures to $0.95 per share andto reduce the conversion price of the debentures to $0.90 per share.

The Company has consideredthe impact of Emerging Issue Task Force statements, or EITFs 96-19—*Debtor’s Accounting for a Modification or Exchange of Debt Instruments,02-4—Determining Whether a Debtor’s Modification or Exchange of DebtInstruments is Within the Scope of FASB No. 15, and 05-7—Accountingfor Modifications to conversion Options Embedded in Debt Instruments andRelated Issues* on the accounting treatment of the change inconversion price of the 2005 Convertible Debentures described in the paragraphabove. EITF 96-19 states that a transaction resulting in a significantchange in the nature of a debt instrument should be accounted for as anextinguishment of debt. The Company has concluded that the change in conversionprice does not constitute a significant change in the nature of the debt andthat the transaction should not be treated as an extinguishment of that debt.

Thefollowing table summarizes the 2005 Convertible Debentures and embeddedderivatives outstanding at June 30, 2007 :

| 2005 Convertible  debentures at $0.90 at face                    |   | $          | 3,953,097 |   |
|------------------------------------------------------------------|--------|------------|-----------|--------|
| Discounts on  debentures:                                        |   |       |      |
| Original issue discount                                          |   | (367,234   | )         |
| Conversion feature derivative                                    |   | (622,155   | )         |
| Warrant derivative                                               |   | (488,473   | )         |
| Other derivatives                                                |   | (23,746    | )         |
| Net convertible  debentures                                      |   | 2,451,489  |      |
| Embedded  derivatives                                            |   | 784,518    |      |
| 2005 Convertible  debentures and embedded derivatives            |   | 3,236,007  |      |
| Less current portion                                             |   | (2,968,064 | )         |
| 2005 Convertible  debentures and embedded derivatives- long term |   | $          | 267,943   |   |

 

**5.**                 WARRANT ANDOPTION DERIVATIVES

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 accordancewith the provisions of EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to and Potentially Settled in a Company’s Own Stock” theCompany has reviewed all instruments previously recorded as permanent equityunder EITF 00-19 which are described in detail in Note 8—Stockholders’Equity Transactions. As of September 15, 2005, the closing date of theconvertible debenture financing, a $25,600,000 increase in the fair value ofinstruments previously recorded as permanent equity with a value of zero wasrecorded based upon fair values computed under a Black Scholes model with thefollowing assumptions: (1) dividend yield of 0% (2) expectedvolatility of 64% (3) risk-free interest rate of approximately 3.9% and (4) expectedlife and exercise prices consistent with each individual instrument.

16

----

The accumulated fair valueof these and other instruments at September 15, 2005 of approximately$27,700,000, after the increase to fair value described above, was reclassifiedfrom equity to Warrant Derivative liability in accordance with the requirementsof EITF 00-19.

At June 30, 2007 thefair value of each instrument was computed under a Black Scholes model with thefollowing assumptions: (1) dividend yield of 0% (2) expectedvolatility of 155% (3) risk-free interest rate of approximately 4.92% and (4) expectedlife and exercise prices consistent with each individual instrument. Thesecalculations resulted in an aggregate value of derivative instruments ofapproximately $10,099,000. As a result, for the three months ended June 30,2007 the Company recorded approximately $10,600,000 as a credit to Adjustmentto Fair Value of Derivatives.

The Company has consideredthe impact of Emerging Issue Task Force statements, or EITFs 96-19—*Debtor’s Accounting for a Modification or Exchange of Debt Instruments,02-4—Determining Whether a Debtor’s Modification or Exchange of DebtInstruments is Within the Scope of FASB No. 15, and 05-7—Accountingfor Modifications to conversion Options Embedded in Debt Instruments andRelated Issues* on the accounting treatment of the change inconversion price of the 2005 Convertible Debentures described in the paragraphabove. EITF 96-19 states that a transaction resulting in a significantchange in the nature of a debt instrument should be accounted for as anextinguishment of debt. The Company has concluded that the change in conversionprice does not constitute a significant change in the nature of the debt andthat the transaction should not be treated as an extinguishment of that debt.

The carrying value of theremaining 2005 debenture warrant derivatives at June 30, 2007 has beenadjusted to reflect “fair value” of approximately $770,000 based upon a BlackScholes calculation as follows: (1) dividend yield of 0%; (2) expectedvolatility of 155%, (3) risk-free interest rate of 4.89%, and (4) expectedremaining life of 3.00 years. This resulted in an additional decrease in thefair value of the warrant derivative liability of approximately $775,000 which wasrecorded through results of operations as a credit to Adjustment to Fair Valueof Derivatives.

The carrying value of thereplacement warrant derivatives at June 30, 2007 has been adjusted toreflect “fair value” of approximately $1,700,00 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%; (2) expectedvolatility of 155%, (3) risk-free interest rate of 4.92%, and (4) expectedremaining life of 4.25. This resulted in a decrease in the fair value of thewarrant derivative liability of approximately $1,538,000 which was recorded asa credit to Adjustment to Fair Value of Derivatives in the results ofoperations for the three months ended June 30, 2007.

The carrying value of the January 2005financing warrant derivatives at June 30, 2007 have been adjusted toreflect fair value of approximately $1,188,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 155%, (3) risk-free interest rate of 4.89%, and (4) expectedremaining life of 1.50 years. This resulted in an additional decrease in thefair value of the warrant derivative liability of approximately $1,608,000 whichwas recorded through results of operations as a credit to Adjustment to FairValue of Derivatives.

The carrying value of thebroker dealer warrant derivatives at June 30, 2007 have been adjusted toreflect fair value of approximately $1,801,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 155%, (3) risk-free interest rate of 4.89%, and (4) expectedremaining life of 4.25 years. This resulted in a decrease in the fair value ofthe warrant derivative liability of approximately $1,578,000 which was recordedthrough results of operations as a credit to Adjustment to Fair Value ofDerivatives.

The carrying value of theremaining warrant derivatives at June 30, 2007 have been adjusted to reflectfair value of approximately $2,882,000 based upon a Black Scholes calculationas follows: (1) dividend yield of 0%, (2) expected volatility of 155%, (3)risk-free interest rate ranging from 4.25% to 4.89%, and (4) expected remaininglife ranging from .25 years to 4.25 years. This resulted in a decrease in thefair value of the warrant derivative liability of approximately $3,557,000which was recorded through results of operations as a credit to Adjustments toFair Value of Derivatives.

17

----

**6.**                 ADJUSTMENTTO FAIR VALUE OF DERIVATIVES

Thefollowing table summarizes the components of the Adjustment to Fair Value ofDerivatives which were recorded as charges to results of operations in thequarter ended June 30, 2007. The table summarizes by category ofderivative liability the impact from market changes during the quarter andimpact of additional investments.

| ** **                                       | ** ** | **“Market”** | ** ** | **Total F.V.** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **F.V. Adj**      | ** ** | **Adjustment**      | ** ** |
| PIPE Hybrid  instrument (September 2006)    |       | (6,596,473             | )          | (6,596,473          | )          |
| Embedded PIPE  derivatives (September 2005) |       | (1,024,757             | )          | (1,024,757          | )          |
| Original Warrants  PIPE (September 2005)    |       | (775,201               | )          | (775,201            | )          |
| Other Warrant  derivatives                       |       | (9,846,113             | )          | (9,846,113          | )          |
|                                             |       | (18,242,544            | )          | (18,242,544         | )          |

 

**7.**                 RECLASSIFICATIONOF EQUITY TRANSACTIONS

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 8—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) dividendyield of 0% (2) expected volatility of 64% (3) risk-free interestrate of approximately 3.9% and (4) expected life and exercise pricesconsistent with each individual instrument.

The accumulated fair valueof these and other instruments at September 15, 2005 of approximately$27,700,000, after the increase to fair value described above, was reclassifiedfrom equity to Warrant Derivative liability in accordance with the requirementsof EITF 00-19.

**8.**                 STOCKHOLDERS’EQUITY TRANSACTIONS

We are authorized to issue two classes of capitalstock, to be designated, respectively, Preferred Stock and Common Stock. Thetotal number of shares of Preferred Stock we are authorized to issue is50,000,000 par value $0.001 per share. The total number of shares of CommonStock we are authorized to issue is 500,000,000, par value $0.001 per share. Wehad no Preferred Stock outstanding as of June 30, 2007. We had59,974,205  shares of Common Stockoutstanding as of June 30, 2007.

In January 2007, the Company issued 300,000warrants to purchase common stock at $0.96 per share in connection withconsulting services provided during the quarter. The warrants were valued atapproximately $225,000 using the Black Scholes pricing model with the followingassumptions: (1) dividend yield of 0%; (2) expected volatility of165%, (3) risk-free interest rate of 4.90%, and (4) expected life of4.0 years. This warrant is classified as a warrant derivative.

18

----

In January 2007, the Company issued 35,909 fullyvested shares of Common Stock as consideration for service on the Company’sBoard of Directors and Audit Committee. These shares are valued at market priceon date of grant.

In January 2007, the Company issued 515,000 shareof Common Stock, valued at $407,000, to employees. These shares are fullyvested at issuance and are valued at fair market proce on date of grant.

In February 2007, the Company issued 800,00shares of Common Stock, valued at $608,000 based upon the closing price pershare on the date of issuance, to Infigen, Inc. in connection with theexecution of a Patent Assignment Agreement. The Company recorded the $608,000as deferred royalty fees and will amortize over an estimated useful life of 10years.

In April 2007, theCompany issued 85,000 shares of common stock in settlement of legal fees ofapproximately $68,000. The shares were valued at the closing price per share onthe date of issuance.

**9.**                 STOCK-BASEDCOMPENSATION

**Stock Plans**

On August 12, 2004, ACT’s Board of Directorsapproved the establishment of the 2004 Stock Option Plan (the “*2004 Stock Plan*”). Stockholder approval was received on December 13, 2004.The total number of common shares available for grant and issuance under theplan may not exceed 2,800,000 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 2,604,000common share purchase options 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*”). Thetotal number of common shares available for grant and issuance under the planmay not exceed 1,301,161 shares, 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.

On January 31, 2005, the Company’s Board ofDirectors approved the establishment of the 2005 Stock Incentive Plan (the “2005Plan”), subject to approval of our shareholders. The total number of commonshares available for grant and issuance under the plan may not exceed9 million shares, plus an annual increase on the first day of each of theCompany’s fiscal years beginning in 2006 equal to 5% of the number of shares ofour common stock outstanding on the last day of the immediately precedingfiscal year, 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.

Pursuant to the 2005 Plan, on February 5, 2007,we granted 1,300,000 common stock purchase options to employees. The optionsgranted have an exercise price of $0.76 per share, the market price of theCompany’s stock on the date of grant. The options vest monthly over a period of4 years. The fair value of the options was estimated at $953,000 using theBlack Scholes option pricing model. The assumptions used in the Black Scholesmodel are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 163%, (3) risk-free interest rate of 4.80%, and (4) expectedlife of 6.25 years. The fair value was treated in accordance withFAS 123(R) and is being amortized over a period of four years. Sincethe Company vests options on the graded method, the fair value is amortized ona straight line basis which approximates the vesting schedule.

19

----

Theassumptions used in the Black Scholes models referred to above are based uponthe following data: (1) Expected dividends on the underlying shares overthe remaining term 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**         | ** ** | **Stock**       | ** ** | ** **         | ** ** | **Average**  | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** |
| ** **                         | ** ** | **Available**      | ** ** | **Options**     | ** ** | **Price Per** | ** ** | **Exercise** | ** ** | **Average**  | ** ** | **Intrinsic** | ** ** |
| ** **                         | ** ** | **For Grant** | ** ** | **Outstanding** | ** ** | **Share**          | ** ** | **Price**    | ** ** | **Life**     | ** ** | **Value**     | ** ** |
| Balance at  December 31, 2006 |       | 478,137            |       |            | 13,656,976 |               |       | $            | 0.05-$2.48 |         |       | $             | 0.71       |   |   | 8.2 years |   |   |   |
| Annual increase pursuant to plan   |       | 1,965,963          |       |            | —     |               |       | —       |       |         | —     |          |       | — |   |   |   |
| Options granted                    |       | (1,300,000         | )          |            | 1,300,000  |               |       | $            | 0.76       |         |       | $             | 0.76       |   |   | 9.8 years |   |   |   |
| Stock Awards                       |       | (515,000           | )          |            |       |               |       | $            | —     |         |       | $             | —     |   |   |   |   |   |   |
| Balance at  June 30, 2007     |       | 629,100            |       |            | 14,956,976 |               |       | $            | 0.05-$2.48 |         |       | $             | 0.74       |   |   | 8.2 years |   | 3,983,000 |   |

 

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

As of June 30, 2007 and December 31, 2006, there were 8,720,879 and 7,503,665exercisable options outstanding at a weighted average exercise price per shareof $0.72 and $0.61, respectively, and with a weighted average life of 8.25years and 8.40 years respectively.

During the period, no options were forfeited orexercised. The aggregate intrinsic value of all options vested is approximately$1,847,000. All fully vested options in the Company are exercisable.

The fair value of all options vested during the yearended December 2006 and the six months ended June 30, 2007 was$522,516 and $344,984 respectively.

For the three and six months ended March 31, 2007and June 30,  2007, a charge ofapproximately $35,000 and $35,000, and $180,000 and $94,000 respectively wasrecorded through results of operations as General and Administrative andResearch and Development expense related to share based compensation. Theseamounts were calculated using a pre-vesting forfeiture rate of 13%, basedon historical employee turnover and forfeiture data.

Asummary of the status of unvested employee stock options as of June 30,2007 and changes during the period then ended, is presented below:

| ** **                          | ** ** | **Options** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|-------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at  December 31, 2006 |       | 3,416,398   |       |                                                                    | $          | 0.22 |   |   |
| Granted                             |       | 1,300,000   |       |                                                                    | $          | 0.69 |   |   |
| Vested                              |       | (1,217,212  | )          |                                                                    | $          | 0.26 |   |   |
| Unvested at  June 30, 2007     |       | 3,499,186   |       |                                                                    | $          | 0.38 |   |   |

 

As of June 30, 2007 ,the total remaining unrecognized compensation cost related to unvested stockoptions amounted to $1.4  million, which will be amortized over theweighted-average remaining requisite service period of 4.0 years.

20

----

**10.**          COMMITMENTSAND CONTINGENCIES

We are a party to a license agreement with theUniversity of Massachusetts, as amended from time to time (the “UMass License”).Under the UMass License, we were granted certain exclusive rights to licenseand sublicense certain products and services invented as part of thecollaborative effort. The term of the UMass License extends to the later of theexpiration of the related patents currently 2021, or April 16, 2006. Weare required to pay royalties ranging from 2.5% to 4.5% of net sales oflicensed products and services, as defined. Minimum royalties of $45,000 peryear must be paid to UMass. For 2006 and 2007, we have paid only the minimumroyalty required. Additionally, we are required to pay sublicense fees of 18%for sublicense income, as defined. We are required to spend a minimum annualamount of $200,000 on research and development. The Company did, in fact,fulfill this requirement.

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 pay minimum annual royalties of $25,000 perannum for 2006, $37,500 for 2007 and $50,000 each year thereafter through theterm of the agreement. The initial license fees paid have been capitalized andwill be amortized over the life of the underlying intellectual property,estimated to be approximately ten years.

In March 2006 we entered into an exclusivesublicense agreement with TranXenoGen, Inc. whereby we are the exclusivelicensee of certain of TranXenoGen’s technology and intellectual property.Pursuant to this agreement we issued 163,399 shares of common stock with afair value of approximately $239,000 and made a cash payment during the first quarterof 2006 of $140,000. We had previously paid $20,000 as an option paymentrelated to the TranXenoGen technology. The total value paid for this licenseagreement of $399,000 has been capitalized and will be amortized over the lifeof the underlying intellectual property, estimated to be approximately sevenyears.

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 on December 1,2006; and $400,000 on June 1, 2007. There is no stated interest rate for$1,000,000 of notes, the remaining $400,000 bear interest at 10% per year, butonly if the notes are not paid at maturity. Because of the uncertainty of the ultimatecollection of the principal amount of the notes, they have not been recorded inthe financial statements and will not be recorded until their collectibility isreasonable assured.

TheCompany entered into a lease for office and laboratory space in Massachusettscommencing December 2004 and expiring April 2010 and for office spacein California commencing November 2005 and expiring May 2008. Annualminimum lease payments are as follows:

| Year 1 |   | $       | 550,967 |   |
|--------|--------|---------|---------|--------|
| Year 2 |   | 242,670 |    |
| Year 3 |   | 206,472 |    |

 

21

----

During2005, the Company entered into a lease for laboratory equipment commencing November 29,2005 and expiring May 31, 2008. Annual minimum lease payments are asfollows:

| 2007                                      |   | 53,459  |   |
|-------------------------------------------|--------|---------|--------|
| 2008                                      |   | 36,655  |   |
|                                      |   | 90,114  |   |
| Imputed interest                          |   | (12,520 | )      |
| Net asset value                           |   | 77,594  |   |
| Less current  portion                     |   | (77,594 | )      |
| Long-term commitment  under capital lease |   | $       | 0      |   |
|                                           |        |         |        |  |

 

Rent expense recorded in the financial statements forthe three month and six month period ended June 30, 2007 and 2006 wasapproximately $324,000, $652,249, $326,000 and $416,348, respectively.

We have entered intoemployment contracts with certain executives and research personnel. Thecontracts provide for salaries, bonuses and stock option grants, along withother employee benefits. The employment contracts generally have no set termand can be terminated by either party. There is a provision for payments ofthree months to one year of annual salary as severance if we terminate acontract without cause, along with the acceleration of certain unvested stock optiongrants.

**11.**          INCOMETAXES

The Company files income tax returns in the U.S.federal jurisdiction, and various states and foreign jurisdictions. With fewexceptions, the Company is no longer subject to U.S. federal, state and localincome tax examinations by tax authorities for years before 2001.

The Company adopted the provisions of FASBInterpretation No. 48, *Accounting forUncertainty in Income Taxes*(“FIN48”), on January 1, 2007. As a result of the implementation of FIN48, the Company reduced its net operating loss carryforward by $1,550,000. Thisreduction of the net operating loss carryforward translated into a reduction ofthe gross deferred tax asset of $658,500 , with a corresponding reduction ofthe valuation allowance against that deferred tax asset. Due to the offsettingeffect of the reduction of the valuation allowance, the adoption ofInterpretation No. 48 had no impact on the Company’s balance sheets orstatements of operations.

Included in the deferred tax balance at June 30,2007 are $4.4 million of tax positions for which the ultimatedeductibility is highly certain but for which there is uncertainty about thetiming of such deductibility. Because of the impact of the valuation allowance,the disallowance of the shorter deductibility period would not affect theannual effective tax rate.

As the Company hassignificant net operating loss carryforwards, even if certain of the Company’stax positions were disallowed, it is not foreseen that the Company would haveto pay any taxes in the near future. Consequently, the Company does notcalculate the impact of interest or penalties on amounts that might bedisallowed.

**12.**          GAINON SETTLEMENT WITH ROTHWELL FIGG

In April, 2007, theCompany settled outstanding payable amounts to Rothwell Figg. In total,$311,381worth of liabilites were settled. As part of the settlement, theCompany issued 85,000 shares worth a total of $68,000, and made three monthlypayments totaling $50,000. As a result, the Company recognized a gain on thistransaction totaling $193,861.

22

----

**13.**          SUBSEQUENTEVENTS

In July  2007, the Company made its monthlyredemptions of convertible debentures described in Note 4. The terms of theagreement provide for payment in cash or stock at the company’s discretion. Inconnection with the July redemption, the Company issued approximately983,149  shares of common stock andredeemed approximately $501,406  in NotesPayable.

In August  2007, the Company made its monthlyredemptions of convertible debentures described in Note 4. In connection withthe August  redemptions, the Company issued approximately 1,176,370  shares of common stock and redeemedapproximately $399,966 in Notes Payable.

At June 30, 2007, approximately 220,297  of the shares related to the July  redemptionhad been preliminarily issued by the transfer agent in accordance with theterms of the debenture agreement. Such shares are not reflected as issued andoutstanding by the company prior to finalizing share and cash payments inconnection with the redemption in July 2007.

On July 31, 2007, the Company entered into adefinitive merger agreement pursuant to which a wholly owned subsidiary of theCompany will merge with and into Mytogen, with Mytogen as the surviving entity.With the definitive merger agreement approved and executed by both parties, theCompany and Mytogen anticipate closing the transaction within ten daysfollowing the satisfaction of certain closing conditions, which to date havenot yet been satisfied. The merger agreement provides for an aggregatedpurchase consideration of 8,064,516 restricted shares of the Company’s commonstock, plus the assumption of certain Mytogen liabilities. Mytogen shareholderswill also receive a warrant to purchase an additional 1.5 million shares of theCompany’s common stock at $0.75 subject to the achievement of certainmilestones.

On August 14, 2007, certain existing investors of theCompany advanced $300,000 to the Company pursuant to a bridge loancommitment.  The bridge loan commitmententered into on August 14, 2007 provides a total of up to $600,000 of interimbridge financing to the Company structured in the form of a convertible notewith draws to be made in the Company’s discretion.  Such bridge financing shall be used to fundthe working capital needs of the Company while the Company continues to seeklong-term financing over the course of the next several weeks.

23

----

**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” and variations thereof, and otherstatements contained in quarterly report, and the exhibits hereto, regarding mattersthat are 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 stageof development, including a lack of operating history, lack of profitableoperations and the need for additional capital; the development andcommercialization of largely novel and unproven technologies and products; ourability to protect, maintain, and defend our intellectual property rights:uncertainties regarding our ability to obtain the capital resources needed tocontinue research and development operations and to conduct research,preclinical development and clinical trials necessary for regulatory approvals;uncertainty regarding the outcome of clinical trials and our overall ability tocompete effectively in a highly complex, rapidly developing, capital intensiveand competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS”**set forth below on page 28 for amore complete discussion of these factors. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of thedate that they are made. We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

The following discussionshould be read in conjunction with the financial statements and notes theretoincluded in Part I, Item 1 of this Quarterly Report on Form 10-QSB.

We are a biotechnologycompany focused on developing and commercializing human stem cell technology inthe emerging fields of regenerative medicine and stem cell therapy.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

***Use of Estimates—***These consolidatedfinancial 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 variables used to calculate theBlack Scholes and binomial lattice model calculations used to value derivativeinstruments discussed below under “Valuation of Derivative Instruments”. Inaddition, management has estimated the expected economic life and value of ourlicensed technology, our net operating loss for tax purposes, share-basedpayments to compensation to employees, directors, consultants and investmentbanks, the useful lives of our fixed assets and our allowance for bad debts.Actual results could differ from those estimates.

***Fair Value of Financial Instruments—***Forcertain of our financial instruments, including accounts receivable, accountpayable, accrued expenses, interest payable, bank overdraft, advances payableand notes payable, the carrying amounts approximate fair value due to theirrelatively short maturities.

***Valuation of Derivative Instruments—***FAS 133,“Accounting for Derivative Instruments and Hedging Activities” requiresbifurcation of embedded derivative instruments and measurement of fair valuefor accounting purposes. In addition, FAS 155, “Accounting for CertainHybrid Financial Instruments” requires measurement of fair values of hybridfinancial instruments for accounting purposes. We applied the accountingproscribed in FAS 155 to account for the 2006 Convertible Debentures describedbelow in Note 5—Convertible Debentures 2006. In determining the appropriatefair value, the Company uses a variety of valuation techniques including BlackScholes models, Binomial Option Pricing models, Standard Put Option Binomialmodels and net present value of certain penalty amounts. Derivative liabilitiesare 

24

----

adjusted to reflectfair value at each period end, with any increase or decrease in the fair valuebeing recorded in results of operations as Adjustments to Fair Value ofDerivatives. The effects of interactions between embedded derivatives arecalculated and accounted for in arriving at the overall fair value of thefinancial instruments. In addition, the fair values of freestanding derivativeinstruments such as warrant derivatives are valued using Black Scholes models.

***Deferred Issuance Costs******—Payments, either in cash orshare-based payments, made in connection with the sale of debentures arerecorded as deferred debt issuance costs and amortized using the effectiveinterest method over the lives of the related debentures. The weighted averageamortization period for deferred debt issuance costs is 36 months.***

***Stock Based Compensation—***AtJune 30, 2007 we had two stock-based employee compensation plans, whichare described more fully in Note 8—Stock Based Compensation.

Prior to the January 1,2006 adoption of the FAS No. 123(R), “Share-Based Payment,” the Companyaccounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Because the stockoption grant price equaled the market price on the date of grant, nocompensation expense was recognized by the Company for stock-based compensation.As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”) stock-based compensation was included as a pro forma disclosure in thenotes to the consolidated financial statements.

Effective January 1,2006, the Company adopted the fair value recognition provisions of SFAS 123R,using the modified prospective transition method. Under this transition method,stock-based compensation expense is recognized in the consolidated financialstatements for granted, modified or settled stock options based on estimatedfair values. Results for prior periods have not been restated, as provided forunder the modified prospective transition method.

Prior to the adoption ofSFAS 123R, the Company presented all tax benefits resulting from the exerciseof stock options as operating cash inflows in the consolidated statements ofcash flows, in accordance with the provisions of the Emerging Issues Task Force(“EITF”) Issue No. 00-15, “Classification in the Statement of CashFlows of the Income Tax Benefit Received by a Company upon Exercise of aNonqualified Employee Stock Option.” SFAS 123R requires the benefits of taxdeductions in excess of the compensation cost recognized for those options tobe classified as financing cash inflows rather than operating cash inflows, ona prospective basis. The impact of this change was not material to the Company.

***Recent AccountingPronouncements***

On February 15, 2007,the Financial Accounting Standards Board, or FASB, issued FAS No. 159, “TheFair Value Option for Financial Assets and Liabilities—Including an Amendmentof FAS 115.” This standard permits an entity to choose to measure manyfinancial instruments and certain other items at fair value. This option isavailable to all entities. Most of the provisions in FAS 159 are elective;however, an amendment to FAS 115 “Accounting for Certain Investments in Debtand Equity Securities” applies to all entities with available for sale or tradingsecurities. Some requirements apply differently to entities that do not reportnet income. FAS 159 is effective as of the beginning of an entities firstfiscal year that begins after November 15, 2007. Early adoption ispermitted as of the beginning of the previous fiscal year provided that theentity makes that choice in the first 120 days of that fiscal year and alsoelects to apply the provisions of FAS 157 “Fair Value Measurements.” We willadopt FAS 159 beginning January 1, 2008 and we are currently evaluatingthe potential impact the adoption of this pronouncement will have on ourfinancial statements.

Effective January 1,2007, Advanced Cell Technology adopted FSP No. FIN 48-1, “Definitionof Settlement in FASB Interpretation No. 48,” (FSP FIN 48-1), whichwas issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 toprovide guidance on how an entity should determine whether a tax position iseffectively settled for the purpose of recognizing previously unrecognized taxbenefits. The term 

25

----

“effectivelysettled” replaces the term “ultimately settled” when used to describerecognition, and the terms “settlement” or “settled” replace the terms “ultimatesettlement” or “ultimately settled” when used to describe measurement of a taxposition under FIN 48. FSP FIN 48-1 clarifies that a tax position can beeffectively settled upon the completion of an examination by a taxing authoritywithout being legally extinguished. For tax positions considered effectivelysettled, an entity would recognize the full amount of tax benefit, even if thetax position is not considered more likely than not to be sustained basedsolely on the basis of its technical merits and the statute of limitationsremains open. The adoption of FSP FIN 48-1 did not have an impact on theaccompanying Financial Statements.

**RESULTS OF OPERATIONS**

**Three and six months ended June 30, 2007 and 2006**

***Revenues***

Revenues for the three andsix months ended June 30, 2007 and 2006 were approximately $274,000,$399,000, $121,000, and $204,000 respectively. These amounts relate primarilyto license fees and royalties collected that are being amortized over theperiod of the license granted. The increase in revenue in current periods wasdue to new licenses being granted.

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

Research and development expensesfor the three and six months ended June 30, 2007 and 2006 wereapproximately $2,829,000, $6,478,000, $2,617,000, and $4,426,000 respectively.The increase in expenses in the current periods, which consist mainly offacility costs, payroll and payroll related expenses, research supplies andcosts incurred in connection with specific research grants, relate principallyto increased staffing and spending for scientific research.

Our research anddevelopment expenses consist primarily of costs associated with basic andpre-clinical research exclusively in the field of human stem cell therapies andregenerative medicine, with focus on development of our technologies incellular reprogramming, reduced complexity applications, and stem celldifferentiation. These expenses represent both pre-clinical development costsand costs associated with non-clinical support activities such as qualitycontrol and regulatory processes. The cost of our research and developmentpersonnel is the most significant category of expense; however, we also incurexpenses with third parties, including license agreements, sponsored researchprograms and consulting expenses.

We do not segregateresearch and development costs by project because our research is focusedexclusively on human stem cell therapies as a unitary field of study. Althoughwe have three principal areas of focus for our research, these areas arecompletely intertwined and have not yet matured to the point where they areseparate and distinct projects. The intellectual property, scientists and otherresources dedicated to these efforts are not separately allocated to individualprojects, but rather are conducting our research on an integrated basis.

We expect that researchand development expenses will continue to increase in the foreseeable future aswe add personnel, expand our pre-clinical research, begin clinical trialactivities, and increase our regulatory compliance capabilities. The amount ofthese increases is difficult to predict due to the uncertainty inherent in thetiming and extent of progress in our research programs, and initiation ofclinical trials. In addition, the results from our basic research andpre-clinical trials, as well as the results of trials of similar therapeuticsunder development by others, will influence the number, size and duration ofplanned and unplanned trials. As our research efforts mature, we will continueto review the direction of our research based on an assessment of the value ofpossible commercial applications emerging from these efforts. Based on thiscontinuing review, we expect to establish discrete research programs andevaluate the cost and potential for cash inflows from commercializing products,partnering with others in the biotechnology or pharmaceutical industry, orlicensing the technologies associated with these programs to third parties.

26

----

We believe that it is notpossible at this stage to provide a meaningful estimate of the total cost tocomplete our ongoing projects and bring any proposed products to market. Theuse of human embryonic stem cells as a therapy is an emerging area of medicine,and it is not known what clinical trials will be required by the FDA in orderto gain marketing approval. Costs to complete could vary substantiallydepending upon the projects selected for development, the number of clinicaltrials required and the number of patients needed for each study. It ispossible that the completion of these studies could be delayed for a variety ofreasons, including difficulties in enrolling patients, delays in manufacturing,incomplete or inconsistent data from the pre-clinical or clinical trials, anddifficulties evaluating the trial results. Any delay in completion of a trialwould increase the cost of that trial, which would harm our results ofoperations. Due to these uncertainties, we cannot reasonably estimate the size,nature nor timing of the costs to complete, or the amount or timing of the netcash inflows from our current activities. Until we obtain further relevantpre-clinical and clinical data, we will not be able to estimate our futureexpenses related to these programs or when, if ever, and to what extent we willreceive cash inflows from resulting products.

Grant reimbursements forthe three and six months ended June 30, 2007 and 2006 were approximately$9,600, $67,000, $163,000 and $364,000 respectively. The 2006 amounts representapproved reimbursements pursuant the grant from National Institutes of Scienceand Technology. This grant expired in May 2006. The 2007 grant amount isfrom the Small Business Technology Transfer Program.

***General andAdministrative Expenses***

General and administrativeexpenses for the three and six months ended June 30 2007 and 2006 wereapproximately $1,246,000, $2,987,000, $1,878,000 and $4,508,000 respectively.Expenses for the three month period versus the same period last year havedecreased primarily as a result of decreased general and administrativeinfrastructure costs and legal fees.

***Other Income(Expense)***

Other income (expense) forthe three and six months ended June 30, 2007 and 2006 were approximately$15,071,000, $409,000, $13,599,000 and $22,628,000, respectively. The increasein other expense in the three months ended June 30, 2007, compared toother income in the prior periods, relates primarily to adjustments to fairvalue of derivatives related to the Convertible Debenture financing and theCharges related to issuance of Convertible Debentures. The increase in interestexpense in the six months ended June 2007, compared to interest expense in theprior periods relates primarily to interest recorded in connection with theconvertible debentures.

***Net Income (Loss)***

Net income (loss) for thethree and six months ended June 30, 2007and 2006 was approximately$11,169,000, ($8,762,000), $9,295,000, and $14,108,000 respectively. Thedecrease in loss in the current period is the result of changes to the fairvalue of derivatives, interest charges related to convertible debentures andcharges related to issuance of Convertible Debentures along with increasedgeneral and administrative and research and development expenses, as well asdecreased grant reimbursements.

***LIQUIDITY ANDCAPITAL RESOURCES***

We are financing ouroperations primarily with $8,750,000 of proceeds of convertible debenturesissued in September, 2006 and described in our Current Report on Form 8-Kfiled with the Securities and Exchange Commission and above in Note 3—ConvertibleDebentures 2006, and $4,314,588 of proceeds from warrant exercises as describedabove in Note 5—Warrant and Option Derivatives. To a substantially lesserdegree, financing of our operations is provided through grant funding, paymentsreceived under license agreements, and interest earned on cash and cashequivalents.

27

----

With the exception of2002, when we sold certain assets of a subsidiary resulting in a gain for theyear, we have incurred substantial net losses each year since inception as aresult of research and development and general and administrative expenses insupport of our operations. We anticipate incurring substantial net losses inthe future.

Cash and cash equivalentsat June 30, 2007 and December 31, 2006 were approximately $770,000and $8,689,000, respectively. The decrease in the current period is primarilythe result of operational cash expenditures.

Our cash and cashequivalents are limited. We currently have cash and cash equivalents ofapproximately $330,000 as of August 14, 2007. Our current cash isanticipated to be sufficient to fund our operations only throughSeptember 30, 2007. We will require substantial additional funding tocontinue operations thereafter. We are currently seeking additional debt andequity financing to satisfy these immediate liquidity needs. 

Our future cashrequirements will depend on many factors, including the pace and scope of ourresearch and development programs, the costs involved in filing, prosecuting,maintaining and enforcing patents and other costs associated withcommercializing our potential products. We intend to seek additional fundingprimarily through public or private financing transactions, and, to a lesserdegree, new licensing or scientific collaborations, grants from governmental orother institutions, 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 cannot assure you that publicor private financing or grants will be available on acceptable terms, if atall. Several factors will affect our ability to raise additional funding,including, but not limited to, the volatility of our Common Stock.

**RISKFACTORS THAT MAY AFFECT OUR BUSINESS**

*Our business is subject to various risks, included butnot limited to those described below. You should carefully consider thesefactors, together with all the other information disclosed in this QuarterlyReport on Form 10-QSB. Any of these risks could materially adverselyaffect our business, operating results and financial condition.*

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

**We have a limitedoperating history on which potential investors may evaluate our operations andprospects for profitable operations.****  **We have a limited operating history on which apotential investor may base an evaluation of us and our prospects. If we areunable to begin and sustain profitable operations, investors may lose theirentire investment in us. We are in the pre-clinical stage, and our prospectsmust be considered speculative in light of the risks, expenses and difficultiesfrequently encountered by companies in their early stages of development,particularly in light of the uncertainties relating to the new, competitive andrapidly evolving markets in which we anticipate we will operate. To attempt toaddress these risks, we must, among other things, further develop ourtechnologies, products and services, successfully implement our research,development, marketing and commercialization strategies, respond to competitivedevelopments and attract, retain and motivate qualified personnel. Asubstantial risk is involved in investing in us because, as an early stagecompany,

·       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 that maybe made, as well as to external factors beyond our control.

These difficulties arecompounded by our heavy dependence on emerging and sometimes unproventechnologies. In addition, some of our significant potential revenue sourcesinvolve ethically sensitive and 

28

----

controversialissues which could become the subject of legislation or regulations that couldmaterially restrict our operations and, therefore, harm our financialcondition, operating results and prospects for bringing our investors a returnon their investment.

**We have a history ofoperating losses, and we cannot assure you that we will achieve future revenuesor operating profits.****  **We have generated modest revenue to date from our operations.Historically, we have had net operating losses each year since our inception.We have limited current potential sources of revenue from license fees andproduct development revenues, and we cannot assure you that we will be able todevelop such revenue sources or that our operations will become profitable,even if we are able to commercialize our technologies or any products orservices developed from those technologies. If we continue to suffer losses aswe have in the past, investors may not receive any return on their investmentand may lose their entire investment.

Although we have revenuesfrom license fees and royalties, we have no commercially marketable productsand no immediate ability to generate revenue from commercial products, nor anyassurance of being able to develop our technologies for commercialapplications. As a result, we may never be able to operate profitably. We arejust beginning to identify products available for pre-clinical trials and maynot receive significant revenues from commercial sales of our products for thenext several years, if at all, although we do generate revenues from licensingactivities. We have marketed only a limited amount of services based on ourtechnologies and have little experience in doing so. Our technologies and anypotential products or services that we may develop will require significantadditional effort and investment prior to material commercialization and, inthe case of any biomedical products, pre-clinical and clinical testing andregulatory approvals. We cannot assure you that we will be able to develop anysuch technologies or any products or services, or that such technologies,products or services will prove to be safe and efficacious in clinical trials,meet applicable regulatory standards, be capable of being produced incommercial quantities at acceptable costs or be successfully marketed. For thatreason, we may not be able to generate revenues from commercial production oroperate profitably.

We have sold theagricultural portion of our business in order to finance operations. Theagricultural applications of our technology generally have a more rapidrealization of revenues due to more limited regulatory requirements andtesting. Our ability to generate revenue from any agricultural applications ofour technology is limited to existing license royalties, if any.

**We will requiresubstantial additional funds to continue operating which may not be availableon 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, thebridge financing described in Note 13—Subsequent Events, and anticipatedrevenue stream from licensing fees and sponsored research contracts issufficient for us to continue operations beyond September 30, 2007 withoutraising additional financing.

Management continues toevaluate alternatives and sources for additional funding, which may includepublic or private investors, strategic partners, and grant programs availablethrough specific states or foundations, although there is no assurance thatsuch sources will result in raising additional capital. Lack of necessary fundsmay require us to delay, scale back or eliminate some or all of our researchand product development programs and/or our capital expenditures, to licenseour potential products or technologies to third parties, to consider businesscombinations related to ongoing business operations, or shut down some, or all,of our operations.

In addition, our cashrequirements may vary materially from those now planned because of results ofresearch and development, potential relationships with strategic partners,changes in the focus and direction of our research and development programs,competition, litigation required to protect our technology, technological advances,the cost of pre-clinical and clinical testing, the regulatory process of 

29

----

theUnited States Food and Drug Administration, or FDA, and foreign regulators,whether any of our products become approved or the market acceptance of anysuch products and other factors. Our current cash reserves are not sufficientto fund our operations through the commercialization of our first products orservices.

**We have limited clinicaltesting, 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 developany such 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 competition includesboth public and private organizations and collaborations among academicinstitutions 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. and Viacell, Inc.,as well as others, many of which have substantially greater resources andexperience in our fields than we do, are well situated to effectively competewith us. Any of the world’s largest pharmaceutical companies represents asignificant actual or potential competitor with vastly greater resources thanours.

These companies holdlicenses to genetic selection technologies and other technologies that arecompetitive with our technologies. These and other competitive enterprises havedevoted, and will continue to devote, substantial resources to the developmentof technologies and products in competition with us.

Private and publicacademic and research institutions also compete with us in the research anddevelopment of human therapeutic or agricultural products. In the past severalyears, the pharmaceutical industry has selectively entered into collaborationswith both public and private organizations to explore the possibilities thatstem cell therapies may present for substantive breakthroughs in the fightagainst disease.

In addition, many of ourcompetitors have significantly greater experience than we have in thedevelopment, pre-clinical testing and human clinical trials of biotechnologyand pharmaceutical products, in obtaining FDA and other regulatory approvals ofsuch products and in manufacturing and marketing such products. Accordingly ourcompetitors may succeed in obtaining FDA approval for products more rapidly oreffectively than we can. Our competitors may also be the first to discover andobtain a valid patent to a particular stem cell which may effectively block allothers from doing so. It will be important for us or our collaborators to bethe first to discover any stem cell that we are seeking to discover. Failure tobe the first could prevent us from commercializing all of our research anddevelopment affected by that discovery. Additionally, if we commence commercialsales of any products, we will also be competing with respect to manufacturingefficiency and sales and marketing capabilities, areas in which we have noexperience.

The United States isencountering tremendous competition from many foreign countries that areproviding an environment more attractive for stem cell research. Thegovernments of numerous foreign countries are investing in stem cell research,providing facilities, personnel and legal environments 

30

----

intendedto attract biotechnology companies and encourage stem cell research anddevelopment of stem cell-related technologies.

These efforts by foreigncountries may make it more difficult to effectively compete in our industry andmay generate competitors 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 to successfullydevelop, which will prevent us from generating revenues, operating profitablyor providing investors any return on their investment.****  **We have concentrated our research on our nucleartransfer and embryonic stem cell technologies, and our ability to operateprofitably will depend on being able to successfully develop these technologiesfor human applications. These are emerging technologies with, as yet, limitedhuman applications. We cannot guarantee that we will be able to successfullydevelop our nuclear transfer and embryonic stem cell technologies or that suchdevelopment will result in products or services with any significant commercialutility. We anticipate that the commercial sale of such products or services,and royalty/licensing fees related to our technology, would be our primarysources of revenues. If we are unable to develop our technologies, investorswill likely lose their entire investment in us.

The outcome ofpre-clinical, clinical and product testing of our products is uncertain, and ifwe are unable to satisfactorily complete such testing, or if such testingyields unsatisfactory results, we will be unable to commercially produce ourproposed products. Before obtaining regulatory approvals for the commercialsale of any potential human products, our products will be subjected toextensive pre-clinical and clinical testing to demonstrate their safety andefficacy in humans. We cannot assure you that the clinical trials of ourproducts, or those of our licensees or collaborators, will demonstrate thesafety and efficacy of such products at all, or to the extent necessary toobtain appropriate regulatory approvals, or that the testing of such productswill be completed in a timely manner, if at all, or without significantincreases in costs, program delays or both, all of which could harm our abilityto generate revenues. In addition, our prospective products may not prove to bemore effective for treating disease or injury than current therapies.Accordingly, we may have to delay or abandon efforts to research, develop orobtain regulatory approval to market our prospective products. Many companiesinvolved in biotechnology research and development have suffered significantsetbacks in advanced clinical trials, even after promising results in earliertrials. The failure to adequately demonstrate the safety and efficacy of atherapeutic product under development could delay or prevent regulatoryapproval of the product and could harm our ability to generate revenues,operate profitably or produce any return on an investment in us.

While the marketing ofcloned or transgenic animals does not currently require regulatory approval,such approval may be required in the future. We cannot assure you that we wouldobtain such approvals or that our licensees’ products would be accepted in themarketplace. This lack of approval could reduce or preclude any royaltyrevenues we might receive from our licensees in that field.

**We may not be able tocommercially develop our technologies and proposed product lines, which, inturn, would significantly harm our ability to earn revenues and result in aloss of investment.  **Our ability to commercially develop our technologies will be dictatedin large part by forces outside our control which cannot be predicted,including, but not limited to, general economic conditions, the success of ourresearch and pre-clinical and field testing, the availability of collaborativepartners to finance our work in pursuing applications of nuclear transfertechnology and technological or other developments in the biomedical fieldwhich, due to efficiencies, technological breakthroughs or greater acceptancein the biomedical industry, may render one or more areas of commercializationmore attractive, obsolete or competitively unattractive. It is possible thatone or more areas of commercialization will not be pursued at all if acollaborative partner or entity willing to fund research and development cannotbe located. Our decisions regarding the ultimate products and/or services wepursue could have a significant adverse affect on our 

31

----

**abilityto earn revenue if we misinterpret trends, underestimate development costsand/or pursue wrong products or services. Any of these factors either alone orin concert could materially harm our ability to earn revenues and could resultin a loss of any investment in us.**

**If we are unable to keepup with rapid technological changes in our field or compete effectively, wewill 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 our technologiesor potential products or services uneconomical or result in products superiorto those we develop or that any technologies, products or services we developwill be preferred to any existing or newly-developed technologies,products or services.

**We may not be ableto protect our proprietary technology, which could harm our ability to operateprofitably.****  **The biotechnology and pharmaceutical industries place considerableimportance on obtaining patent and trade secret protection for new technologies,products and processes. Our success will depend, to a substantial degree, onour ability to obtain and enforce patent protection for our products, preserveany trade secrets and operate without infringing the proprietary rights ofothers. We cannot assure you that:

·       we will succeed in obtaining anypatents in a timely manner or at all, or that the breadth or degree ofprotection of any such patents will protect our interests,

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

·       patent applications relating toour potential products or technologies will result in the issuance ofany patents or that, if issued, such patents will afford adequate protection tous 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 certainpatents that have been granted to others and certain patent applications thathave been filed by others with respect to nuclear transfer technologies. Thefields in which we operate have been characterized by significant efforts bycompetitors to establish dominant or blocking patent rights to gain acompetitive advantage, and by considerable differences of opinion as to thevalue and legal legitimacy of competitors’ purported patent rights and thetechnologies they actually utilize in their businesses.

**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.

Certain of these licensesalso contain restrictions, such as limitations on our ability to grantsublicenses that could materially interfere with our ability to generaterevenue through the licensing or sale to third parties of important andvaluable technologies that we have, for strategic reasons, elected not topursue directly. The possibility exists that in the future we will requirefurther licenses to complete and/or commercialize our proposed products. Wecannot assure you that we will be able to acquire any such licenses on acommercially viable basis.

**We may not be able toadequately protect against piracy of intellectual property in foreignjurisdictions.****  **Considerable research in the areas of stem cells, cell therapeutics andregenerative 

32

----

**medicineis being performed in countries outside of the United States, and a number ofour competitors are located in those countries. The laws protectingintellectual property in some of those countries may not provide protection forour trade secrets and intellectual property adequate to prevent our competitorsfrom misappropriating our trade secrets or intellectual property. If our tradesecrets or intellectual property are misappropriated in those countries, we maybe without adequate remedies to address the issue.**

**Certain of our technologyis not protectable by patent.****  **Certain parts of our know-how and technology are notpatentable. To protect our proprietary position in such know-how andtechnology, we intend to require all employees, consultants, advisors andcollaborators to enter into confidentiality and invention ownership agreementswith us. We cannot assure you, however, that these agreements will providemeaningful protection for our trade secrets, know-how or other proprietaryinformation in the event of any unauthorized use or disclosure. Further, in theabsence of patent protection, competitors who independently developsubstantially equivalent technology may harm our business.

**Patent litigation presentsan ongoing threat to our business with respect to both outcomes and costs.****  **We have previously been involved in patentinterference litigation, and it is possible that further litigation over patentmatters with one or more competitors could arise. We could incur substantiallitigation or interference costs in defending ourselves against suits broughtagainst us or in suits in which we may assert our patents against others. Ifthe outcome of any such litigation is unfavorable, our business could bematerially adversely affected. To determine the priority of inventions, we mayalso have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial cost tous. Without additional capital, we may not have the resources to adequatelydefend or pursue this litigation.

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

**If we are required for anyreason to repay our outstanding debentures we would be required to deplete ourworking capital, if available, or raise additional funds. Our failure to repay theconvertible debentures, if required, could result in legal action against us,which could require the sale of substantial assets.  **We have outstanding, as of August 1, 2007, $11,396,412aggregate original principal amount of convertible debentures with an originalissue discount of 20.3187% with $8,344,687 in 2006 Debentures and $3,051,725 in2005 Debentures. We are required to redeem on a monthly basis, by payment withcash or with shares of our common stock, 1/30th of the aggregate originalprincipal amount of the debentures. Unless waived by the holders of thedebentures, in order to redeem with shares of our common stock we must satisfycertain conditions which have yet to be satisfied, including such conditions asthe listing of our shares of common stock on either the NASDAQ National Market,the NASDAQ Small Cap Market, or the American Stock Exchange. These monthlypayments will impact the amount of working capital available to us.

The 2005 Debentures aredue and payable on September 14, 2008, unless sooner converted into sharesof our common stock, and the 2006 Debentures are due and payable onFebruary 28, 2010, unless sooner converted into shares of our commonstock. Any event of default could require the early repayment of theconvertible debentures, including the accruing of interest on the outstandingprincipal balance of the debentures if the default is not cured with thespecified grace period. We anticipate that the full amount of the convertibledebentures will be converted into shares of our common stock, in accordance withthe terms of the convertible debentures. If, prior to the maturity date, we arerequired to repay the convertible debentures in full, we would be required touse our limited working capital and raise additional funds. If we were unableto repay the notes when required, the debenture holders could commence legalaction against us to recover the amounts due. Any such action could require usto curtail or cease operations.

33

----

**There are a largenumber of shares underlying our convertible debentures in full, and warrantsthat are registered and available for sale and the sale of these shares maydepress the market price of our common stock. As of August 1, 2007,** we had:

·       certain outstanding 2005 Debentures that may beconverted into an estimated 3,390,806 shares of common stock based on aconversion price of $0.90, and

·       outstanding2005 Warrants to purchase 1,463,223 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 28,974,607 shares ofcommon stock based on a conversion price of $0.288, and

·       outstanding 2006 Warrants to purchase 19,064,670shares of common stock with an exercise price of $0.3168 that were issued inconnection with the sale of the 2006 Debentures, and

·       outstandingreplacement warrants to purchase 4,541,672 shares of common stock with anexercise price of $0.95, and

·       outstandingwarrants to purchase 4,575,521 shares of common stock with an exercise price of$0.3168 that were issued in connection with the sale of the 2006 Debentures.

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

**The issuance of shares upon conversion of theconvertible debentures and exercise of outstanding warrants will causeimmediate and substantial dilution to our existing stockholders.**   Theissuance of shares upon conversion of the convertible debentures and exerciseof warrants, including the replacement warrants, will result in substantialdilution to the interests of other stockholders since the selling securityholders may ultimately convert and sell the full amount issuable on conversion.Although no single selling security holder may convert its convertible debenturesand/or exercise its warrants if such conversion or exercise would cause it toown more than 4.99% of our outstanding common stock, this restriction does notprevent each selling security holder from converting and/or exercising some ofits holdings and then converting the rest of its holdings. In this way, eachselling security holder could sell more than this limit while never holdingmore than this limit. There is no upper limit on the number of shares that maybe issued which will have the effect of further diluting the proportionateequity interest and voting power of holders of our common stock, includinginvestors in this offering. In addition, the issuance of the 2006 Debenturesand the 2006 Warrants triggered certain anti-dilution rights for certain thirdparties currently holding securities of the Company resulting in substantialdilution to the interests of other stockholders.

**Payment ofmandatory monthly redemptions in shares of common stock will result insubstantial dilution.**   Weexpect to satisfy all or a significant portion of our obligation to redeem 1¤30th of the aggregate original principal amount ofdebentures per month through issuance of additional shares of our common stock.This approach will result in substantial dilution to the interests of otherstockholders.

**If wefail to effect and maintain registration of the common stock issued or issuablepursuant to conversion of our debentures, or upon exercise of our warrants, wemay be obligated to pay the investors of those securities liquidated damages.**   Wehave various obligations to file and obtain the effectiveness of certainregistration statements which include certain outstanding common stock andcommon stock underlying outstanding debentures and common stock underlying thewarrants. If we fail to meet any obligations we have to have effective andcurrent registration statements available (including the current registrationstatement related to the common stock underlying our debentures and warrants),we may become obligated to pay liquidated damages to investors to the extentthey may be entitled to such damages. In addition, pursuant to the amendmentsto the 2005 and 2006 financing documents described 

34

----

above,we are contractually obligated to file additional registration statements at varioustimes in the future. Because of the SEC’s recent interpretation of Rule 415,we cannot offer any assurances that we will be able to obtain the effectivenessof any registration statement or post-effective amendments that we may file.

**Risks Relating toGovernment Regulation**

**Companies such as ours engaged in research usingnuclear transfer and embryonic stem cells are currently subject to strictgovernment regulations, and our operations could be harmed by any legislativeor administrative efforts impacting the use of nuclear transfer technology orhuman 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.

**Restrictions on theuse of human embryonic stem cells, and the ethical, legal and socialimplications of that research, could prevent us from developing or gainingacceptance for commercially viable products in these areas.**   Some of our most important programs involvethe use of stem cells that are derived from human embryos. The use of humanembryonic stem cells gives rise to ethical, legal and social issues regardingthe appropriate use of these cells. In the event that our research related to humanembryonic stem cells becomes the subject of adverse commentary or publicity,the market price for our common stock could be significantly harmed. Somepolitical and religious groups have voiced opposition to our technology andpractices. We use stem cells derived from human embryos that have been createdfor in vitro fertilization procedures but are no longer desired or suitable forthat use and are donated with appropriate informed consent for research use.Many research institutions, including some of our scientific collaborators,have adopted policies regarding the ethical use of human embryonic tissue.These policies may have the effect of limiting the scope of research conductedusing human embryonic stem cells, thereby impairing our ability to conductresearch 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 oradditional government-imposed restrictions in these or other jurisdictionswith respect to use of embryos or human embryonic stem cells in research anddevelopment could have a material adverse effect on us, by, among other things:

·       harmingour ability to establish critical partnerships and collaborations,

35

----

·       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 our collaborators must obtain regulatoryapproval to market our products in the United States and other countries, wecannot predict whether or when we will be permitted to commercialize ourproducts.****  **Federal, state and local governments in the United States andgovernments in other countries have significant regulations in place thatgovern many of our activities. We are or may become subject to various federal,state and local laws, regulations and recommendations relating to safe workingconditions, laboratory and manufacturing practices, the experimental use ofanimals 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 that mayprevent us from creating commercially viable products from our discoveries. Inaddition, the sale by us or our collaborators of any commercially viableproduct will be subject to government regulation from several 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 of substantialresources. Biological drugs and non-biological drugs are rigorously regulated.In particular, proposed human pharmaceutical therapeutic product candidates aresubject to rigorous preclinical and clinical testing and other requirements bythe FDA in the United States and similar health authorities in other countriesin order to demonstrate safety and efficacy. We may never obtain regulatoryapproval to market our proposed products. For additional information aboutgovernmental regulations that will affect our planned and intended businessoperations, see “DESCRIPTION OF BUSINESS—*GovernmentRegulation*” in our Annual Report on Form 10KSB for fiscal year2006.

Our products may not receive FDA approval, which wouldprevent us from commercially marketing our products and producing revenues. TheFDA and comparable government agencies in foreign countries impose substantialregulations on the manufacture and marketing of pharmaceutical products throughlengthy and detailed laboratory, pre-clinical and clinical testing procedures,sampling activities and other costly and time-consuming procedures.Satisfaction of these regulations typically takes several years or more andvaries substantially based upon the type, complexity and novelty of theproposed product. We cannot yet accurately predict when we might first submitany Investigational New Drug, or IND, application to the FDA, or whether anysuch IND application would be granted on a timely basis, if at all, nor can weassure you that we will successfully complete any clinical trials in connectionwith any such IND application. Further, we cannot yet accurately predictwhen we might first submit any product license application for FDA approval orwhether any such product license application would be granted on a timelybasis, if at all. As a result, we cannot assure you that FDA approvals for anyproducts developed by us will be granted on a timely basis, if at all. Any suchdelay in obtaining, or failure to obtain, such approvals could have a materialadverse effect on the marketing of our products and our ability to generateproduct revenue. For additional information about governmental regulations thatwill affect our planned and intended business operations, see “DESCRIPTION OFBUSINESS—*Government Regulation*”in our Annual Report on Form 10KSB for fiscal year 2006.

**For-profit entities may be prohibited from benefitingfrom grant funding.****  **There has been much publicity about grant resources for stem cellresearch, including Proposition 71 in California, which is described more fullyunder the heading “DESCRIPTION OF BUSINESS—*CaliforniaProposition 71*” in our Annual Report on Form 10KSB for fiscalyear 2006. There is ongoing litigation in California that may delay, or preventthe sale of State bonds that would fund the activities contemplated byCalifornia voters. 

36

----

**Inaddition, rules and regulations related to any funding that may ultimatelybe provided, the type of entity that will be eligible for funding, the scienceto be funded, and funding details have not been finalized. As a result of theseuncertainties regarding Proposition 71, we cannot assure you that funding, ifany, will be available to us, or any for-profit entity.**

**The government maintainscertain rights in technology that we develop using government grant money andwe may lose the revenues from such technology if we do not commercialize andutilize the technology pursuant to established government guidelines.****  **Certain of our and our licensors’ research has beenor is being funded in part by government grants. In connection with certaingrants, the U.S. government retains rights in the technology developed with thegrant. These rights could restrict our ability to fully capitalize upon thevalue of this research.

**Risks Relating toOur Reliance on Third Parties**

**We depend on our collaborators to help us develop andtest our proposed products, and our ability to develop and commercializeproducts may be impaired or delayed if 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 or perform theirobligations under our agreements with them. We cannot control the amount andtiming of our collaborators’ resources that will be devoted to our research anddevelopment activities related to our collaborative agreements with them. Ourcollaborators may choose to pursue existing or alternative technologies inpreference to those being developed in collaboration with us.

Under agreementswith collaborators, we may rely significantly on such collaborators to, amongother 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 receive any development or milestonepayments. If we do not achieve milestones set forth in the agreements, or if ourcollaborators breach or terminate their collaborative agreements with us, ourbusiness may be materially harmed.

**Our reliance on theactivities of our non-employee consultants, research institutions, andscientific contractors, whose activities are not wholly within our control, maylead to delays in development of our proposed products.**   We rely extensively upon and haverelationships with scientific consultants at academic and other institutions,some of whom conduct research at our request, and other consultants withexpertise in clinical development strategy or other matters. These consultantsare not our employees and may have commitments to, or consulting or advisorycontracts with, other entities that may limit their availability to us. We havelimited control over the activities of these consultants and, except asotherwise required by our collaboration and consulting agreements to the extentthey exist, can expect only limited amounts of their time to be dedicated toour activities.

In addition, we have formed research collaborationswith academic and other research institutions throughout the world. Theseresearch facilities may have commitments to other commercial and non-

37

----

commercial entities. Wehave limited control over the operations of these laboratories and can expectonly limited amounts of time to be dedicated to our research goals.

We also rely on othercompanies for certain process development or other technical scientific work.We have contracts with these companies that specify the work to be done andresults to be achieved, but we do not have direct control over their personnelor operations. If any of these third parties are unable or refuse to contributeto projects on which we need their help, our ability to generate advances inour technologies and develop our products could be significantly harmed.

**General RisksRelating to Our Business**

**We may be subjectto litigation that will be costly to defend or pursue and uncertain in itsoutcome.**   Our businessmay bring us into conflict with our licensees, licensors, or others with whomwe have contractual or other business relationships, or with our competitors orothers whose interests differ from ours. If we are unable to resolve thoseconflicts on terms that are satisfactory to all parties, we may become involvedin litigation brought by or against us. That litigation is likely to beexpensive and may require a significant amount of management’s time andattention, at the expense of other aspects of our business. The outcome oflitigation is always uncertain, and in some cases could include judgmentsagainst us that require us to pay damages, enjoin us from certain activities,or otherwise affect our legal or contractual rights, which could have asignificant adverse effect on our business.

**We may not be able to obtain third-party patientreimbursement or favorable product pricing, which would reduce our ability tooperate profitably.**   Our ability to successfullycommercialize certain of our proposed products in the human therapeutic fieldmay depend to a significant degree on patient reimbursement of the costs ofsuch products and related treatments at acceptable levels from governmentauthorities, private health insurers and other organizations, such as healthmaintenance organizations. We cannot assure you that reimbursement in theUnited States or foreign countries will be available for any products we maydevelop or, if available, will not be decreased in the future, or thatreimbursement amounts will not reduce the demand for, or the price of, ourproducts with a consequent harm to our business. We cannot predict whatadditional regulation or legislation relating to the health care industry orthird-party coverage and reimbursement may be enacted in the future orwhat effect such regulation or legislation may have on our business. Ifadditional regulations are overly onerous or expensive, or if health carerelated legislation makes our business more expensive or burdensome thanoriginally anticipated, we may be forced to significantly downsize our businessplans or completely abandon our business model.

**Our products arelikely to be expensive to manufacture, and they may not be profitable if we areunable to control the costs to manufacture them.**   Our products are likely to be significantlymore expensive to manufacture than most other drugs currently on the markettoday. 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 market today.In addition, we may not be able to charge a high enough price for any celltherapy product we develop, even if they are safe and effective, to make aprofit. If we are unable to realize significant profits from our potentialproduct candidates, our business would be materially harmed.

38

----

**To besuccessful, our proposed products must be accepted by the health carecommunity, which can be very slow to adopt or unreceptive to new technologiesand products.**   Our proposed products and those developedby our collaborative partners, if approved for marketing, may not achievemarket acceptance since hospitals, physicians, patients or the medicalcommunity in general may decide not to accept and utilize these products. Theproducts that 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 of revenues depends on thestability and performance of our sublicensees.**   Ourability to collect royalties on product sales from our sublicensees will dependon the financial and operational success of the companies operating under asublicense. Revenues from those licensees will depend upon the financial andoperational success of those third parties. We cannot assure you that theselicensees will be successful in obtaining requisite financing or in developingand successfully marketing their products. These licensees may experienceunanticipated obstacles including regulatory hurdles, and scientific ortechnical challenges, which could have the effect of reducing their ability togenerate revenues and pay us royalties.

**Wedepend on key personnel for our continued operations and future success, and aloss of certain key personnel could significantly hinder our ability to moveforward with our business plan.**   Because of thespecialized nature of our business, we are highly dependent on our ability toidentify, hire, train and retain highly qualified scientific and technicalpersonnel for the research and development activities we conduct or sponsor.The loss of one or more certain key executive officers would be significantlydetrimental to us. In addition, recruiting and retaining qualified scientificpersonnel to perform research and development work is critical to our success.Our anticipated growth and expansion into areas and activities requiringadditional expertise, such as clinical testing, regulatory compliance,manufacturing and marketing, will require the addition of new managementpersonnel and the development of additional expertise by existing managementpersonnel. There is intense competition for qualified personnel in the areas ofour present and planned activities, and there can be no assurance that we willbe able to continue to attract and retain the qualified personnel necessary forthe development of our business. The failure to attract and retain suchpersonnel or to develop such expertise would adversely affect our business.

**Ourcredibility as a business operating in the field of human embryonic stem cellsis largely dependent upon the support of our Ethics Advisory Board.**   Becausethe use of human embryonic stem cells gives rise to ethical, legal and socialissues, we have instituted an Ethics Advisory Board. Our Ethics Advisory Boardis made up of highly qualified individuals with expertise in the field of humanembryonic stem cells. We cannot assure you that these members will continue toserve on our Ethics Advisory Board, and the loss of any such member may affectthe credibility and effectiveness of the Board. As a result, our business maybe materially harmed in the event of any such loss.

39

----

**Ourinsurance policies may be inadequate and potentially expose us to unrecoverablerisks.****  **Wehave limited director and officer insurance and commercial insurance policies.Any significant insurance claims would have a material adverse effect on ourbusiness, financial condition and results of operations. Insuranceavailability, coverage terms and pricing continue to vary with marketconditions. We endeavor to obtain appropriate insurance coverage for insurablerisks that we identify, however, we may fail to correctly anticipate orquantify insurable risks, we may not be able to obtain appropriate insurancecoverage, and insurers may not respond as we intend to cover insurable eventsthat may occur. We have observed rapidly changing conditions in the insurancemarkets relating to nearly all areas of traditional corporate insurance. Suchconditions have resulted in higher premium costs, higher policy deductibles,and lower coverage limits. For some risks, we may not have or maintaininsurance coverage because of cost or availability.

**Wehave no product liability insurance, which may leave us vulnerable to futureclaims we will be unable to satisfy.****  **The testing, manufacturing,marketing and sale of human therapeutic products entail an inherent risk ofproduct liability claims, and we cannot assure you that substantial productliability claims will not be asserted against us. We have no product liabilityinsurance. In the event we are forced to expend significant funds on defendingproduct liability actions, and in the event those funds come from operatingcapital, we will be required to reduce our business activities, which couldlead 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.

**Wepresently have members of management and other key employees located in variouslocations throughout the country which adds complexities to the operation ofthe business.**   Presently, we have members ofmanagement and other key employees located in both California andMassachusetts, which adds complexities to the operation of our business. Weintend to maintain our research facilities in Massachusetts and we haveestablished 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 of2002, as well as related new rules and regulations implemented by theSecurities and Exchange Commission and the Public Company Accounting OversightBoard, require changes in the corporate governance practices and financialreporting standards for public companies. These new laws, rules andregulations, including compliance with Section 404 of the Sarbanes-OxleyAct of 2002 relating to internal control over financial reporting, referred toas Section 404, have materially increased our legal and financialcompliance costs and made some activities more time-consuming and moreburdensome. Section 404 requires that by the end of 2007 our managementassess our internal control over financial reporting annually and include areport on its assessment in our annual report. In 2008 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 control overfinancial reporting.

40

----

**Risks Relating toOur Common Stock**

**Stock prices forbiotechnology companies have historically tended to be very volatile.****  **Stock prices and trading volumes formany biotechnology companies fluctuate widely for a number of reasons,including but not limited to the following factors, some of which may beunrelated 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.

**Asignificant number of shares of our common stock have or will become availablefor sale 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. In addition, on January 31, 2007, a significant number ofour outstanding securities that were previously restricted became eligible forsale under Rule 144(k) of the Securities Act, and their sale will notbe subject to any volume limitations.

Not including the shares of common stock underlyingthe 2005 Debentures, the 2005 Warrants, the 2006 Debentures, the 2006 Warrants,and the replacement warrants, there are presently approximately 8,100,000outstanding options, warrants and other securities convertible or exercisableinto shares of our common stock.

We may also sell a substantial number of additionalshares of our common stock in connection with a private placement or publicoffering of shares of our common stock (or other series or class of capitalstock to be designated in the future). The terms of any such private placementwould likely require us to register the resale of any shares of capital stockissued or issuable in the transaction. We have also issued common stock tocertain parties, such as vendors and service providers, as payment for productsand services. Under these arrangements, we may agree to register the shares forresale soon after their issuance. We may also continue to pay for certain goodsand services with equity, which would dilute each stockholder’s interest in thecompany.

41

----

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 donot intend to pay cash dividends on our common stock in the foreseeable future.****  **Any payment of cash dividends willdepend upon our financial condition, results of operations, capitalrequirements and other factors and will be at the discretion of our board ofdirectors. We do not anticipate paying cash dividends on our common stock inthe foreseeable future. Furthermore, we may incur additional indebtedness thatmay severely restrict or prohibit the payment of dividends.

**Oursecurities are quoted on the OTC Bulletin Board, which may limit the liquidityand price of our securities more than if our securities were quoted or listedon the Nasdaq Stock Market or a national exchange.**   Oursecurities are currently quoted on the OTC Bulletin Board, an NASD-sponsoredand operated inter-dealer automated quotation system for equitysecurities not included in the Nasdaq Stock Market. Quotation of our securitieson the OTC Bulletin Board may limit the liquidity and price of our securitiesmore than if our securities were quoted or listed on The Nasdaq Stock Market ora national exchange. Some investors may perceive our securities to be lessattractive because they are traded in the over-the-counter market. In addition,as an OTC Bulletin Board listed company, we do not attract the extensiveanalyst coverage that accompanies companies listed on Nasdaq or any otherregional or national exchange. Further, institutional and other investors mayhave investment guidelines that restrict or prohibit investing in securitiestraded in the over-the-counter market. These factors may have an adverse impacton the trading and price of our securities.

**Our common stock issubject to “penny stock” regulations and restrictions on initial and secondarybroker-dealer sales.****  **The Securities and Exchange Commission has adoptedregulations which generally define “penny stock” to be any listed, tradingequity security that has a market price less than $5.00 per share or anexercise price of less than $5.00 per share, subject to certain exemptions.Penny stocks are subject to certain additional oversight and regulatoryrequirements. Brokers and dealers affecting transactions in our common stock inmany circumstances must obtain the written consent of a customer prior topurchasing our common stock, must obtain information from the customer and mustprovide disclosures to the customer. These requirements may restrict theability of broker-dealers to sell our common stock and may affect yourability to sell your shares of our common stock in the secondary market.

**ITEM3.**                CONTROLSAND PROCEDURES

(a)   Evaluationof disclosure controls and procedures. Our management, with the participationof our principal executive officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as of the end of the fiscal quarter covered by this quarterly reporton Form 10-QSB. Based on such evaluation, our principal executiveofficer has concluded that such disclosure controls and procedures wereeffective 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.

(b)   Changes ininternal controls. There were no changes in the Company’s internal controlsover financial reporting, known to the chief executive officer or the principalaccounting officer, that occurred during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

42

----

At the end of 2007, Section 404 of theSarbanes-Oxley Act will require our management to provide an assessment of theeffectiveness of our internal control over financial reporting, and at the endof 2008, our independent registered public accountants will be required toaudit management’s assessment. We are in the process of performing the systemand process documentation, evaluation and testing required for management tomake this assessment and for its independent registered public accountants toprovide their attestation report. We have not completed this process or itsassessment, and this process will require significant amounts of managementtime and resources. In the course of evaluation and testing, management mayidentify deficiencies that will need to be addressed and remediated.

43

----

**PART II.OTHER INFORMATION**

**ITEM1.**                LEGAL PROCEEDINGS

None.

**ITEM2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM3.**                DEFAULTSUPON SENIOR SECURITIES

None.

**TheCompany has not received the necessary consents to the bridge financing describedin Note 13—Subsequent Events from the holders of its 2005 and 2006Convertible Debentures. In the event all required consents are not obtainedwithin a maximum of ten (10) trading days following August 14, 2007,entering into the bridge financing will constitute an event of default underthe 2005 and 2006 Convertible Debentures.**

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

**ITEM5.**                OTHERINFORMATION

None.

**ITEM 6.**                EXHIBITS 
| Exhibit No. | ** ** | ** ** | ** **                                                                                                                 | **Exhibit Description** |
|------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------------------------|
| 10.1             |       |       | Commercial Products  Addendum by and between the Company and Wisconsin Alumni Research Foundation  dated May 2, 2007* |
| 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*                                        |
|                  |            |            |                                                                                                                            |                              |  |  |

----

*                    Filed herewith

44

----

**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: August 14, 2007 |                                |   |   |

 

45

----

**Exhibit Index**
| Exhibit No. | ** ** | ** **                                                                                                                 | ** ** | **Exhibit Description** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|
| 10.1             |       | Commercial Products  Addendum by and between the Company and Wisconsin Alumni Research Foundation  dated May 2, 2007* |
| 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*                                        |

----

*                    Filed herewith

46

----