**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

 

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**FORM 10-Q**

 

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| x                                                       | ** ** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                               |
| **FOR THE QUARTERLY PERIOD ENDED MARCH 31,  2008** |
|                                                    |       |                                                                                                     |
| ** **                                              |       | **OR**                                                                                                   |
|                                                    |       |                                                                                                     |
| **o**                                                   | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**FOR THE TRANSITION PERIODFROM            TO          .**

** **

**COMMISSION FILE NUMBER:0-50295**

 

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**ADVANCEDCELL TECHNOLOGY, INC.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

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

 

**381 PLANTATION STREET,WORCESTER, MASSACHUSETTS 01605**

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVEOFFICES)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.      Yes  x  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o | Accelerated filer o | Non-accelerated filer o                         | Smaller reporting  company x |
|----------------------------|--------------------------|-------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a  smaller  reporting company) |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

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

 
| **Class:**                                | ** ** | **Outstanding at June 25, 2008:** |
|-------------------------------------------|------------|-----------------------------------|
| Common Stock,  $0.001 par value per share |       | 102,265,237 shares           |

 

 

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# **ADVANCEDCELL TECHNOLOGY, INC.**

#  

# **INDEX**

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

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

** **

This Quarterly Report on Form 10-Qand the 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 of development, including alack of operating history, lack of profitable operations and the need foradditional capital; the development and commercialization of largely novel andunproven technologies and products; our ability to protect, maintain and defendour intellectual property rights; uncertainties regarding our ability to obtainthe capital resources needed to continue research and development operationsand to conduct research, preclinical development and clinical trials necessary forregulatory approvals; uncertainty regarding the outcome of clinical trials andour overall ability to compete effectively in a highly complex, rapidlydeveloping, capital intensive and competitive industry. See “RISK FACTORS THAT MAY AFFECTOUR BUSINESS” set forth on page 29 herein for a more complete discussionof these factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date that they are made.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

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

 

**Explanatory Note**

 

As previously disclosed in its Form 8-K filed on March 27,2008, as amended on April 7, 2008, Advanced Cell Technology, Inc.(the “Company”) determined that it is required to amend and restate itspreviously issued audited consolidated financial statements and other financialinformation for the year ended December 31, 2006, and the unauditedconsolidated financial statements for the quarters ended September 30,2006, March 31, 2007, June 30, 2007, and September 30, 2007 (the“First Restatement Periods”) as a result of errors associated with theCompany’s valuation of certain warrants.

 

As previously disclosed in its Form 8-K filed on June30, 2008, in mid-May 2008 the Company discovered that the Discounts andDeferred Issuance costs related to its outstanding debentures had beenamortized over a period longer than the weighted average life of theinstruments, with the result that the discounts and debt issuance costs shouldhave been charged to interest expense on a faster basis than previouslyreported. Upon learning of the error the Company has recalculated theamortization and resulting interest expense. The Company also discovered that its calculation of the weighted averageshares used in calculating basic and diluted earnings per share for the threemonth period ended March 31, 2007 was in error, with the actual weightedaverage shares being approximately 6.2 million higher than reported.  On June 24, 2008, the Company’s managementand the Audit Committee of its Board of Directors determined that the Company isrequired to amend and restate its previously issued audited consolidatedfinancial statements and other financial information for the year ended December 31,2007, and the unaudited consolidated financial statements for the quartersended March 31, 2007, June 30, 2007, and September 30, 2007 (the“Second Restatement Periods” together with the First Restatement Periods, the“Relevant Periods”).

 

These restatements are outlined in Note 2 to theConsolidated Financial Statements.    Thereader should not rely on the prior annual and quarterly filings for theRelevant Periods with the exception of the Company’s Annual Report on Form10-KSB originally filed on April 18, 2008 and amended on June 30, 2008. TheCompany is working toward filing amendments to all such periodic reports. ThisQuarterly Report on Form 10-Q corrects these errors for the periodsreported herein.

 

1

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1. FINANCIALSTATEMENTS**

** **

**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**    | ** ** | **(Restated)**        | ** ** |
| **ASSETS**                                                                                                        |       |               |       |                  |       |
| Current assets:                                                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                                                         |       | $                  | 601,123    |                  | $          | 1,166,116 |   |
| Accounts receivable                                                                                               |       | 31,793             |       | 27,026                |       |
| Prepaid expenses                                                                                                  |       | 113,089            |       | 68,416                |       |
| Deferred royalty fees, current portion                                                                            |       | 257,911            |       | 341,274               |       |
| Total current assets                                                                                              |       | 1,003,916          |       | 1,602,832             |       |
| Property and equipment, net                                                                                       |       | 947,188            |       | 914,504               |       |
| Deferred royalty fees, less current portion                                                                       |       | 947,566            |       | 1,202,430             |       |
| Deposits                                                                                                          |       | 115,192            |       | 115,192               |       |
| Deferred issuance costs, net of  amortization of $4,699,912 and $3,874,300.                                       |       | 3,946,475          |       | 4,772,087             |       |
| Total assets                                                                                                      |       | $                  | 6,960,337  |                  | $          | 8,607,045 |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                    |       |               |       |                  |       |
| Current liabilities:                                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                                  |       | $                  | 7,371,983  |                  | $          | 5,517,876 |   |
| Accrued expenses                                                                                                  |       | 2,470,573          |       | 1,120,781             |       |
| Deferred revenue, current portion                                                                                 |       | 497,374            |       | 497,374               |       |
| Advances payable—other                                                                                       |       | 130,000            |       | 130,000               |       |
| 2005 Convertible debenture and embedded  derivatives, net of discounts of $203,999 and $600,246                   |       | 770,013            |       | 1,276,871             |       |
| 2006 Convertible debenture and embedded  derivatives (fair value $5,611,411 and $3,939,862)                       |       | 2,845,750          |       | 1,625,327             |       |
| 2007 Convertible debenture and embedded  derivatives (fair value $4,546,037 and $3,874,026)                       |       | 1,755,339          |       | 1,160,847             |       |
| Warrant and option derivatives—current  portion                                                              |       | —             |       | 14,574                |       |
| Capital leases—current portion                                                                               |       | 12,955             |       | 31,605                |       |
| Notes payable—other                                                                                          |       | 1,098,425          |       | 468,425               |       |
| Total current liabilities                                                                                         |       | 16,952,412         |       | 11,843,680            |       |
| 2006 Convertible debenture and embedded  derivatives, less current portion (fair value $0 and $3,447,230)         |       | 0                  |       | 1,422,164             |       |
| 2007 Convertible debenture and embedded  derivatives, less current portion (fair value $6,440,219 and $7,748,052) |       | 2,486,729          |       | 2,321,695             |       |
| 2008 Convertible notes payable and embedded  derivatives (fair value $1,282,211 and $0)                           |       | 1,179,086          |       | —                |       |
| Warrant and option derivatives, less  current portion                                                             |       | 12,946,051         |       | 13,011,751            |       |
| Deferred revenue, less current portion                                                                            |       | 1,410,143          |       | 1,534,485             |       |
| Total liabilities                                                                                                 |       | 34,974,421         |       | 30,133,776            |       |
| 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, 102,265,237 and 85,027,461 issued and outstanding |       | 102,265            |       | 85,027                |       |
| Additional paid-in capital                                                                                        |       | 37,317,401         |       | 34,302,334            |       |
| Accumulated deficit                                                                                               |       | (65,433,750        | )          | (55,914,091           | )          |
| Total stockholders’ deficit                                                                                  |       | (28,014,084        | )          | (21,526,730           | )          |
| Total liabilities and stockholders’ deficit                                                                  |       | $                  | 6,960,337  |                  | $          | 8,607,045 |   |

 

The accompanying notes are an integral partof these financial statements.

 

2

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                | ** ** | ** **                                           | ** ** | **(Restated)** | ** ** |
| Revenue:                                                                  |       |                                                 |       |   |   |
| License fees and royalties                                                |       | $                                                    | 124,343    |   | $ | 124,343 |   |
| Cost of revenue                                                           |       | 190,728                                              |       | 61,436 |   |
| Gross (loss) profit                                                       |       | (66,385                                              | )          | 62,907 |   |
| Operating expenses:                                                       |       |                                                 |       |   |   |
| Research and development                                                  |       | 3,967,552                                            |       | 3,649,088 |   |
| Grant reimbursements                                                      |       | (105,169                                             | )          | (57,582 | ) |
| General and administrative                                                |       | 1,725,822                                            |       | 1,741,104 |   |
| Total operating expenses                                                  |       | 5,588,205                                            |       | 5,332,610 |   |
| Loss from operations                                                      |       | (5,654,590                                           | )          | (5,269,703 | ) |
| Other income (expense):                                                   |       |                                                 |       |   |   |
| Interest income                                                           |       | 6,849                                                |       | 78,047 |   |
| Interest expense and late fees                                            |       | (4,206,616                                           | )          | (7,072,550 | ) |
| Charges related to issuance of convertible  notes payable 2008            |       | (685,573                                             | )          | — |   |
| Charges related to repricing of 2005  Convertible Debentures and Warrants |       | —                                               |       | (843,277 | ) |
| Adjustments to fair value of derivatives                                  |       | 1,020,271                                            |       | (11,633,518 | ) |
| Total other income (expense)                                              |       | (3,865,069                                           | )          | (19,471,298 | ) |
| Net loss                                                                  |       | $                                                    | (9,519,659 | ) | $ | (24,741,001 | ) |
| Basic and diluted loss per share                                          |       | $                                                    | (0.10      | ) | $ | (0.53 | ) |
| Weighted average shares used in computation  of earnings per share        |       | 95,870,879                                           |       | 46,818,854 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                   | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | ** **                                 | ** ** | **(Restated)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                    |       |                                       |       |   |   |
| Net loss                                                                     |       | $                                          | (9,519,659 | ) | $ | (24,741,001 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                       |       |   |   |
| Depreciation and amortization                                                |       | 109,904                                    |       | 93,997 |   |
| Amortization of deferred charges                                             |       | 338,227                                    |       | 61,436 |   |
| Amortization of deferred revenue                                             |       | (124,342                                   | )          | (124,343 | ) |
| Amortization of deferred issuance costs                                      |       | 825,612                                    |       | 1,372,544 |   |
| Amortization of discounts                                                    |       | 3,372,267                                  |       | 5,697,499 |   |
| Adjustments to Fair Value of Derivatives                                     |       | (1,020,271                                 | )          | 11,633,518 |   |
| Charges related to issuance of 2008 debt                                     |       | 685,573                                    |       | — |   |
| Repricing of 2005 Convertible Debentures  and Warrants                       |       | —                                     |       | 843,277 |   |
| Warrants issued for consulting services                                      |       | 155,281                                    |       | — |   |
| Charges related to settlement of anti-dilution provision                     |       | 15,581                                     |       | — |   |
| Non-cash compensation charge                                                 |       | 378,853                                    |       | 1,479,208 |   |
| Changes in operating assets and  liabilities:                                |       |                                       |       |   |   |
| (Increase) decrease in:                                                      |       |                                       |       |   |   |
| Accounts receivable                                                          |       | (4,767                                     | )          | 10,863 |   |
| Prepaid expenses                                                             |       | (44,673                                    | )          | (46,483 | ) |
| Deferred charges                                                             |       | —                                     |       | (518,001 | ) |
| Increase (decrease) in:                                                      |       |                                       |       |   |   |
| Accounts payable and accrued expenses                                        |       | 3,243,846                                  |       | (502,268 | ) |
| Interest payable                                                             |       | 4,813                                      |       | — |   |
| Net cash used in operating activities                                        |       | (1,583,755                                 | )          | (4,739,754 | ) |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                    |       |                                       |       |   |   |
| Purchases of property and equipment                                          |       | (142,588                                   | )          | (39,139 | ) |
| Payment of deposits                                                          |       | —                                     |       | (5,000 | ) |
| Net cash used in investing activities                                        |       | (142,588                                   | )          | (44,139 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                    |       |                                       |       |   |   |
| Proceeds from issuance of convertible notes                                  |       | 550,000                                    |       | — |   |
| Payments on convertible debentures                                           |       | —                                     |       | (139,123 | ) |
| Payments on capital lease                                                    |       | (18,650                                    | )          | (19,490 | ) |
| Proceeds from notes payable                                                  |       | 630,000                                    |       | — |   |
| Net cash (used in)/provided by financing  activities                         |       | 1,161,350                                  |       | (158,613 | ) |
| Net increase/(decrease) in cash                                              |       | (564,993                                   | )          | (4,942,506 | ) |
| Cash and cash equivalents, beginning of  period                              |       | 1,166,116                                  |       | 8,689,336 |   |
| Cash and cash equivalents, end of period                                     |       | 601,123                                    |       | 3,746,830 |   |
| Cash paid for:                                                               |       |                                       |       |   |   |
| Interest                                                                     |       | $                                          | 2,504      |   | $ | 2,504 |   |
| Income taxes                                                                 |       | $                                          | —     |   | $ | — |   |

 

***Supplementalschedule of non-cash financing activities:***

 

**During the quarter ended March 31, 2008:**

 

The Company issuedapproximately 13,736,111 shares of common stock in redemption of convertibledebentures with a face value of approximately $2,109,105.

The Company issuedapproximately 1,368,460 shares of common stock in conversion of convertibledebentures with a face value of approximately $405,639.

The Company issuedapproximately 862,522 shares of common stock in payment of consulting expensesof approximately $204,352.

The Company issuedapproximately 70,503 shares of common stock in respect of anti-dilutionprovision of convertible debenture for a value of $15,581.

The Company issuedapproximately 1,200,000 shares of common stock upon the exercise of employeestock options for a value of $60,000.

 

The accompanying notes are an integral partof these financial statements.

 

4

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’DEFICIT**

**FOR THE THREE MONTH PERIOD ENDED MARCH 31,2008 (UNAUDITED)**

 
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**   | ** **  |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------|-------------|
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Deficit** | ** **  |
| Balance at December 31, 2007  (Restated)                            |       | 85,027,461            |       | $           | 85,027     |            | $          | 34,302,334             |       | $           | (55,914,091 | ) | $ | (21,526,730 | ) |
| Convertible Debenture Redemption                                         |       | 13,736,111            |       | 13,736      |       | 2,095,369       |       | —                 |       | 2,109,105   |        |
| Convertible Debenture Conversion                                         |       | 1,368,640             |       | 1,369       |       | 404,270         |       | —                 |       | 405,639     |        |
| Option compensation charges                                              |       | —                |       | —      |       | 159,261         |       | —                 |       | 159,261     |        |
| Adjustment to fair value of derivatives                                  |       | —                |       | —      |       | 78,367          |       | —                 |       | 78,367      |        |
| Issuance in respect of anti-dilution  provision of convertible debenture |       | 70,503                |       | 71          |       | 15,510          |       | —                 |       | 15,581      |        |
| Issuance of stock in payment of expenses                                 |       | 862,522               |       | 862         |       | 203,490         |       | —                 |       | 204,352     |        |
| Issuance of stock upon exercise of options                               |       | 1,200,000             |       | 1,200       |       | 58,800          |       | —                 |       | 60,000      |        |
| Net loss for the three months ended  March 31, 2008                 |       | —                |       | —      |       |            |       | (9,519,659             | )          | (9,519,659  | )           |
| Balance at March 31, 2008                                           |       | 102,265,237           |       | $           | 102,265    |            | $          | 37,317,401             |       | $           | (65,433,750 | ) | $ | (28,014,084 | ) |

 

The accompanying notes are an integral partof these financial statements.

 

5

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**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARY**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**March 31,2008**

**(UNAUDITED)**

 

**1.****       ORGANIZATIONAL MATTERS**

 

**Organization**

 

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

 

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

 

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

 

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

 

**Nature of Business**

 

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

 

**Going Concern**

 

As reflected in the accompanying financial statements,the Company has losses from operations, negative cash flows from operations, asubstantial stockholders’ deficit and current liabilities exceed currentassets. The Company will thus not be able to continue as a going concern andfund cash requirements for operations through July 31, 2008 with currentcash reserves. As more fully described in Note 14—Subsequent Events, the Companywas able to raise cash in April 2008. Notwithstanding success in raising capital, there continues to besubstantial doubt about the Company’s ability to continue as a going concern.

 

In view of the matters described in the precedingparagraph, recoverability of a major portion of the recorded asset amountsshown in the accompanying consolidated balance sheet is dependent uponcontinued operations of the Company, which, in turn, is dependent upon theCompany’s ability to continue to raise capital and ultimately generate positivecash flows from operations. The financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts or amounts and classifications of liabilities that might be necessaryshould the Company be unable to continue its existence.

 

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:

 

·                     OnJune 17, 2008, the Company drew down $60,000 and received $50,000 (reflecting a16.66% original issue discount) under Note B described in Note 4 to thefinancial statements.

 

·                     On April 4, 2008, the Companyreleased closing escrow on the issuance of $4,038,880 of its amortizing seniorsecured convertible debentures and associated warrants. The purchaserspurchased from the Company senior secured convertible debentures and warrantsto purchase shares of the Company’s common stock. The net cash received by theCompany related to this financing was $2,527,231.

 

·                     Management anticipates raisingadditional future capital from its current convertible debenture holders, orother financing sources, that will be used to fund any capital shortfalls. Theterms of any financing will likely be negotiated based upon current marketterms for similar financings. No commitments have been received for additionalinvestment and no assurances can be given that this financing will ultimatelybe completed.

 

6

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·                     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 cannot be determined, management believes that focuseddevelopment will ultimately provide a quicker path to revenues, and anincreased likelihood of raising additional financing.

 

·     Managementwill continue to pursue licensing opportunities of the Company’s extensiveintellectual property portfolio.

 

**2. RESTATEMENT**

 

As indicated in Notes 4 through 7, the Company hasissued a series of complex convertible debentures over the past severalyears.  The convertible debentures areissued for less than face value, thus generating significant original issuediscounts.  In conjunction with theinstruments, the Company has issued substantial numbers of warrants, and thevalue of these warrants as of the issue date is treated in the same manner asan original issue discount.  Thesediscounts are amortized into interest expense over the life of the debenture,which is a complex calculation due to the planned monthly redemptions after acertain point included in the debenture agreements.  Further, the Debentures are converted intoshares at the holder’s option, the timing of which depends on the price of thecompany’s stock.  The Company also givesbrokers and other intermediaries considerable value via cash and warrants inorder to assist in selling the debentures. The cost associated with issuing the debt are capitalized and amortizedover the life of the debt.

 

On September 6, 2006, the Company entered into asecurities purchase agreement in which the purchasers purchased from theCompany amortizing convertible debentures and warrants to purchase shares ofthe Company’s common stock. In connection with that transaction, and for eachquarter thereafter, the Company performed a valuation of the debentures andwarrants (see Note 6).

 

On March 24, 2008, the Company discovered that ithad been using an incorrect number of warrants in calculating the appropriatefair value. The Company had been using 4,541,672 warrants instead of thecorrect number of 19,064,670 warrants. Upon learning of the error, theCompany recalculated the correct fair value and noted that this change inwarrant valuation had no impact on the value of the related convertibledebentures and all the related embedded derivatives.

 

In mid-May 2008, the Company discovered that theDeferred Issuance costs and discounts had been amortized over a period longerthan the weighted average life of the instruments, with the result that thediscounts and debt issuance costs should have been charged to interest expenseon a faster basis than had been the case. Upon learning of the error theCompany has recalculated the amortization and resulting interest expense.  The Company also discovered that itscalculation of the weighted average shares used in calculating basic anddiluted earnings per share for the three month period ended March 31, 2007was in error, with the actual weighted average shares being approximately 6.2million higher than reported.

 

In accordance with Statement of Accounting Standards No.154, the Company has determined that these were errors, and has thereforerestated the accompanying statements of operations, and cash flows for thethree months ended March 31, 2007 and the balance sheet as of December 31,2007.  The effects of such restatementsare shown in the table below:

 
| ** **                                                                  | ** ** | **As Originally  Reported** | ** ** | **Restated** | ** ** | **Difference** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
|                                                                        |       |                             |       |         |       |           |       |
| *December 31,  2007*                                                   |       |                             |       |         |       |           |       |
|                                                                        |       |                             |       |         |       |           |       |
| *Balance  Sheet*                                                            |       |                             |       |         |       |           |       |
| Deferred  issuance costs                                                    |       | 5,107,599                        |       | 4,772,087    |       | (335,512       | )          |
| 2005 Convertible  debenture and embedded derivatives – current portion |       | 1,040,156                        |       | 1,276,871    |       | 236,715        |       |
| 2006 Convertible  debenture and embedded derivatives – current portion |       | 906,860                          |       | 1,625,327    |       | 718,467        |       |
| 2007 Convertible  debenture and embedded derivatives – current portion |       | 363,805                          |       | 1,160,847    |       | 797,042        |       |
| 2006 Convertible  debenture and embedded derivatives, less current portion  |       | 793,504                          |       | 1,422,164    |       | 628,660        |       |
| 2007 Convertible  debenture and embedded derivatives, less current portion  |       | 2,364,731                        |       | 2,321,695    |       | (43,036        | )          |
| Accumulated  deficit                                                        |       | (53,240,732                      | )          | (55,914,091  | )          | (2,673,359     | )          |
| Total  stockholders’ deficit at December 31, 2007                 |       | (18,853,371                      | )          | (21,526,730  | )          | (2,673,359     | )          |

 

7

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|                                                                        |   | **As Originally  Reported** | ** ** | **Restated** | ** ** | **Difference** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------|------------|--------------|------------|----------------|--------|
| *March 31,  2007*                                                      |   |                             |       |         |       |           |   |
|                                                                        |   |                             |       |         |       |           |   |
| *Balance  Sheet*                                                            |   |                             |       |         |       |           |   |
| Deferred  issuance costs                                                    |   | 4,583,206                        |       | 4,246,674    |       | (336,532       | )      |
| 2005 Convertible  debenture and embedded derivatives – current portion |   | 4,485,754                        |       | 4,531,105    |       | 45,351         |   |
| 2006 Convertible  debenture and embedded derivatives – current portion |   | 4,160,035                        |       | 2,260,617    |       | (1,899,418     | )      |
| 2005 Convertible  debenture and embedded derivatives, less current portion  |   | 952,967                          |       | 962,602      |       | 9,635          |   |
| 2006 Convertible  debenture and embedded derivatives, less current portion  |   | 13,668,685                       |       | 7,427,743    |       | (6,240,942     | )      |
| Warrant  derivatives, less current portion                                  |   | 16,988,265                       |       | 27,688,754   |       | 10,700,489     |   |
| Accumulated  deficit                                                        |   | (61,804,719                      | )          | (64,756,366  | )          | (2,951,647     | )      |
| Total  stockholders’ deficit at March 31, 2007                         |   | (39,438,371                      | )          | (42,390,018  | )          | (2,951,647     | )      |
|                                                                        |   |                             |       |         |       |           |   |
| *Three  Months Ended March 31, 2007*                                   |   |                             |       |         |       |           |   |
|                                                                        |   |                             |       |         |       |           |   |
| *Statement  of Operations*                                                  |   |                             |       |         |       |           |   |
| Interest expense                                                            |   | (4,977,140                       | )          | (7,072,550   | )          | (2,095,410     | )      |
| Adjustments  related to fair value of warrants                              |   | (8,919,131                       | )          | (11,633,518  | )          | (2,714,387     | )      |
| Net loss                                                                    |   | (19,931,204                      | )          | (24,741,001  | )          | (4,809,797     | )      |
| Basic and  diluted loss per share                                           |   | (0.49                            | )          | (0.53        | )          | (0.04          | )      |
|                                                                        |   |                             |       |         |       |           |   |
| Weighted average  shares                                                    |   | 40,623,810                       |       | 46,818,854   |       | 6,195,044      |   |
|                                                                        |   |                             |       |         |       |           |   |
| *Statement  of Cash Flows*                                                  |   |                             |       |         |       |           |   |
| Net loss                                                                    |   | (19,931,204                      | )          | (24,741,001  | )          | (4,809,797     | )      |
| Amortization of  discount                                                   |   | 3,938,622                        |       | 5,697,499    |       | 1,758,877      |   |
| Amortization of  deferred issuance cost                                     |   | 1,036,012                        |       | 1,372,544    |       | 336,532        |   |
| Adjustments  related to fair value of derivatives                           |   | 8,919,131                        |       | 11,633,518   |       | 2,714,387      |   |

 

**3. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Basis of Presentation***—The accompanying interim consolidated financial statements areunaudited and have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) including those forinterim financial information and with the instructions for Form 10-Q andArticle 10 of Regulation S-X issued by the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all of the information andnote disclosures required by GAAP for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been reflectedin these interim financial statements. These financial statements should beread in conjunction with the audited financial statements and notes for theyear ended December 31, 2007 included in the Company’s Annual Report onForm 10-KSB filed with the SEC on April 18, 2008 and amended on June 30,2008.

*** ***

***Principles ofConsolidation*** —The accounts of the Company and Mytogen, Inc.(“Mytogen”) are included in the accompanying consolidated financial statementsfor the period from September 20, 2007 to December 31, 2007. On September 20,2007, a newly formed subsidiary of the Company merged into Mytogen to effect areorganization of Mytogen. As a result of the merger, the Company became theowner of 100% of the outstanding shares of Mytogen. During the period from September 20,2007 to March 31, 2008, all intercompany balances and transactionswere eliminated in consolidation.

 

***Use of Estimates***—These consolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States and, accordingly,require management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported 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 for 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.

 

***Reclassifications***—Certain prior year financial statement balances have been reclassified toconform to the current year presentation. These reclassifications had no effecton the recorded net loss.

 

***Cash and CashEquivalents*** —Cash equivalents are comprised of certainhighly liquid investments with maturities of three months or less whenpurchased. We maintain our cash in bank deposit accounts, which at times, mayexceed federally insured limits. We have not experienced any losses related tothis concentration of risk.

 

***Accounts Receivable***—We periodically assess our accounts receivable for collectibility on aspecific identification basis. If collectibility of an account becomesunlikely, we record an allowance for that doubtful account. Once we haveexhausted efforts to collect, we write off the account receivable against the allowancewe have already created. We do not require collateral for our trade accountsreceivable.

 

8

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***Equipment***—We record our equipment at historical cost. We expense maintenance and repairsas incurred. Depreciation is provided for using the straight-line method overthree to six years. Upon disposition of equipment, the gross cost andaccumulated depreciation are written off and the difference between theproceeds and the net book value is recorded as a gain or loss on sale ofassets. In the case of certain assets acquired under capital leases, the assetsare recorded net of imputed interest, based upon the net present value offuture payments. Assets under capital lease are pledged as collateral for the relatedlease.

 

***Deferred IssuanceCosts*** —Payments, either in cash or share-based payments,made in connection with the sale of debentures are recorded as deferred debtissuance costs and amortized using the effective interest method over the livesof the related debentures. The weighted average amortization period fordeferred debt issuance costs is 36 months.

 

**Intangible and Long-Lived Assets**—Wefollow Statement 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 thecarrying amount of an asset may not be recoverable. The carrying amount of along-lived asset is not recoverable if it exceeds the sum of the undiscounted cashflows expected 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 three months ended March 31,2008 and 2007, no impairment loss was recognized.

 

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

 

***Valuation ofDerivative Instruments*** —FAS 133, “Accounting forDerivative Instruments and Hedging Activities” requires bifurcation of embeddedderivative instruments and measurement of fair value for accounting purposes.In addition, FAS 155, “Accounting for Certain Hybrid Financial Instruments”requires measurement of fair values of hybrid financial instruments foraccounting purposes. We applied the accounting prescribed in FAS 155 toaccount for the 2006 Convertible Debentures described below in Note 6—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 the net present valueof certain 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 the Black Scholesmodel.

 

***Revenue Recognition***—Our revenues are generated from license and research agreements withcollaborators. Licensing revenue is recognized on a straight-line basis overthe shorter of the life of the license or the estimated economic life of thepatents related to the license. Deferred revenue represents the portion of thelicense and other payments received that has not been earned. Costs associatedwith the license revenue are deferred and recognized over same term as therevenue. Reimbursements of research expense pursuant to grants are recorded inthe period during which collection of the reimbursement becomes assured,because the reimbursements are subject to approval.

 

***Research andDevelopment Costs*** —Research and development costs consistof expenditures for the research and development of patents and technology,which cannot be capitalized. Our research and development costs consist mainlyof payroll and payroll related expenses, research supplies and research grants.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 areexpensed as incurred.

 

***Share-BasedCompensation***

 

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of FAS 123(R), using themodified-prospective transition method. Under this method, stock-basedcompensation expense is recognized in the consolidated financial statements forstock options granted, modified or settled after the adoption date. Inaccordance with FAS 123(R), the unamortized portion of options grantedprior to the adoption date is recognized into earnings after adoption. Resultsfor prior periods have not been restated, as provided for under themodified-prospective method.

 

Under FAS 123(R), stock-based compensationexpense recognized is based on the value of the portion of share-based paymentawards that are ultimately expected to vest during the period. Based on this,our stock-based compensation is reduced for estimated forfeitures at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

 

The fair value of each stock option is estimated onthe date of grant using the Black-Scholes option pricing model. Assumptionsrelative to volatility and anticipated forfeitures are determined at the timeof grant with the following weighted average assumptions used in the threemonths ended March 31, 2008:

 

9

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| Expected life in years |   | 4.0  | ** ** |
|---------------------------------------|--------|------|------------|
| Volatility                            |   | 148  | %          |
| Risk free  interest rate              |   | 2.50 | %          |
| Expected  dividends                   |   | None |       |
| Expected  forfeitures                 |   | 13   | %          |

 

The assumptions used in the Black Scholes modelsreferred to above are based upon the following data: (1) The expected lifeof the option is estimated by considering the contractual term of the option,the vesting period of the option, the employees’ expected exercise behavior andthe post-vesting employee turnover rate. (2) The expected stock pricevolatility of the underlying shares over the expected term of the option isbased upon historical share price data. (3) The risk free interest rate isbased on published U.S. Treasury Department interest rates for the expectedterms of the underlying options. (4) Expected dividends are based onhistorical dividend data and expected future dividend activity. (5) Theexpected forfeiture rate is based on historical forfeiture activity andassumptions regarding future forfeitures based on the composition of currentgrantees.

 

In accordance with FAS 123(R), the benefits oftax deductions in excess of the compensation cost recognized for optionsexercised during the period are classified as financing cash inflows ratherthan operating cash inflows.

 

***Income Taxes***—Deferred income taxes are provided using the liability method whereby deferredtax assets are recognized for deductible temporary differences and operatingloss and tax credit carryforwards and deferred tax liabilities are recognizedfor taxable temporary differences. Temporary differences are the differencesbetween the reported amounts of assets and liabilities and their tax bases.Deferred tax assets are reduced by a valuation allowance when, in the opinionof management, it is more likely than not that some portion or all of thedeferred tax assets will not be realized. Deferred tax assets and liabilitiesare adjusted for the effects of the changes in tax laws and rates of the dateof enactment.

 

When tax returns are filed, it is highly certain thatsome positions taken would be sustained upon examination by the taxingauthorities, while others are subject to uncertainty about the merits of theposition taken or the amount of the position that would be ultimatelysustained. The benefit of a tax position is recognized in the financialstatements in the period during which, based on all available evidence,management believes it is more likely than not that the position will besustained upon examination, including the resolution of appeals or litigationprocesses, if any. Tax positions taken are not offset or aggregated with otherpositions. Tax positions that meet the more-likely-than-not recognition thresholdare measured as the largest amount of tax benefit that is more than50 percent likely of being realized upon settlement with the applicabletaxing authority. The portion of the benefits associated with tax positionstaken that exceeds the amount measured as described above is reflected as aliability for unrecognized tax benefits in the accompanying balance sheet alongwith any associated interest and penalties that would be payable to the taxingauthorities upon examination.

 

If applicable interest and penalties associated withunrecognized tax benefits are classified as additional income taxes in thestatement of income.

 

***Net Loss Per Share***—We use FAS No. 128, “Earnings Per Share” for calculating the basic anddiluted loss per share. We compute basic loss per share by dividing the netloss and net loss attributable to common shareholders by the weighted averagenumber of common shares outstanding. Diluted loss per share is computed similarto basic loss per share except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if thepotential shares had been issued and if the additional shares were dilutive.Common equivalent shares are excluded from the computation of net loss pershare if their effect is anti-dilutive.

 

For the three months ended March 31, 2008,approximately 172,346,000 potentially dilutive shares were excluded from theshares used to calculate diluted earnings per share as their inclusion would beanti-dilutive. There were 76,000,000 potentially dilutive shares at March 31,2007 that were excluded from the calculation as their inclusion would beanti-dilutive.

 

***Concentrations andOther Risks*** —Currently, the Company’s revenues andaccounts receivable are concentrated in one customer. There is also ageographic concentration of the Company’s primary activities in NorthernCalifornia and Massachusetts. Other risks include the uncertainty of theregulatory 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***

 

In December 2007, the Financial AccountingStandards Board, or FASB, issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133”. This standard requirescompanies to provide enhanced disclosures about (a) how and why an entityuses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under Statement 133 and its relatedinterpretations, and (c) how derivative instruments and related hedged itemsaffect an entity’s financial position, financial performance, and cash flows.This Statement is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008, with earlyapplication encouraged. The Company has not yet adopted the provisions of FAS No. 161,but does not expect it to have a material impact on its financial position,results of operations or cash flows.

 

10

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In December 2007, the SEC issued Staff AccountingBulletin No. 110 regarding the use of a “simplified” method, as discussedin SAB No. 107 (“SAB 107”), in developing an estimate of expectedterm of “plain vanilla” share options in accordance with Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment”. Inparticular, the staff indicated in SAB 107 that it will accept a company’selection to use the simplified method, regardless of whether the company hassufficient information to make more refined estimates of expected term. At thetime SAB 107 was issued, the staff believed that more detailed externalinformation about employee exercise behavior (e.g., employee exercisepatterns by industry and/or other categories of companies) would, over time,become readily available to companies. Therefore, the staff stated inSAB 107 that it would not expect a company to use the simplified methodfor share option grants after December 31, 2007. The staff understandsthat such detailed information about employee exercise behavior may not bewidely available by December 31, 2007. Accordingly, the staff willcontinue to accept, under certain circumstances, the use of the simplifiedmethod beyond December 31, 2007. The Company currently uses the simplifiedmethod for “plain vanilla” share options, and will assess the impact ofSAB 110 for fiscal year 2008. It is not believed that this will have animpact on the Company’s financial position, results of operations or cashflows.

 

In December 2007, the FASB issued FAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51.” This Statement amends ARB 51 to establish accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary is an ownership interest in the consolidated entity that should bereported as equity in the consolidated financial statements. Before thisStatement was issued, limited guidance existed for reporting noncontrollinginterests. As a result, considerable diversity in practice existed. So-calledminority interests were reported in the consolidated statement of financialposition as liabilities or in the mezzanine section between liabilities and equity.This Statement improves comparability by eliminating that diversity. ThisStatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption is prohibited.The effective date of this Statement is the same as that of the relatedStatement 141 (revised 2007). The Company will adopt this Statementbeginning January 1, 2009. It is not believed that this will have animpact on the Company’s financial position, results of operations or cashflows.

 

In December 2007, the FASB, issued FAS No. 141(revised 2007), “Business Combinations.” This Statement replaces FASB StatementNo. 141, “Business Combinations,” but retains the fundamental requirementsin Statement 141. This Statement establishes principles and requirements forhow the acquirer: (a) recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquire; (b) recognizes and measures the goodwill acquiredin the business combination or a gain from a bargain purchase; and (c) determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. ThisStatement applies prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. An entity may not apply itbefore that date. The effective date of this Statement is the same as that ofthe related FASB Statement No. 160, “Noncontrolling Interests inConsolidated Financial Statements”. The Company will adopt this Statementbeginning January 1, 2009. It is not believed that this will have animpact on the Company’s financial position, results of operations or cashflows.

 

In February 2007, the FASB, issued FAS No. 159,“The Fair Value Option for Financial Assets and Liabilities—Including anAmendment of FAS 115.” This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Thisoption is available to all entities. Most of the provisions in FAS 159 areelective; however, an amendment to FAS 115 “Accounting for CertainInvestments in Debt and Equity Securities” applies to all entities withavailable for sale or trading securities. Some requirements apply differentlyto entities that do not report net income. FAS 159 is effective as of thebeginning of an entities first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the entity makes that choice in the first 120 days ofthat fiscal year and also elects to apply the provisions of FAS 157 “FairValue Measurements.” The Company has adopted FAS 159 beginning January 1,2008, and does not believe the adoption had a material impact on its financialposition, results of operations or cash flows.

 

Effective January 1, 2007, the Company adoptedFSP No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,”(FSP FIN 48-1), which was issued on May 2, 2007. FSP FIN 48-1amends FIN 48 to provide guidance on how an entity should determinewhether a tax position is effectively settled for the purpose of recognizingpreviously unrecognized tax benefits. The term “effectively settled” replacesthe term “ultimately settled” when used to describe recognition, and the terms “settlement”or “settled” replace the terms “ultimate settlement” or “ultimately settled”when used to describe measurement of a tax position under FIN 48. FSPFIN 48-1 clarifies that a tax position can be effectively settled upon thecompletion of an examination by a taxing authority without being legallyextinguished. For tax positions considered effectively settled, an entity wouldrecognize the full amount of tax benefit, even if the tax position is notconsidered more likely than not to be sustained based solely on the basis of itstechnical merits and the statute of limitations remains open. The adoption ofFSP FIN 48-1 did not have an impact on the accompanying FinancialStatements.

 

In September 2006, the FASB issued FAS 157 “FairValue Measurements.” This Statement defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles (GAAP),and expands disclosures about fair value measurements. This Statement appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements.However, for some entities, the application of this Statement will changecurrent practice. This Statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those 

 

11

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fiscal years. Earlier application is encouraged,provided that the reporting entity has not yet issued financial statements forthat fiscal year, including financial statements for an interim period withinthat fiscal year.  The Company hasadopted FAS 157 beginning January 1, 2008 and does not believe theadoption had a material impact on its financial position, results of operationsor cash flows.

 

**4. CONVERTIBLE NOTES PAYABLE—2008**

 

The Company issued and sold a $600,000 unsecuredconvertible note dated as of February 15, 2008 (“Note A”) to JMJ Financial, fora net purchase price of $500,000 (reflecting a 16.66% original issue discount)in a private placement. Note A bears interest at the rate of 12% per annum, andis due by February 15, 2010. At any time after the 180th day following theeffective date of Note A, the holder may at its election convert all or part ofNote A plus accrued interest into shares of the Company's common stock at theconversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of theaverage of the three lowest trade prices in the 20 trading days prior to theconversion. Pursuant to the Use of Proceeds Agreement entered into inconnection with the issuance of Note A, the Company is required to use theproceeds from Note A solely for research and development dedicated to adultstem cell research.

 

Effective February 15, 2008, in exchange for$1,000,000 in the form of a Secured & Collateralized Promissory Note (the “JMJNote”) issued by JMJ Financial to the Company, the Company issued and sold anunsecured convertible note (“Note B”) to JMJ Financial in the aggregateprincipal amount of $1,200,000 or so much as may be paid towards the balance ofthe JMJ Note. Note B bears interest at the rate of 10% per annum, and is due byFebruary 15, 2010. At any time following the effective date of Note B, theholder may at its election convert all or part of Note B plus accrued interestinto shares of the Company’s common stock at the conversion rate of the lesserof: (a) $0.38 per share, or (b) 80% of the average of the three lowest tradeprices in the 20 trading days prior to the conversion. In connection with theissuance of Note B, the Company entered into a Collateral and SecurityAgreement dated as of February 15, 2008 with JMJ Financial pursuant to whichJMJ Financial granted the Company a security interest in certain of its assetssecuring the JMJ Note. As of March 31, 2008, the Company had drawn down andreceived the following amounts under Note B:

 

·On March 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a16.66% original issue discount).

 

Pursuant to the Use of Proceeds Agreement entered intoin connection with the issuance of Note B, the Company is required to use theproceeds from Note B solely for research and development dedicated to adultstem cell research.

 

The conversion provisions included in Note A and NoteB represent embedded derivative instruments.  Accordingly, the Company has complied with the provisions ofFAS 155 “Accounting for Certain Hybrid Financial Instruments”.  The fair values of Note A and Note B andrelated embedded derivatives, valued using a Monte Carlo simulation model, wererecorded as of February 15, 2008. The excess of these values over facevalues of Note A and Note B was recorded through the results of operations asCharges related to issuance of 2008 Convertible Notes.

 

At March 31, 2008 Note A and Note B and relatedembedded derivatives outstanding were again valued at fair value using a MonteCarlo simulation model, result in a decreases shown in the following table inthe fair values of the respective liabilities versus the values at February 15,2008 and March 17, 2008.  The decreaseswere recorded through the results of operations as an Adjustment to Fair Valueof Derivatives.

 
| ** ** | ** ** | ** **           | ** ** | ** **                       | ** ** | **Fair Value at** | ** ** | ** **         | ** ** |
|------------|------------|----------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------------|------------|
| ** ** | ** ** | ** **           | ** ** | ** **                       | ** ** | **February 15,**       | ** ** | **March 31,** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Face Amount** | ** ** | **Net Purchase Price** | ** ** | **2008**                    | ** ** | **2008**           | ** ** | **Decrease** | ** ** |
| Note A     |       | $                    | 600,000    |                             | $          | 500,000                     |       | $                  | 1,229,466  |   | $ | 1,167,542 |   | $ | 61,924 |   |
| Note B     |       | $                    | 60,000     |                             | $          | 50,000                      |       | $                  | 116,107    | ** | $ | 114,669 |   | $ | 1,438 |   |
| Total      |       | $                    | 660,000    |                             | $          | 550,000                     |       | $                  | 1,345,573  |   | $ | 1,282,211 |   | $ | 63,362 |   |

 

----

**   FairValue at March 17, 2008

 

**5. CONVERTIBLE DEBENTURES—2007**

 

On August 31, 2007 we entered into a SecuritiesPurchase Agreement with accredited investors for the issuance of an aggregateof $12,550,000 principal amount of convertible debentures with an originalissue discount of $2,550,000 representing approximately 20.3%. In connectionwith the closing of the sale of the debentures, we received gross proceeds of$10,000,000. The convertible debentures are convertible at the option of theholders into 36,911,765 shares of Common Stock at a fixed conversion price of$0.34 per share, subject to anti-dilution and other customary adjustments. Inconnection with the Securities Purchase Agreement, we also issued warrants topurchase an aggregate of 43,240,655 shares of our Common Stock. The term of thewarrants is five years and the exercise price is $0.38 per share, subject toanti-dilution and other customary adjustments. The investors have contractuallyagreed to restrict their ability to convert the convertible debentures,exercise the warrants and exercise the additional investment right and receiveshares of our Common Stock such that the number of shares of our Common Stockheld by them and their affiliates after such conversion or exercise does notexceed 4.99% of our then issued and outstanding shares of our Common Stock.

 

The agreements entered into provide that the Companywill pay certain cash amounts as liquidated damages in the event that theCompany does not maintain an effective registration statement, or if theCompany fails to timely execute stock trading activity.

 

Under the terms of the agreements, principal amountsowed under the debentures become due and payable commencing six monthsfollowing closing of the transaction. At that time, and each month thereafter,the Company is required to either repay 1/30 of the outstanding balance owed in commonstock at the lesser of $0.34 per share or 80% of the prior ten day’s averageclosing stock price, immediately preceding the redemption. The agreements alsoprovide that the Company may force conversion of outstanding amounts owed underthe debentures into common stock, if the Company has met certain conditions andmilestones, and additionally, has a stock price for 20 consecutive trading daysthat exceeds 200% of the conversion price.

 

The agreement included a number of other embeddedderivative instruments, and the Company has complied with the provisions ofFAS 155 “Accounting for Certain Hybrid Financial Instruments”, andrecorded the fair value of the convertible debentures, and related embeddedderivatives, as of August 31, 2007. The fair value of the debentures andrelated derivative instruments was valued using a combination of Binomial andBlack Scholes models, resulting in a fair value of $11,875,539. The excess ofthis value over the face value of the 

 

12

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Convertible Debentures was recorded through theresults of operations as Charges related to issuance of 2007 ConvertibleDebentures and Warrants.

 

The 2007 Convertible Debentures and related embeddedderivatives outstanding at March 31, 2008 were again valued at fair valueusing a combination of Binomial and Black Scholes models, resulting in adecrease in the fair value of the liability of approximately $217,489 versusthe value at December 31, 2007, which was recorded through the results ofoperations as an Adjustment to Fair Value of Derivatives.

 

In connection with this financing, we paid cash feesto a placement agent of $1,001,800 and issued a warrant to purchase 6,328,890shares of Common Stock at an exercise price of $0.38 per share. The initialfair value of the warrant was estimated at approximately $2,025,000 using theBlack Scholes pricing model. The broker-dealer warrants were again valued at March31, 2008 at fair value using the Black Scholes model, resulting in an increasein the fair value of the liability of approximately $51,623, which was recordedthrough the results of operations as an Adjustment to Fair Value ofDerivatives. The assumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 145%, (3) risk-free interestrate of 2.0%, and (4) expected life of 4.50 years. Cash fees paid,and the initial fair value of the warrant, have been capitalized as debtissuance costs and are being amortized over 36 months, and as redemptionsoccur the Company writes off the proportional amount of the original deferredissuance cost to interest expense. Interest expense for three months ended March 31, 2008 was $252,264.

 

The following table summarizes the 2007 ConvertibleDebentures and discounts outstanding at March 31, 2008:

 
| 2007 Convertible  debentures at fair value                      |   | $          | 10,986,256 |   |
|-----------------------------------------------------------------|--------|------------|------------|--------|
| Warrant  derivative discount                                    |   | (5,024,420 | )          |
| Original issue  discount                                        |   | (1,719,768 | )          |
|                                                            |   |       |       |
| Net convertible  debentures                                     |   | 4,242,068  |       |
| Less current  portion                                           |   | (1,755,339 | )          |
|                                                            |   |       |       |
| 2007 Convertible  debentures and embedded derivatives-long term |   | $          | 2,486,729  |   |

 

As of March 31, 2008, the outstanding principalamount for the 2007 Convertible Debentures is $12,131,667.

 

**6. CONVERTIBLE DEBENTURES—2006**

 

On September 6, 2006, we entered into aSecurities Purchase Agreement with accredited investors for the issuance of anaggregate of $10,981,250 principal amount of convertible debentures with anoriginal issue discount of $2,231,250 representing approximately 20.3%. Inconnection with the closing of the sale of the debentures, we received grossproceeds of $8,750,000. The 2006 convertible debentures and related embeddedderivatives outstanding at March 31, 2008 were again valued at fair valueusing a combination of Binomial and Black Scholes models, resulting in adecrease in the fair value of the liability of approximately $484,305 versusthe value at December 31, 2007, which was recorded through the results ofoperations as an Adjustment to Fair Value of Derivatives.

 

The following table summarizes the 2006 ConvertibleDebentures and discounts outstanding at March 31, 2008:

 
| 2006 Convertible  debentures at fair value                      |   | $          | 5,611,411 |   |
|-----------------------------------------------------------------|--------|------------|-----------|--------|
| Warrant  derivative discount                                    |   | (2,407,465 | )         |
| Original issue  discount                                        |   | (358,196   | )         |
|                                                            |   |       |      |
| Net convertible  debentures                                     |   | 2,845,750  |      |
| Less current  portion                                           |   | (2,845,750 | )         |
|                                                            |   |       |      |
| 2006 Convertible  debentures and embedded derivatives-long term |   | $          | 0         |   |

 

In connection with this financing, we paid cash feesto a broker-dealer of $525,000 and issued a warrant to purchase 4,575,521shares of Common Stock at an exercise price of $0.3168 per share. Thebroker-dealer warrants were again valued at March 31, 2008 at fair valueusing the Black Scholes model, resulting in a decrease in the fair value of theliability of approximately $80,731, which was recorded through the results ofoperations as a debit to Adjustments to Fair Value of Derivatives. Theassumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 145% to 147%, (3) risk-freeinterest rate of 1.9% to 2.8%, and (4) expected life of 3.25 years. Cashfees paid, and the initial fair value of the warrant, have been capitalized asdebt issuance costs and are being amortized over 36 months, and asredemptions occur the Company writes off the proportional amount of theoriginal deferred issuance cost to interest expense.

 

13

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As of March 31, 2008, the outstanding principalamount for the 2006 Convertible Debentures is $5,106,245.

 

**7. CONVERTIBLE DEBENTURES—2005**

 

On September 15, 2005, we entered into a SecuritiesPurchase Agreement with accredited investors for the issuance of an aggregateof $22,276,250 principal amount of convertible debentures with an originalissue discount of $4,526,250 representing approximately 20.3%. In connectionwith the closing of the sale of the debentures, we received gross proceeds of$17,750,000.

 

The agreement included a number of embedded derivativeinstruments that required separate valuation in accordance with therequirements of FAS 133, EITF 05 - 04 and related accountingliterature. The following summarizes the fair values of embedded derivatives atMarch 31, 2008 and December 31, 2007, followed by a description ofthe valuation methodology utilized to determine fair values:

 
| **Embedded Derivative Liability (Asset)** | ** ** | **Fair value  March 31,  2008** | ** ** | **Fair value  December 31,  2007** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| Conversion  Feature                                      |       | $                                         | 486        |                                         | $          | 1,736 |   |
| Anti-dilution  protection                                |       | 98,293                                    |       | 194,356                                      |       |
| Default  provisions                                      |       | 1,982                                     |       | 3,122                                        |       |
| Right to provide  future financing                       |       | —                                    |       | —                                       |       |
| Company right to  force conversion                       |       | —                                    |       | —                                       |       |
|                                                     |       |                                      |       |                                         |       |
|                                                     |       | $                                         | 100,761    |                                         | $          | 199,214 |   |

 

The fair value of the derivative for the conversionfeature was valued as an American call option using the Binomial Option PricingModel with the following inputs: (1) closing stock price from $0.17 to$0.25 (2) exercise price equal to the $0.34 conversion price (3) volatilitybased upon the Company’s stock trading of 123% to 127% (4) Treasury noterates with terms commensurate with the remaining term of the Notes of 1.5% to3.0%, and (5) duration of the note as an amortizing debenture ofapproximately .05 to .12 years, based upon present values.

 

The fair value of the derivative for anti-dilutionprotection was valued using a standard put option binomial model, adjusted forthe probability of subsequent financing at prices below the principal’sconversion option with the following inputs: (1) closing stock price as ofthe valuation date from $0.17 to $0.25 (2) exercise price equal to the$0.34 conversion price (3) volatility based upon the Company’s stocktrading of 123% to 127% (4) Treasury note rates with terms commensuratewith the remaining term of the Notes of 1.5% to 3.0% and (5) duration ofthe note as an amortizing debenture of approximately .05 to .12 years basedupon present values.

 

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

 

The fair value of the derivative asset related to theCompany’s right to force conversion was based upon a binomial option pricingmodel with the following inputs: (1) closing stock price at the valuationdate from $0.17 to $0.25 (2) exercise price of $0.68 per share which isrequired for the forced conversion (3) volatility based upon the Company’sstock trading of 123% to 127% (4) Treasury note rate with termscommensurate with the remaining term of the Notes of 1.5% to 3.0% and (5) durationof the note as an amortizing debenture of approximately .05 to .12 years basedupon present values.

 

During the three months ended March 31, 2008 adecrease in the fair value of the embedded derivative amounts of approximately$89,548 was recorded through results of operations as Adjustment to Fair Valueof Derivatives. An additional decrease in the fair value totaling $8,905 can beattributed to conversions on debt that occurred during the year.

 

During the three months ended March 31, 2008 theCompany recorded approximately $396,380 as Interest Expense for amortization ofdiscounts for original issue discount, discount for warrant derivative, andother discounts.

 

In connection with this financing, we paid cash feesto a broker-dealer of $1,065,000 and issued a warrant to purchase 1,162,239shares of Common Stock at an exercise price of $2.53 per share. The initialfair value of the warrant was estimated at approximately $1,379,000 using theBlack Scholes pricing model. The assumptions used in the Black Scholes modelare as follows: (1) dividend yield of 0%; (2) expected volatility of 146%,(3) risk-free interest rate of 1.5%, and (4) expected life of5 years. Cash fees paid, and the initial fair value of the warrant, havebeen capitalized as debt issuance costs and are being amortized over36 months under the effective interest rate method. Interest expense forthe three months ended March 31, 2008 was approximately $150,140.

 

In January 2007, the Company’s Board of Directorsagreed to reduce the exercise price of the warrants issued in connection withthe 2005 debentures to $0.95 per share and to reduce the conversion price ofthe debentures to $0.90 per share.

 

14

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The Company has considered the impact of EmergingIssue Task Force statements, or EITFs 96 - 19— *Debtor’s Accounting for a Modification or Exchange ofDebt Instruments, 02 - 4—Determining Whether a Debtor’s Modificationor Exchange of Debt Instruments is Within the Scope of FASB No. 15, and05 - 7—Accounting for Modifications to conversion Options Embedded inDebt Instruments and Related Issues* on the accounting treatment ofthe change in conversion price of the 2005 Convertible Debentures described inthe paragraph above. EITF 96 - 19 states that a transactionresulting in a significant change in the nature of a debt instrument should beaccounted for as an extinguishment of debt. The Company has concluded that thechange in conversion price does not constitute a significant change in thenature of the debt and that the transaction should not be treated as anextinguishment of that debt.

 

***Reduction ofExercise Price***

 

On August 24, 2006, the Company’s Board ofDirectors agreed to reduce the exercise price of the warrants issued in connectionwith the 2005 debentures from $2.53 per share to $0.95 per share forapproximately three days. As a result of this repricing, warrant holders withan aggregate of 4,541,672 warrants exercised their rights generatingapproximately $4,315,000 of cash proceeds. Warrant holders who exercised theirwarrants were issued replacement warrants to purchase an equivalent number ofshares at an exercise price of $1.60 per share. Warrant holders who did notexercise their warrants had the conversion price of their convertibledebentures reduced to $0.95. As a result of certain anti-dilution protection inthe original warrant agreement, certain of the warrant holders who did notexercise their warrants received anti-dilution protection and had the number ofshares covered under the warrant agreement increased to 2,135,615, and theexercise price reduced to $0.95 per share. One warrant holder waived the rightto reprice their warrant for $2.53 to $0.95 and did not exercise all of theirwarrants. Their remaining warrants on an aggregate of 581,119 common sharesremain outstanding at an exercise price of $2.53 per share.

 

The Company has considered the impact ofEITFs 96 - 19, 02 - 4 and 05 - 7 on theaccounting treatment of the change in conversion price of a portion of the 2005Convertible Debentures described in the paragraph above.EITF 96 - 19 states that a company should recognize as anextinguishment of debt a significant change in the nature of a debt instrument.EITF 05 - 7 states that if the change in the cash flows of thedebt instrument plus the change in the fair value of the conversion derivativeas a result of the change is greater than 10%, the change should be treated assignificant and the debt is considered extinguished. The Company has concludedthat the change in conversion price from $2.30 to $0.95 of a portion of theoutstanding Debenture does not constitute an extinguishment of that debt.

 

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

 

The fair value of the derivative for the investors’option to provide future financing was determined using a Black-Scholes OptionPricing Model with the following inputs: (1) The stock and exercise pricewas based on the maximum amount of additional investment of $8,875,000 (2) Volatilityof 2% was based on the historical volatility of government and high yield bondindices (3) Risk free rate of 3.9% was based on Treasury notes and (4) timeto maturity was based upon the six month option period. This option expired inSeptember, 2006 and no value has been attached to it at December 31, 2006.

 

The fair value of the derivative asset related to theCompany’s right to force conversion was based upon a binomial option pricingmodel with the following inputs: (1) closing stock price at the valuationdates of $2.20 at September 15, 2005 and $0.58 at December 31, 2006 (2) exerciseprice of $4.60 per share which is required for the forced conversion (3) volatilitybased upon the Company’s stock trading of 64% at September 15, 2005 and162% at December 31, 2006 (4) Treasury note rate with termscommensurate with the remaining term of the Notes of 3.9% and (5) durationof the note as an amortizing debenture of approximately 0.8 years at December 31,2007 and 0.68 years at December 31, 2006 based upon present values.

 

***Anti-dilutionImpact***

 

As a result of the 2007 Financing, described morefully in Note 5, the warrants issued in connection with the 2005 Financing wereautomatically diluted down to $0.34. The result of this was to impact both thenumber and price of the original warrants and replacement warrants issued toboth the investors and the brokers.

 

The new number of original warrants issued toinvestors totaled 2,335,005. The assumptions used in the Black Scholes model tovalue the warrants on the date or dilution were as follows: (1) dividendyield of 0%; (2) expected volatility of 146%, (3) risk-free interestrate of 1.6%, and (4) expected life of 2.25 years. The broker-dealerwarrants were again valued at March 31, 2008 at fair value using acombination of Binomial and Black Scholes models, resulting in a decrease inthe fair value of the liability of approximately $14,607 versus the value at December 31,2007, which was recorded through the results of operations as a credit toAdjustments to Fair Value of Derivatives.

 

The new number of replacement warrants issued toinvestors and brokers totaled 12,689,966. The assumptions used in the BlackScholes model to value the warrants on the date or dilution were as follows: (1) dividendyield of 0%; (2) expected volatility of 146%, (3) risk-free interestrate of 2.5%, and (4) expected life of 3.5 years. The warrants wereagain valued at March 31, 2008 at fair value using a Black Scholes model,resulting in a decrease in the fair value of the liability of approximately$44,200 versus the value at December 31, 2007, which was recorded throughthe results of operations as a credit to Adjustments to Fair Value ofDerivatives.

 

15

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The following table summarizes the 2005 ConvertibleDebentures and embedded derivatives outstanding at March 31, 2008:

 
| 2005 Convertible  debentures at $0.34 at face                        |   | $        | 873,250 |   |
|----------------------------------------------------------------------|--------|----------|---------|--------|
| Discounts on  debentures:                                            |   |     |    |
| Original issue  discount                                             |   | (51,672  | )       |
| Conversion  feature derivative                                       |   | (65,607  | )       |
| Warrant  derivative                                                  |   | (83,528  | )       |
| Other  derivatives                                                   |   | (3,192   | )       |
| Net convertible  debentures                                          |   | 669,251  |    |
| Embedded  derivatives                                                |   | 100,761  |    |
| 2005 Convertible  debentures and embedded derivatives                |   | 770,012  |    |
| Less current  portion                                                |   | (770,012 | )       |
| 2005 Convertible  debentures and embedded derivatives—long term |   | $        | —  |   |

 

**8.             WARRANT DERIVATIVES—OTHER**

 

In January, 2008 the Company issued 680,636 warrantsto purchase common stock at $0.39 per share in connection with consultingservices provided during the previous quarter. The warrants were valued at $112,492 using the Black Scholes pricingmodel with the following assumptions:  (1) dividendyield of 0%; (2) expected volatility of 146%; (3) risk-free interestrate of 2.5%, and expected life of ten years. These warrants are classified as a warrant derivative.  The warrants were again valued at March 31,2008 at fair value using the Black Scholes pricing model resulting in anincrease in the fair value of the liability of approximately $252 versus theoriginal value, which was recorded through the results of operations as a debitto Adjustments to Fair Value of Derivatives.

 

**9.****                                  ****ADJUSTMENT TO FAIR VALUE OFDERIVATIVES**

 

The following table summarizes the components of theAdjustment to Fair Value of Derivatives which were recorded as charges toresults of operations for the three months ended March 31, 2008. The tablesummarizes by category of derivative liability the impact from market changesduring the quarter, impact of additional investments and repricing and exerciseof certain warrants.

 
| ** **                                                    | ** ** | **Fair Value  Adjustment** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|
| Embedded Pipe derivatives - 9.05                              | ** ** | $                               | 89,548     | ** ** |
| Pipe Hybrid instrument – 9.06                            |       | 414,842                         |       |
| Pipe Hybrid- FAS 155 – 8.07                              |       | 217,498                         |       |
| Pipe Hybrid- 2008                                             |       | 63,362                          |       |
| Original warrants PIPE 2005 , excluding replacement  warrants |       | 14,607                          |       |
| Replacement Warrants                                          |       | 44,202                          |       |
| Warrants – PIPE 2006-investors                           |       | 80,731                          |       |
| Warrants – PIPE 2007-investors                           |       | (51,623                         | )     |
| Other Warrant Derivatives- 2005 and 2006                      |       | 123,471                         |       |
| Other Warrants Derivatives - 2007                             |       | 23,633                          |       |
|                                                          |       |                            |       |
|                                                          |       | $                               | 1,020,271  |   |

 

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**10.****                           ****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 March 31, 2008. We had102,265,237 shares of Common Stock outstanding as of March 31, 2008.

 

**11.****                           ****STOCK-BASED COMPENSATION**

 

**StockPlans**

 

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 numberof common shares available for grant and issuance under the plan may not exceed2,800,000 shares, subject to adjustment in the event of certainrecapitalizations, reorganizations and similar transactions. Common stockpurchase options may be exercisable by the payment of cash or by other means asauthorized by the Board of Directors or a committee established by the Board ofDirectors. At March 31, 2008, ACT had granted 2,492,000 common share purchaseoptions under the plan. At March 31, 2008, there were 308,000 options availablefor grant under this plan.

 

On December 13, 2004, ACT’s Board of Directorsand stockholders approved the establishment of the 2004 Stock Option Plan II(the “2004 Stock Plan II”). The total number of common shares available forgrant and issuance under the plan may not exceed 1,301,161 shares, subject toadjustment in the event of certain recapitalizations, reorganizations andsimilar transactions. Common stock purchase options may be exercisable by thepayment of cash or by other means as authorized by the Board of Directors or acommittee established by the Board of Directors. At March 31, 2008, ACT hadgranted 1,301,161 common share purchase options under the plan. At March 31,2008, there were no options available for grant under this plan.

 

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 exceed 9 millionshares, plus an annual increase on the first day of each of the Company’sfiscal years beginning in 2006 equal to 5% of the number of shares of ourcommon stock outstanding on the last day of the immediately preceding fiscalyear, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. On January 24, 2008, the Company’sshareholders approved an increase of 25,000,000 shares to the 2005 Plan. 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 March 31, 2008, we had granted 19,958,707 (net offorfeitures) common stock purchase options and 3,466,747 shares of common stockunder the plan. At March 31, 2008, there were 17,718,017 options availablefor grant under this plan.

 

***Stock OptionActivity***

 

A summary of optionactivity for the three months ended March 31, 2008 is presented below:

 
| ** **                                          | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | ** **  | ** ** | ** **                              | ** ** | ** **                                                        | ** ** | **(000)**                       | ** ** |
| Outstanding at January 1, 2008  |       | 11,620,971  |       | $                                       | 0.78       |                                                              | 7.16       |                            | $          |  255 | ** ** |
| Granted                                             |       | 11,875,734  |       | $                                       | 0.21       |                                                              |       |                            |       | ** ** |
| Exercised                                           |       | (1,200,000  | )          | $                                       | 0.05       |                                                              |       |                            |       | ** ** |
| Forfeited                                           |       | (122,920    | )          | $                                       | 1.63       |                                                              |       |                            |       | ** ** |
|                                                |       |        |       |                                    |       |                                                              |       |                            | ** ** |
| Outstanding at  March 31, 2008                 |       | 22,173,785  |       | $                                       | 0.51       |                                                              | 8.52       |                            | $          | 111 |   |
|                                                |       |        |       |                                    |       |                                                              |       |                            |       |
| Vested and  expected to vest at March 31, 2008 |       | 20,625,007  |       | $                                       | 0.53       |                                                              | 8.42       |                            | $          | 111 |   |
|                                                |       |        |       |                                    |       |                                                              |       |                            |       |
| Exercisable at  March 31, 2008                 |       | 10,260,112  |       | $                                       | 0.80       |                                                              | 7.09       |                            | $          | 111 |   |

 

The aggregate intrinsic value in the table above isbefore applicable income taxes and is calculated based on the differencebetween the exercise price of the options and the quoted price of the Company’scommon stock as of the reporting date.

 

17

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A summary of the status of unvested employee stockoptions as of March 31, 2008 and changes during the period then ended, ispresented below:

 
| ** **                          | ** ** | **Options** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|-------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at  December 31, 2007 |       | 783,814     |       | $                                                                       | 0.46       |   |
| Granted                             |       | 11,875,734  |       | $                                                                       | 0.18       |   |
| Vested                              |       | (701,396    | )          | $                                                                       | 0.21       |   |
| Forfeited                           |       | (44,479     | )          | $                                                                       | 1.78       |   |
| Unvested at  March 31, 2008    |       | 11,913,673  |       | $                                                                       | 0.20       |   |

 

As of March 31, 2008, total unrecognizedstock-based compensation expense related to nonvested stock options wasapproximately $2,418,000, which is expected to be recognized over a weightedaverage period of approximately 3.9 years.

 

The weighted average grant date fair value of optionsgranted during the three months ended March 31, 2008 was $0.18.

 

The following table summarizes information about stockoptions outstanding and exercisable at March 31, 2008.

 
| ** **              | ** **  | **Options Outstanding**   | ** ** | **Options Exercisable**                        | ** ** |
|-------------------------|-------------|--------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** **  | **Number of Shares** | ** ** | **Weighted  Average  Remaining Life  (Years)** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Number of Shares** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
| $                       | 0.05        |                           | 922,000    |                                                | 6.37       |   | $ | 0.05 |   | 922,000 |   | $ | 0.05 |   |
| $                       | 0.21        |                           | 11,875,734 |                                                | 9.86       |   | $ | 0.21 |   | 527,329 |   | $ | 0.21 |   |
| $                       | 0.25        |                           | 1,301,161  |                                                | 6.70       |   | $ | 0.25 |   | 1,295,670 |   | $ | 0.25 |   |
| $                       | 0.35        |                           | 90,000     |                                                | 8.28       |   | $ | 0.35 |   | 37,500 |   | $ | 0.35 |   |
| $                       | 0.75 - 0.76 |                           | 389,375    |                                                | 8.83       |   | $ | 0.76 |   | 363,550 |   | $ | 0.76 |   |
| $                       | 0.85        |                           | 6,293,099  |                                                | 6.84       |   | $ | 0.85 |   | 6,010,140 |   | $ | 0.85 |   |
| $                       | 1.35        |                           | 235,000    |                                                | 8.06       |   | $ | 1.35 |   | 190,094 |   | $ | 1.35 |   |
| $                       | 2.04 - 2.11 |                           | 315,000    |                                                | 7.74       |   | $ | 2.07 |   | 228,542 |   | $ | 2.07 |   |
| $                       | 2.20 - 2.48 |                           | 752,417    |                                                | 7.39       |   | $ | 2.36 |   | 685,288 |   | $ | 2.34 |   |
|                    |        | 22,173,785                     |       |                                                |       |   |   | 10,260,112 |   |   |   |
|                         |             |                                |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

**12.****                           ****COMMITMENTS AND CONTINGENCIES**

 

The Company entered into a lease for office andlaboratory space in Massachusetts commencing December 2004 and expiring April 2010and for office space in California commencing November 2005 and expiring May 2008.The Company also acquired a lease agreement from Mytogen that extends until2012. Annual minimum lease payments are as follows:

 
| Year 1 |   | $         | 1,216,406 |   |
|--------|--------|-----------|-----------|--------|
| Year 2 |   | 1,196,592 |      |
| Year 3 |   | 1,002,764 |      |
| Year 4 |   | 1,016,280 |      |
| Year 5 |   | 518,366   |      |
| Total  |   | $         | 4,950,408 |   |
|        |        |           |           |        |  |

 

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Rent expense recorded in the financial statements forthe three months ended March 31, 2008 and 2007 was approximately $411,000and $328,000 respectively.

 

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

 

**13.****                           ****INCOME TAXES**

 

The Company adopted the provisions of FASB InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes* (“FIN 48”), on January 1, 2007. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. Due to the fact that the Company has substantialnet operating loss carryforwards, adoption of FIN 48 had no impact on theCompany’s beginning retained earnings, balance sheets, or statements ofoperations.

 

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

 

The Company recognizes accrued interest and penaltieson unrecognized tax benefits in income tax expense. The Company did not haveany unrecognized tax benefits as of March 31, 2008 and 2007. As a result,the Company did not recognize interest expense, and additionally, did notrecord any penalties during the three months ended March 31, 2008 and2007. The Company does not expect that the amounts of unrecognized tax benefitswill change significantly within the next 12 months.

 

**14.****                           ****SUBSEQUENT EVENTS**

 

On June 17, 2008, the Company drew down $60,000 andreceived $50,000 (reflecting a 16.66% original issue discount) under Note Bdescribed in Note 4 to the financial statements.

 

On May 26, 2008, Alan G. Walton, Ph., D.Sc. announcedhis resignation from the Board of Directors of the Company, effectiveimmediately.  Dr. Walton had nodisagreements with the Company, its Board of Directors or its management in anymatter relating to the Company’s operations, policies or practices.  

 

On April 30, 2008 the Company received a one timepayment of $300,000 from Terumo International which extended their ability tocommence a Phase I Clinical Trial in Japan by one year.  All other terms and conditions for thelicense agreement between Terumo and Mytogen Inc. remain the same.

 

In April – June 2008, the Company made its monthlyredemptions of convertible debentures described in Notes 5, 6 and 7.

 

On April 4, 2008, the Company closed a financingtransaction for the issuance of $4,038,880 of its amortizing senior securedconvertible debentures and associated warrants (“2008 Financing”). Inconnection with the closing of the 2008 Financing, the Company entered into aSecurities Purchase Agreement (the “Securities Purchase Agreement”), dated asof March 31, 2008, with the purchasers of the debentures and warrants (the“Purchasers”). The Purchasers purchased from the Company senior secured convertibledebentures and warrants to purchase shares of the Company's common stock. Theamortizing senior secured convertible debentures issued at the closing of the2008 financing will be due and payable one (1) year from the closing, and willnot bear interest. The debentures begin amortizing on October 1, 2008. Theaggregate purchase price for the debentures, including cash, in-kind paymentsand refinancing of a short-term bridge loan in anticipation of the financingwas $3,218,231 which represented a 20.3187% discount to the full principalamount of the debentures. The cash purchase price excluding refinancing ofbridge debt and in-kind payments was $2,527,231.  Refinanced bridge debt consisted of theaggregate $130,000 in unsecured convertible notes previously issued and sold toPDPI LLC and The Shapiro Family Trust on March 21, 2008.  The net outstanding amount of principal plusinterest of the Notes was converted into the debt within the 2008 Financing ona dollar-for-dollar basis.  Dr. Shapiro,one of the Company’s directors, may be deemed the beneficial owner of thesecurities owned by The Shapiro Family Trust.

 

Effective as of March 7, 2008, Jonathan F. Atzen,the Company’s Senior Vice President, General Counsel and Secretary, resignedfrom his positions with the Company and terminated his employment arrangementwith the Company. Pursuant to the terms of an agreement between the Company andMr. Atzen effective April 1, 2008, the Company agreed to (i) payMr. Atzen $48,333.33 as a severance payment, (ii) issue a fullyvested option to purchase an aggregate of 400,000 shares of common stockpursuant to the Company’s 2005 Stock Incentive Plan, as amended (the “2005 Plan”),(iii) issue an aggregate of 936,692 shares of the common stock pursuant tothe 2005 Plan, (iv) provide for the vesting of all outstanding stockoptions held by Mr. Atzen and (v) provide Mr. Atzen and hisfamily with full healthcare and dental coverage for a period of 6 monthsas was provided to Mr. Atzen during his employment.

 

Effective as of March 17,2008, Ivan Wolkind, the Company’s Senior Vice President—Finance, Administration &Chief Accounting Officer, resigned from all positions with the Company andvoluntarily terminated his employment arrangement with the Company for personalreasons. On April 2, 2008, the Company entered into a Consulting Agreementwith Mr. Wolkind. Pursuant to the Consulting Agreement, Mr. Wolkindagreed for a period of 90 days to provide up to 20 hours per week offinancial consulting services to the Company including but not limited to (i) assistingwith general accounting and investor diligence, (ii) commenting on thestructure of proposed financial transactions, (iii) responding to queriesregarding ACT’s corporate structure, and (iv) reviewing strategic andfinancial documents as appropriate. As consideration for the services to beprovided, the Company agreed to pay Mr. Wolkind an aggregate of $68,751,$45,834 of which was paid on 

 

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April 2, 2008, and the remainder of which waspayable on June 2, 2008. As additional consideration for the services tobe provided, the Company agreed to issue to Mr. Wolkind 238,719 shares ofcommon stock pursuant to the 2005 Plan. On May 2, 2008, the contract wasterminated with no future payments due.

 

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**ITEM 2.****    ****MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

**OVERVIEW**

 

This Quarterly Report on Form 10-Q containsforward-looking statements that involve risks and uncertainties. We use wordssuch as “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,”“expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,”“budgets,” “potential,” “continue” and variations thereof, and other statementscontained in quarterly report, and the exhibits hereto, regarding matters thatare not historical facts and are forward-looking statements. Because thesestatements involve risks and uncertainties, as well as certain assumptions,actual results may differ materially from those expressed or implied by suchforward-looking statements. Factors that could cause actual results to differmaterially include, but are not limited to risks inherent in: our early 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 29 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.

 

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

 

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

 

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**SIGNIFICANTACCOUNTING POLICIES**

 

***Deferred IssuanceCos******t—*** Payments,either in cash or share-based payments, made in connection with the sale ofdebentures are recorded as deferred debt issuance costs and amortized using theeffective interest method over the lives of the related debentures. The weightedaverage amortization period for deferred debt issuance costs is 36 months.

 

***Valuation ofDerivative Instruments—*** FAS 133, “Accounting for Derivative Instruments andHedging Activities” requires bifurcation of embedded derivative instruments andmeasurement of fair value for accounting purposes. In addition, FAS 155, “Accountingfor Certain Hybrid Financial Instruments” requires measurement of fair valuesof hybrid financial instruments for accounting purposes. We applied theaccounting proscribed in FAS 155 to account for the 2006 Convertible Debenturesdescribed below in Note 3—Convertible Debentures 2006. In determining theappropriate fair value, the Company uses a variety of valuation techniquesincluding Black Scholes models, Binomial Option Pricing models, Standard PutOption Binomial models and net present value of certain penalty amounts.Derivative liabilities are adjusted to reflect fair value at each period end,with any increase or decrease in the fair value being recorded in results ofoperations as Adjustments to Fair Value of Derivatives. The effects ofinteractions between embedded derivatives are calculated and accounted for inarriving at the overall fair value of the financial instruments. In addition,the fair values of freestanding derivative instruments such as warrantderivatives are valued using Black Scholes models.

 

***RevenueRecognition—***Our revenues are generated from license and research agreements withcollaborators. Licensing revenue is recognized on a straight-line basis overthe shorter of the life of the license or the estimated economic life of thepatents related to the license. Deferred revenue represents the portion of thelicense and other payments received that has not been earned. Costs associatedwith the license revenue are deferred and recognized over same term as therevenue. Reimbursements of research expense pursuant to grants are recorded inthe period during which collection of the reimbursement becomes assured,because the reimbursements are subject to approval.

 

***Stock BasedCompensation—***At March 31, 2008, we had two stock-based employee compensation plans,which are described more fully in Note 9—Stock-Based Compensation.

 

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Prior to the January 1, 2006 adoption of the FAS No. 123(R),“Share-Based Payment,” the Company accounted for stock-based compensation usingthe intrinsic value method prescribed in Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. Because the stock option grant price equaled the market priceon the date of grant, no compensation expense was recognized by the Company forstock-based compensation. As permitted by SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) stock-based compensation was included asa pro forma disclosure in the notes to the consolidated financial statements.

 

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of SFAS 123R, using the modifiedprospective transition method. Under this transition method, stock-basedcompensation expense is recognized in the consolidated financial statements forgranted, modified or settled stock options based on estimated fair values.Results for prior periods have not been restated, as provided for under themodified prospective transition method.

 

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***Recent Accounting Pronouncements***

 

In December 2007, the Financial AccountingStandards Board, or FASB, issued FAS No. 161 “ *Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133”.* This standard requirescompanies to provide enhanced disclosures about (a) how and why an entityuses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under Statement 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. This Statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008, with earlyapplication encouraged. The Company has not yet adopted the provisions of FAS No. 160,but does not expect it to have a material impact on its financial position,results of operations or cash flows.

 

In December 2007, the SEC issued Staff AccountingBulletin No. 110 regarding the use of a “simplified” method, as discussedin SAB No. 107 (“SAB 107”), in developing an estimate of expectedterm of “plain vanilla” share options in accordance with Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment. Inparticular, the staff indicated in SAB 107 that it will accept a company’selection to use the simplified method, regardless of whether the company hassufficient information to make more refined estimates of expected term. At thetime SAB 107 was issued, the staff believed that more detailed externalinformation about employee exercise behavior (e.g., employee exercisepatterns by industry and/or other categories of companies) would, over time,become readily available to companies. Therefore, the staff stated inSAB 107 that it would not expect a company to use the simplified methodfor share option grants after December 31, 2007. The staff understandsthat such detailed information about employee exercise behavior may not bewidely available by December 31, 2007. Accordingly, the staff willcontinue to accept, under certain circumstances, the use of the simplifiedmethod beyond December 31, 2007. The Company currently uses the simplifiedmethod for “plain vanilla” share options, and will assess the impact ofSAB 110 for fiscal year 2008. It is not believed that this will have animpact on the Company’s financial position, results of operations or cashflows.

 

In December 2007, the FASB issued FAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51.” This Statement amends ARB 51 to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a noncontrolling interest ina subsidiary is an ownership interest in the consolidated entity that should bereported as equity in the consolidated financial statements. Before thisStatement was issued, limited guidance existed for reporting noncontrollinginterests. As a result, considerable diversity in practice existed. So-calledminority interests were reported in the consolidated statement of financialposition as liabilities or in the mezzanine section between liabilities andequity. This Statement improves comparability by eliminating that diversity.This Statement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption is prohibited.The effective date of this Statement is the same as that of the relatedStatement 141 (revised 2007). The Company will adopt this Statementbeginning January 1, 2009. It is not believed that this will have animpact on the Company’s financial position, results of operations or cashflows.

 

In December 2007, the FASB, issued FAS No. 141(revised 2007), “Business Combinations.” This Statement replaces FASB StatementNo. 141, “Business Combinations,” but retains the fundamental requirementsin Statement 141. This Statement establishes principles and requirements forhow the acquirer: (a) recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquire; (b) recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and (c) determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination. This Statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Anentity may not apply it before that date. The effective date of this Statementis the same as that of the related FASB Statement No. 160, NoncontrollingInterests in Consolidated Financial Statements. The Company will adopt thisStatement beginning January 1, 2009. It is not believed that this willhave an impact on the Company’s financial position, results of operations orcash flows.

 

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In February 2007, the FASB, issued FAS No. 159,“The Fair Value Option for Financial Assets and Liabilities—Including anAmendment of FAS 115.” This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Thisoption is available to all entities. Most of the provisions in FAS 159 areelective; however, an amendment to FAS 115 “Accounting for CertainInvestments in Debt and Equity Securities” applies to all entities withavailable for sale or trading securities. Some requirements apply differentlyto entities that do not report net income. FAS 159 is effective as of thebeginning of an entities first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the entity makes that choice in the first 120 days ofthat fiscal year and also elects to apply the provisions of FAS 157 “FairValue Measurements.” The Company has adopted FAS 159 beginning January 1,2008, and does not believe the adoption had a material impact on its financialposition, results of operations or cash flows.

 

Effective January 1, 2007, the Company adoptedFSP No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,”(FSP FIN 48-1), which was issued on May 2, 2007. FSP FIN 48-1amends FIN 48 to provide guidance on how an entity should determinewhether a tax position is effectively settled for the purpose of recognizingpreviously unrecognized tax benefits. The term “effectively settled” replacesthe term “ultimately settled” when used to describe recognition, and the terms “settlement”or “settled” replace the terms “ultimate settlement” or “ultimately settled”when used to describe measurement of a tax position under FIN 48. FSPFIN 48-1 clarifies that a tax position can be effectively settled upon thecompletion of an examination by a taxing authority without being legallyextinguished. For tax positions considered effectively settled, an entity wouldrecognize the full amount of tax benefit, even if the tax position is notconsidered more likely than not to be sustained based solely on the basis ofits technical merits and the statute of limitations remains open. The adoptionof FSP FIN 48-1 did not have an impact on the accompanying FinancialStatements.

 

In September 2006, the FASB issued FAS 157 “FairValue Measurements.” This Statement defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles (GAAP),and expands disclosures about fair value measurements. This Statement appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements.However, for some entities, the application of this Statement will changecurrent practice. This Statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year,including financial statements for an interim period within that fiscal year.The Company has adopted FAS 157 beginning January 1, 2008, and doesnot believe the adoption had a material impact on its financial position,results of operations or cash flows..

 

**RESULTSOF OPERATIONS**

 

***Revenues***

 

Revenues for the three months ended March, 2008 and2007 were approximately $124,000 in each period. These amounts relate primarilyto license fees and royalties collected that are being amortized over theperiod of the license granted, and are therefore typically consistent betweenperiods. The slight decrease in revenue in the current period was due to fewernew licenses being granted.

 

***Research and Development Expenses and Grant Reimbursements***

 

Research and development expenses (“R&D”) for thethree months ended March 31, 2008 and 2007 were approximately$3,968,000 and $3,649,000 respectively, an increase of $319,000.  R&D consists mainly of facility costs,payroll and payroll related expenses, research supplies and costs incurred inconnection with specific research grants, and for scientific research..  The increase in expenses in the currentperiod relates largely to the Company’s Mytogen subsidiary.

 

Our research and development expenses consistprimarily of costs associated with basic and pre-clinical research exclusivelyin the field of human stem cell therapies and regenerative medicine, with focuson development of our technologies in cellular reprogramming, reducedcomplexity applications, and stem cell differentiation. These expensesrepresent both pre-clinical development costs and costs associated withnon-clinical support activities such as quality control and regulatoryprocesses. The cost of our research and development personnel is the most 

 

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significant category of expense; however, we alsoincur expenses with third parties, including license agreements, sponsoredresearch programs and consulting expenses.

 

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

 

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

 

We believe that it is not possible at this stage toprovide a meaningful estimate of the total cost to complete our ongoingprojects and bring any proposed products to market. The use of human embryonicstem cells as a therapy is an emerging area of medicine, and it is not knownwhat clinical trials will be required by the FDA in order to gain marketingapproval. Costs to complete could vary substantially depending upon theprojects selected for development, the number of clinical trials required andthe number of patients needed for each study. It is possible that thecompletion of these studies could be delayed for a variety of reasons,including difficulties in enrolling patients, delays in manufacturing,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 for the three months ended March 31,2008 and 2007 were approximately $105,000 and $58,000, respectively, from theSmall Business Technology Transfer Program.

 

***General and Administrative Expenses***

 

General and administrative expenses for the threemonths ended March 31, 2008 and 2007 were approximately $1,726,000and $1,741,000 respectively, a decrease of $15,000.  This expense decrease was primarily a resultof decreased general and administrative infrastructure costs and legal fees,including reduced cash incentive compensation to employees.

 

***Other Income (Expense)***

 

Other income (expense), net, for the three monthsended March 31, 2008 and 2007 were approximately ($3,865,000) and($19,471,000),respectively. The decrease in net other expense in the three months ended March 31,2008, compared to that of the earlier period, relates primarily to adjustmentsto fair value of derivatives related to the Convertible Debenture financingsand the Charges related to issuance of Convertible Debentures. Interest incomein the three months ended March 31, 2008 was lower than in the threemonths ended March 31, 2007 due to the lower cash balances held ininterest-bearing deposits during the periods. The decrease in interest expensein the three months ended March 31, 2008, compared to the earlier periodrelates primarily to interest recorded in connection with the convertibledebentures, which decreased as principal balances declined.

 

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***Net Loss***

 

Net loss for the three months periods ended March 31,2008 and 2007 was approximately $9,520,000 and $24,741,000, respectively. Thedecrease in loss in the current period is the result of changes to the fairvalue of derivatives, interest charges related to convertible debentures and chargesrelated to issuance of Convertible Debentures along with increased general andadministrative and research and development expenses, as well as decreasedgrant reimbursements.

 

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***LIQUIDITY ANDCAPITAL RESOURCES***

 

We are financing ouroperations primarily with $2,527,231 of net cash proceeds of convertibledebentures dated March 31, 2008 and described in our Current Report on Form 8-Kfiled with the Securities and Exchange Commission, and above in Note 14—SubsequentEvents. To a substantially lesser degree, financing of our operations isprovided through grant funding, payments received under license agreements, andinterest earned on cash and cash equivalents.

 

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 March 31, 2008 and December 31, 2007 were approximately $601,000and $1,166,000, respectively. The decrease in the current period is primarilythe result of operational cash expenditures.

 

Our cash and cashequivalents are limited. In the short term, we will require substantial additionalfunding prior to July 31, 2008 in order to maintain our current level ofoperations.  If we are unable to raiseadditional funding, we will be forced to either substantially scale back ourbusiness operations or curtail our business operations entirely.

 

On a longer term basis,we have no expectation of generating any meaningful revenues from our productcandidates for a substantial period of time and will rely on raising funds incapital transactions to finance our research and development programs.  Our future cash requirements will depend  on many factors, including the pace and scopeof our research and development programs, the costs involved in filing,persecuting 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 raise additional funds,we will be forced to either scale back or business efforts or curtail ourbusiness activities entirely.  Weanticipate that our available cash and expected income will be sufficient tofinance most of our current activities for at least four months from the dateof the financial statements, although certain of these activities and relatedpersonnel may need to be reduced.  Wecannot assure you that public or private financing or grants will be availableon acceptable terms, if at all.  Severalfactors will affect our ability to raise additional funding, including, but notlimited to, the volatility of our Common Stock.

 

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** **

**RISK FACTORS THAT MAY AFFECT OUR BUSINESS**

** **

*Ourbusiness is subject to various risks, included but not limited to thosedescribed below. You should carefully consider these factors, together with allthe other information disclosed in this Quarterly Report on Form 10-Q. Anyof these risks could materially adversely affect our business, operatingresults and financial condition.*

* *

**Risks Relating to Our Early Stage ofDevelopment**

 

**We have a limited operating historyon which potential investors may evaluate our operations and prospects forprofitable operations.**  We have a limited operatinghistory on which a potential investor may base an evaluation of us and ourprospects. If we are unable to begin and sustain profitable operations,investors may lose their entire investment in us. Our human embryonic stem cellprograms are in the pre-clinical stage, and our adult stem cell myoblastprogram has completed Phase I and Ib FDA clinical trials. 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,

 

·                  we have fewer resources than an established company,

 

·                  our management may be more likely to make mistakes at such an earlystage, and

 

·                  we may be more vulnerable operationally and financially to any mistakesthat may be made, as well as to external factors beyond our control.

 

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

 

**We have a history of operatinglosses, and we cannot assure you that we will achieve future revenues oroperating profits.**  We have generated modest revenue to date fromour operations. Historically, we have had net operating losses each year sinceour inception. We have limited current potential sources of revenue fromlicense fees and product development revenues, and we cannot assure you that wewill be able to develop such revenue sources or that our operations will becomeprofitable, even if we are able to commercialize our technologies or anyproducts or services developed from those technologies. If we continue tosuffer losses as we have in the past, investors may not receive any return ontheir investment and may lose their entire investment.

 

Although we have revenues from license fees androyalties, we have no commercially marketable products and no immediate abilityto generate revenue from commercial products, nor any assurance of being ableto develop our technologies for commercial applications. As a result, we maynever be able to operate profitably. We are just beginning to identify productsavailable for pre-clinical trials and may not receive significant revenues fromcommercial sales of our products for the next several years, if at all,although we do generate revenues from licensing activities. We have marketedonly a limited amount of services based on our technologies and have littleexperience in doing so. Our technologies and any potential products or servicesthat we may develop will require significant additional effort and investmentprior to material commercialization and, in the case of any biomedicalproducts, pre-clinical and clinical testing and regulatory approvals. We cannotassure you that we will be able to develop any such technologies or any productsor services, or that such technologies, products or services will prove to besafe and efficacious in clinical trials, meet applicable regulatory standards,be capable of being produced in commercial quantities at acceptable costs or besuccessfully marketed. For that reason, we may not be able to generate revenuesfrom commercial production or operate profitably. The December 31, 2007 auditopinion included a going concern paragraph.

 

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

 

**We will require substantialadditional funds to continue operating which may not be available on acceptableterms, if at all.**  We have losses from operations, negative cashflows from operations and a substantial stockholders’ deficit that raisesubstantial doubt about our ability to continue as a going concern. We do notbelieve that our cash from all sources, including cash, cash equivalents andanticipated revenue stream from licensing fees and sponsored research contractsis sufficient for us to continue operations beyond July 31, 2008 withoutraising additional funds.

 

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

 

In addition, our cash requirements may vary materiallyfrom those now planned because of results of research and development,potential relationships with strategic partners, changes in the focus anddirection of our research and development programs, competition, litigationrequired to protect our technology, technological advances, the cost ofpre-clinical and clinical testing, the regulatory process of the FDA, andforeign regulators, whether any of our products become approved or the marketacceptance of any such products and other factors. Our current cash reservesare not sufficient to fund our operations through the commercialization of ourfirst products or services.

 

**We have limited clinical testing,regulatory, manufacturing, marketing, distribution and sales capabilities whichmay limit our ability to generate revenues.**  Because of therelatively early stage of our research and development programs, we have notyet invested significantly in regulatory, manufacturing, marketing,distribution or product sales resources. We cannot assure you that we will beable to develop any such resources successfully or as quickly as may benecessary. The inability to do so may harm our ability to generate revenues oroperate profitably.

 

**Risks Relating to Competition**

 

**Our competition includes both publicand private organizations and collaborations among academic institutions andlarge pharmaceutical companies, most of which have significantly greaterexperience and financial resources than we do.**  Thebiotechnology and pharmaceutical industries are characterized by intensecompetition. We compete against numerous companies, both domestic and foreign,many of which have substantially greater experience and financial and otherresources than we have. Several such enterprises have initiated cell therapyresearch programs and/or efforts to treat the same diseases targeted by us.Companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc.,Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, manyof which have substantially greater resources and experience in our fields thanwe do, are well situated to effectively compete with us. Any of the world’slargest pharmaceutical companies represents a significant actual or potentialcompetitor with vastly greater resources than ours.

 

These companies hold licenses to genetic selectiontechnologies and other technologies that are competitive with our technologies.These and other competitive enterprises have devoted, and will continue todevote, substantial resources to the development of technologies and productsin competition with us.

 

Private and public academic and research institutionsalso compete with us in the research and development of therapeutic productsbased on human embryonic and adult stem cell technologies. 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.

 

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In addition, many of our competitors havesignificantly greater experience than we have in the development, pre-clinicaltesting and human clinical trials of biotechnology and pharmaceutical products,in obtaining FDA and other regulatory approvals of such products and inmanufacturing and marketing such products. Accordingly our competitors maysucceed in obtaining FDA approval for products more rapidly or effectively thanwe can. Our competitors may also be the first to discover and obtain a validpatent to a particular stem cell technology 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 technology that we are seeking to discover.Failure to be the first could prevent us from commercializing all of ourresearch and development affected by that discovery. Additionally, if wecommence commercial sales of any products, we will also be competing withrespect to manufacturing efficiency and sales and marketing capabilities, areasin which we have no experience.

 

The United States is encountering tremendouscompetition from many foreign countries that are providing an environment moreattractive for stem cell research. The governments of numerous foreigncountries are investing in stem cell research, providing facilities, personneland legal environments intended to attract biotechnology companies andencourage stem cell research and development of stem cell-related technologies.

 

These efforts by foreign countries may make it moredifficult to effectively compete in our industry and may generate competitorswith substantially greater resources than ours.

 

**Risks Relating to Our Technology**

 

**We rely on nuclear transfer andembryonic stem cell and myoblast technologies that we may not be able tosuccessfully develop, which will prevent us from generating revenues, operatingprofitably or providing investors any return on their investment.** We have concentrated our research on our nuclear transfer, embryonicstem cell and myoblast technologies, and our ability to operate profitably willdepend on being able to successfully develop these technologies for humanapplications. These are emerging technologies with, as yet, limited humanapplications. We cannot guarantee that we will be able to successfully developour nuclear transfer, embryonic stem cell or myoblast 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 of pre-clinical, clinical and producttesting of our products is uncertain, and if we are unable to satisfactorilycomplete such testing, or if such testing yields unsatisfactory results, wewill be unable to commercially produce our proposed products. Before obtainingregulatory approvals for the commercial sale of any potential human products,our products will be subjected to extensive pre-clinical and clinical testingto demonstrate their safety and efficacy in humans. We cannot assure you thatthe clinical trials of our products, or those of our licensees orcollaborators, will demonstrate the safety and efficacy of such products atall, or to the extent necessary to obtain appropriate regulatory approvals, orthat the testing of such products will be completed in a timely manner, if atall, or without significant increases in costs, program delays or both, all ofwhich could harm our ability to generate revenues. In addition, our prospectiveproducts may not prove to be more effective for treating disease or injury thancurrent therapies. Accordingly, we may have to delay or abandon efforts toresearch, develop or obtain regulatory approval to market our prospectiveproducts. Many companies involved in biotechnology research and developmenthave suffered significant setbacks in advanced clinical trials, even afterpromising results in earlier trials. The failure to adequately demonstrate thesafety and efficacy of a therapeutic product under development could delay orprevent regulatory approval of the product and could harm our ability togenerate revenues, operate profitably or produce any return on an investment inus.

 

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

 

**We may not be able to commerciallydevelop our technologies and proposed product lines, which, in turn, wouldsignificantly harm our ability to earn revenues and result in a loss ofinvestment.**  Our ability to commercially develop ourtechnologies will be dictated in large part by forces outside our control whichcannot be

 

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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 ability to earn revenueif we misinterpret trends, underestimate development costs and/or pursue wrongproducts or services. Any of these factors either alone or in concert couldmaterially harm our ability to earn revenues and could result in a loss of anyinvestment in us.

 

**If we are unable to keep up withrapid technological changes in our field or compete effectively, we will beunable to operate profitably.**  We are engagedin activities in the biotechnology field, which is characterized by extensiveresearch efforts and rapid technological progress. If we fail to anticipate orrespond adequately to technological developments, our ability to operateprofitably could suffer. We cannot assure you that research and discoveries byother biotechnology, agricultural, pharmaceutical or other companies will notrender our technologies or potential products or services uneconomical orresult in products superior to those we develop or that any technologies,products or services we develop will be preferred to any existing ornewly-developed technologies, products or services.

 

**We may not be able to protect ourproprietary technology, which could harm our ability to operate profitably.** The biotechnology and pharmaceutical industries place considerableimportance on obtaining patent and trade secret protection for newtechnologies, products and processes. Our success will depend, to a substantialdegree, on our ability to obtain and enforce patent protection for ourproducts, preserve any trade secrets and operate without infringing theproprietary rights of others. We cannot assure you that:

 

·                  we will succeed in obtaining any patents in a timely manner or at all,or that the breadth or degree of protection of any such patents will protectour interests,

 

·                  the use of our technology will not infringe on the proprietary rightsof others,

 

·                  patent applications relating to our potential products or technologieswill result in the issuance of any patents or that, if issued, such patentswill afford adequate protection to us or not be challenged invalidated orinfringed, and

 

·                  patents will not issue to other parties, which may be infringed by ourpotential products or technologies.

 

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

 

**Our business is highly dependent uponmaintaining licenses with respect to key technology.** Several of the key patents we utilize are licensed to us by thirdparties. These licenses are subject to termination under certain circumstances(including, for example, our failure to make minimum royalty payments or totimely achieve development and commercialization benchmarks). The loss of anyof such licenses, or the conversion of such licenses to non-exclusive licenses,could harm our operations and/or enhance the prospects of our competitors.

 

Certain of these licenses also contain restrictions,such as limitations on our ability to grant sublicenses that could materiallyinterfere with our ability to generate revenue through the licensing or sale tothird parties of important and valuable technologies that we have, forstrategic reasons, elected not to pursue directly. The possibility exists thatin the future we will require further licenses to complete and/or commercializeour proposed products. We cannot assure you that we will be able to acquire anysuch licenses on a commercially viable basis.

 

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**We may not be able to adequatelyprotect against piracy of intellectual property in foreign jurisdictions.** Considerable research in the areas of stem cells, cell therapeutics andregenerative medicine is being performed in countries outside of the UnitedStates, and a number of our competitors are located in those countries. Thelaws protecting intellectual property in some of those countries may notprovide protection for our trade secrets and intellectual property adequate toprevent our competitors from misappropriating our trade secrets or intellectualproperty. If our trade secrets or intellectual property are misappropriated inthose countries, we may be without adequate remedies to address the issue.

 

**Certain of our technology is notprotectable by patent.**  Certain parts of our know-howand technology are not patentable. To protect our proprietary position in suchknow-how and technology, we intend to require all employees, consultants,advisors and collaborators to enter into confidentiality and inventionownership agreements with us. We cannot assure you, however, that theseagreements will provide meaningful protection for our trade secrets, know-howor other proprietary information in the event of any unauthorized use ordisclosure. Further, in the absence of patent protection, competitors who independentlydevelop substantially equivalent technology may harm our business.

 

**Patent litigation presents an ongoingthreat to our business with respect to both outcomes and costs.** We have previously been involved in patent interference litigation, andit is possible that further litigation over patent matters with one or morecompetitors could arise. We could incur substantial litigation or interferencecosts in defending ourselves against suits brought against us or in suits inwhich we may assert our patents against others. If the outcome of any suchlitigation is unfavorable, our business could be materially adversely affected.To determine the priority of inventions, we may also have to participate ininterference proceedings declared by the United States Patent and TrademarkOffice, which could result in substantial cost to us. Without additionalcapital, we may not have the resources to adequately defend or pursue thislitigation.

 

**Risks Related to Product Development**

 

**Limited experience in conducting andmanaging preclinical development activities, clinical trials and theapplication process necessary to obtain regulatory approvals.** Our limited experience in conducting and managing preclinicaldevelopment activities, clinical trials and the application process necessaryto obtain regulatory approvals might prevent us from successfully designing orimplementing a preclinical study or clinical trial. If we do not succeed inconducting and managing our preclinical development activities or clinical trials,or in obtaining regulatory approvals, we might not be able to commercialize ourproduct candidates, or might be significantly delayed in doing so, which willmaterially harm our business.

 

None of the products that we are currently developinghas been approved by the FDA or any similar regulatory authority in any foreigncountry. Our ability to generate revenues from any of our product candidateswill depend on a number of factors, including our ability to successfullycomplete clinical trials, obtain necessary regulatory approvals and implementour commercialization strategy. In addition, even if we are successful inobtaining necessary regulatory approvals and bringing one or more productcandidates to market, we will be subject to the risk that the marketplace willnot accept those products. We may, and anticipate that we will need to,transition from a company with a research and development focus to a companycapable of supporting commercial activities and we may not succeed in such atransition.

 

Because of the numerous risks and uncertaintiesassociated with our product development and commercialization efforts, we areunable to predict the extent of our future losses or when or if we will becomeprofitable. Our failure to successfully commercialize our product candidates orto become and remain profitable could depress the market price of our commonstock and impair our ability to raise capital, expand our business, diversifyour product offerings and continue our operations.

 

**Our approach of using cell-basedtherapy for the treatment of heart damage is risky and unproven and no productsusing this approach have received regulatory approval in the United States orEurope.**  We believe that no company has yet beensuccessful in its efforts to obtain regulatory approval in the United States orEurope of a cell-based therapy product for the treatment of heart disease inhumans. Cell-based therapy products, in general, may be susceptible to variousrisks, including undesirable and unintended side effects, unintended immunesystem responses, inadequate therapeutic efficacy or other characteristics thatmay prevent or limit their approval by

 

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regulatorsor commercial use. Many companies in the industry have suffered significantsetbacks in advanced clinical trials, despite promising results in earliertrials.

 

**If our clinical trials areunsuccessful or significantly delayed, or if we do not complete our clinicaltrials, we will not receive regulatory approval for or be able to commercializeour product candidates.**  Our lead product candidate, ourmyoblast program, is still in clinical testing and has not yet receivedapproval from the FDA or any similar foreign regulatory authority for anyindication. Although this product candidate has received positive results inPhase I and Ib clinical trials, it may never receive regulatory approvalor be commercialized in the United States or other countries.

 

We cannot market any product candidate untilregulatory agencies grant approval or licensure. In order to obtain regulatoryapproval for the sale of any product candidate, we must, among otherrequirements, provide the FDA and similar foreign regulatory authorities withpreclinical and clinical data that demonstrate to the satisfaction ofregulatory authorities that our product candidates are safe and effective foreach indication under the applicable standards relating to such productcandidate. The preclinical studies and clinical trials of any productcandidates must comply with the regulations of the FDA and other governmentalauthorities in the United States and similar agencies in other countries.

 

Even though we have achieved positive interim resultsin clinical trials, these results do not necessarily predict final results, andpositive results in early trials may not be indicative of success in latertrials. For example, our myoblast program has been studied in a limited numberof patients to date. Even though our early data has been promising, we have notyet completed any large-scale pivotal trials to establish the safety andefficacy of this therapy. There is a risk that safety concerns relating to ourproduct candidates or cell-based therapies in general will result in thesuspension or termination of our clinical trials.

 

We may experience numerous unforeseen events during,or as a result of, the clinical trial process that could delay or preventregulatory approval and/or commercialization of our product candidates,including the following:

 

·                  the FDA or similar foreign regulatory authorities may find that ourproduct candidates are not sufficiently safe or effective or may find our cellculturing processes or facilities unsatisfactory,

 

·                  officials at the FDA or similar foreign regulatory authorities mayinterpret data from preclinical studies and clinical trials differently than wedo,

 

·                  our clinical trials may produce negative or inconclusive results or maynot meet the level of statistical significance required by the FDA or otherregulatory authorities, and we may decide, or regulators may require us, toconduct additional preclinical studies and/or clinical trials or to abandon oneor more of our development programs,

 

·                  the FDA or similar foreign regulatory authorities may change their approvalpolicies or adopt new regulations,

 

·                  there may be delays or failure in obtaining approval of our clinicaltrial protocols from the FDA or other regulatory authorities or obtaininginstitutional review board approvals or government approvals to conductclinical trials at prospective sites,

 

·                  we, or regulators, may suspend or terminate our clinical trials becausethe participating patients are being exposed to unacceptable health risks orundesirable side effects,

 

·                  we may experience difficulties in managing multiple clinical sites,

 

·                  enrollment in our clinical trials for our product candidates may occurmore slowly than we anticipate, or we may experience high drop-out rates ofsubjects in our clinical trials, resulting in significant delays,

 

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·                  we may be unable to manufacture or obtain from third partymanufacturers sufficient quantities of our product candidates for use inclinical trials, and

 

·                  our product candidates may be deemed unsafe or ineffective, or may beperceived as being unsafe or ineffective, by healthcare providers for aparticular indication.

 

**We depend on third parties to assistus in the conduct of our preclinical studies and clinical trials, and anyfailure of those parties to fulfill their obligations could result in costs anddelays and prevent us from obtaining regulatory approval or successfullycommercializing our product candidates on a timely basis, if at all.** We engage consultants and contract research organizations to helpdesign, and to assist us in conducting, our preclinical studies and clinicaltrials and to collect and analyze data from those studies and trials. Theconsultants and contract research organizations we engage interact withclinical investigators to enroll patients in our clinical trials. As a result,we depend on these consultants and contract research organizations to performthe studies and trials in accordance with the investigational plan and protocolfor each product candidate and in compliance with regulations and standards,commonly referred to as “good clinical practice”, for conducting, recording andreporting results of clinical trials to assure that the data and results arecredible and accurate and the trial participants are adequately protected, asrequired by the FDA and foreign regulatory agencies. We may face delays in ourregulatory approval process if these parties do not perform their obligationsin a timely or competent fashion or if we are forced to change serviceproviders.

 

**We must comply with extensivegovernment regulations in order to obtain and maintain marketing approval forour products in the United States and abroad. If we do not obtain regulatoryapproval for our product candidates, we may be forced to cease our operations.** Our product candidates are subject to extensive regulation in the UnitedStates and in every other country where they will be tested or used. Theseregulations are wide-ranging and govern, among other things:

 

·                  product design, development, manufacture and testing,

 

·                  product safety and efficacy,

 

·                  product labeling,

 

·                  product storage and shipping,

 

·                  record keeping,

 

·                  pre-market clearance or approval,

 

·                  advertising and promotion, and

 

·                  product sales and distribution.

 

We cannot market our product candidates until wereceive regulatory approval. The process of obtaining regulatory approval islengthy, expensive and uncertain. Any difficulties that we encounter inobtaining regulatory approval may have a substantial adverse impact on ourbusiness and cause our stock price to significantly decline.

 

In the United States, the FDA imposes substantialrequirements on the introduction of biological products and many medicaldevices through lengthy and detailed laboratory and clinical testingprocedures, sampling activities and other costly and time-consuming procedures.Satisfaction of these requirements typically takes several years and the timerequired to do so may vary substantially based upon the type and complexity ofthe biological product or medical device.

 

In addition, product candidates that we believe shouldbe classified as medical devices for purposes of the FDA regulatory pathway maybe determined by the FDA to be biologic products subject to the satisfaction ofsignificantly more stringent requirements for FDA approval.

 

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The requirements governing the conduct of clinicaltrials and cell culturing and marketing of our product candidates outside theUnited States vary widely from country to country. Foreign approvals may takelonger to obtain than FDA approvals and can require, among other things,additional testing and different clinical trial designs. Foreign regulatoryapproval processes generally include all of the risks associated with the FDA approvalprocesses. Some foreign regulatory agencies also must approve prices of theproducts. Regulatory approval in one country does not ensure regulatoryapproval in another, but a failure or delay in obtaining regulatory approval inone country may negatively impact the regulatory process in others. We may notbe able to file for regulatory approvals and may not receive necessaryapprovals to market our product candidates in any foreign country. If we failto comply with these regulatory requirements or fail to obtain and maintainrequired approvals in any foreign country, we will not be able to sell ourproduct candidates in that country and our ability to generate revenue will beadversely affected.

 

We cannot assure you that we will obtain FDA or foreignregulatory approval to market any of our product candidates for any indicationin a timely manner or at all. If we fail to obtain regulatory approval of anyof our product candidates for at least one indication, we will not be permittedto market our product candidates and may be forced to cease our operations.

 

**Even if some of our productcandidates receive regulatory approval, these approvals may be subject toconditions, and we and our third party manufacturers will in any event besubject to significant ongoing regulatory obligations and oversight.** Even if any of our product candidates receives regulatory approval, themanufacturing, marketing and sale of our product candidates will be subject tostringent and ongoing government regulation. Conditions of approval, such aslimiting the category of patients who can use the product, may significantlyimpact our ability to commercialize the product and may make it difficult orimpossible for us to market a product profitably. Changes we may desire to maketo an approved product, such as cell culturing changes or revised labeling, mayrequire further regulatory review and approval, which could prevent us fromupdating or otherwise changing an approved product. If our product candidatesare approved by the FDA or other regulatory authorities for the treatment ofany indications, regulatory labeling may specify that our product candidates beused in conjunction with other therapies.

 

Once obtained, regulatory approvals may be withdrawnfor a number of reasons, including the later discovery of previously unknownproblems with the product. Regulatory approval may also require costlypost-marketing follow-up studies, and failure of our product candidates todemonstrate sufficient efficacy and safety in these studies may result ineither withdrawal of marketing approval or severe limitations on permittedproduct usage. In addition, numerous additional regulatory requirementsrelating to, among other processes, the labeling, packaging, adverse eventreporting, storage, advertising, promotion and record-keeping will also apply.Furthermore, regulatory agencies subject a marketed product, its manufacturerand the manufacturer’s facilities to continual review and periodic inspections.Compliance with these regulatory requirements are time consuming and requirethe expenditure of substantial resources.

 

If any of our product candidates is approved, we willbe required to report certain adverse events involving our products to the FDA,to provide updated safety and efficacy information and to comply withrequirements concerning the advertisement and promotional labeling of ourproducts. As a result, even if we obtain necessary regulatory approvals tomarket our product candidates for any indication, any adverse results,circumstances or events that are subsequently discovered, could require that wecease marketing the product for that indication or expend money, time andeffort to ensure full compliance, which could have a material adverse effect onour business.

 

Any failure by us, or by any third parties that maymanufacture or market our products, to comply with the law, including statutesand regulations administered by the FDA or other U.S. or foreign regulatoryauthorities, could result in, among other things, warning letters, fines andother civil penalties, suspension of regulatory approvals and the resultingrequirement that we suspend sales of our products, refusal to approve pendingapplications or supplements to approved applications, export or importrestrictions, interruption of production, operating restrictions, closure ofthe facilities used by us or third parties to manufacture our productcandidates, injunctions or criminal prosecution. Any of the foregoing actionscould have a material adverse effect on our business.

 

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The healthcare community has relatively little experience withtherapies based on cellular medicine and, accordingly, if our productcandidates do not become widely accepted by physicians, patients, third partypayors or the healthcare community, we may be unable to generate significantrevenue, if any.

 

We are developing cell-based therapy product candidates for thetreatment of heart damage that represent novel and unproven treatments and, ifapproved, will compete with a number of more conventional products andtherapies manufactured and marketed by others, including major pharmaceuticalcompanies. We cannot predict or guarantee that physicians, patients, healthcareinsurers, third party payors or health maintenance organizations, or thehealthcare community in general, will accept or utilize any of our productcandidates. We anticipate that, if approved, we will market our myoblastproduct primarily to interventional cardiologists, who are generally not theprimary care physicians for patients who may be eligible for treatment withMyoCell. Accordingly, our commercial success may be dependent on third partyphysicians referring their patients to interventional cardiologists for MyoCelltreatment.

 

**If we are successful in obtaining regulatory approvalfor any of our product candidates, the degree of market acceptance of thoseproducts will depend on many factors, including:**

 

·                  our ability to provideacceptable evidence and the perception of patients and the healthcarecommunity, including third party payors, of the positive characteristics of ourproduct candidates relative to existing treatment methods, including theirsafety, efficacy, cost effectiveness and/or other potential advantages,

 

·                  the incidence and severityof any adverse side effects of our product candidates,

 

·                  the availability ofalternative treatments,

 

·                  the labeling requirementsimposed by the FDA and foreign regulatory agencies, including the scope ofapproved indications and any safety warnings,

 

·                  our ability to obtainsufficient third party insurance coverage or reimbursement for our productscandidates,

 

·                  the inclusion of ourproducts on insurance company coverage policies,

 

·                  the willingness and abilityof patients and the healthcare community to adopt new technologies,

 

·                  the procedure timeassociated with the use of our product candidates,

 

·                  our ability to manufactureor obtain from third party manufacturers sufficient quantities of our productcandidates with acceptable quality and at an acceptable cost to meet demand,and

 

·                  marketing and distributionsupport for our products.

 

Failure to achieve market acceptance would limit our ability togenerate revenue and would have a material adverse effect on our business. Inaddition, if any of our product candidates achieve market acceptance, we maynot be able to maintain that market acceptance over time if competing productsor technologies are introduced that are received more favorably or are morecost-effective.

 

**Risks Relating to the September 2005, September 2006,August 2007 and March 2008 Financings**

 

**If we are required for any reason to repay ouroutstanding debentures we would be required to deplete our working capital, ifavailable, or raise additional funds. Our failure to repay the convertibledebentures, if required, could result in legal action against us, which couldrequire the sale of substantial assets.**  We have outstanding, as of June 25, 2008,$14,293,733 aggregate original principal amount of convertible debentures withan original issue discount of 20.3187% with $3,855,360 in 2008 Debentures $8,031,410in 2007 

 

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Debentures,$2,221,579 in 2006 Debentures, and $185,383 in 2005 Debentures. We are requiredto redeem on a monthly basis, by payment, at our option, with cash or withshares of our common stock, 1/30th of the aggregate original principalamount of the debentures.

 

Unless sooner converted into shares of our common stock the 2005Debentures are due and payable on September 14, 2008, the 2006 Debenturesare due and payable on September 6, 2009, the 2007 Debentures are due andpayable on August 31, 2010, and the 2008 Debentures are due and payable March 31,2009. Any event of default could require the early repayment of the convertibledebentures, including the accruing of interest on the outstanding principalbalance of the debentures if the default is not cured with the specified graceperiod. We anticipate that the full amount of the convertible debentures willbe converted into shares of our common stock, in accordance with the terms ofthe convertible debentures; however no assurance can be provided that anyamount of debentures will be converted. 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.

 

**There are a large number of shares underlying our convertibledebentures and warrants, and the sale of these shares may depress the marketprice of our common stock.**There are a substantialnumber of shares underlying convertible debentures issued by the Company inconnection with the 2005, 2006, 2007 and 2008 financings. When sharesunderlying our convertible debentures and warrants are eligible for resaleunder Rule 144 of the Securities Act, the trading of such shares in the publicmarket could adversely affect the market price of our common stock and make itdifficult for you to sell shares of our common stock at times and prices thatyou 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.** The issuanceof shares upon conversion of the convertible debentures and exercise ofwarrants, 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 convertibledebentures and/or exercise its warrants if such conversion or exercise wouldcause it to own more than 4.99% of our outstanding common stock, this restrictiondoes not prevent each selling security holder from converting and/or exercisingsome of its holdings and then converting the rest of its holdings. In this way,each selling security holder could sell more than this limit while neverholding more than this limit. There is no upper limit on the number of sharesthat may be issued which will have the effect of further diluting theproportionate equity interest and voting power of holders of our common stock.In addition, the issuance of the 2008 Debentures and the 2008 Warrantstriggered certain anti-dilution rights for certain third parties currentlyholding our securities resulting in substantial dilution to the interests ofother stockholders.

 

**Payment of mandatory monthly redemptions in shares ofcommon stock will result in substantial dilution.** We expect tosatisfy all or a significant portion of our obligation to redeem 1/30th ofthe aggregate original principal amount of debentures per month throughissuance of additional shares of our common stock. This approach will result insubstantial dilution to the interests of other stockholders.

 

**Our outstanding indebtedness on our 2005, 2006, 2007and 2008 Debentures imposes certain restrictions on how we conduct ourbusiness. In addition, all of our assets, including our intellectual property,are pledged to secure this indebtedness. If we fail to meet our obligationsunder the Debentures, our payment obligations may be accelerated and thecollateral securing the debt may be sold to satisfy these obligations.**

 

The Debentures and related agreements contain various provisions thatrestrict our operating flexibility. Pursuant to the agreement, we may not,among other things:

 

·                  except for certain permittedindebtedness, enter into, create, incur, assume, guarantee or suffer to existany indebtedness for borrowed money of any kind, including but not limited to,a guarantee, on or with 

 

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respect to any of its property or assets now owned or hereafteracquired or any interest therein or any income or profits therefrom,

 

·                  except for certain permittedliens, enter into, create, incur, assume or suffer to exist any liens of anykind, on or with respect to any of its property or assets now owned orhereafter acquired or any interest therein or any income or profits therefrom,

 

·                  amend our certificate ofincorporation, bylaws or other charter documents so as to materially andadversely affect any rights of holders of the Debentures and Warrants,

 

·                  repay, repurchase or offerto repay, repurchase or otherwise acquire more than a *de minimis* number of shares of our commonstock or common stock equivalents,

 

·                  enter into any transactionwith any of our affiliates, which would be required to be disclosed in anypublic filing with the Securities and Exchange Commission, unless suchtransaction is made on an arm’s-length basis and expressly approved by amajority of our disinterested directors (even if less than a quorum otherwiserequired for board approval),

 

·                  pay cash dividends ordistributions on any of our equity securities,

 

·                  grant certain registrationrights,

 

·                  enter into any agreementwith respect to any of the foregoing, or

 

·                  make cash expenditures inexcess of $1,000,000 per calendar month, subject to certain specifiedexceptions.

 

These provisions could have important consequences for us, including (i) makingit more difficult for us to obtain additional debt financing from anotherlender, or obtain new debt financing on terms favorable to us, (ii) causingus to use a portion of our available cash for debt repayment and service ratherthan other perceived needs and/or (iii) impacting our ability to takeadvantage of significant, perceived business opportunities.

 

**Our obligations under the Securities PurchaseAgreement are secured by substantially all of our assets.** Ourobligations under certain security agreements, executed in connection with boththe 2007 Financing and 2008 Financing, with the holders of the debentures andwarrants are secured by substantially all of our assets. As a result, if wedefault under the terms of the security agreement, such holders could forecloseon their security interest and liquidate all of our assets. This would causeoperations to cease.

 

**Risks Relating to Government Regulation**

 

**Companies such as ours engaged in research usingnuclear transfer and embryonic and adult stem cells are currently subject tostrict government regulations, and our operations could be harmed by anylegislative or administrative efforts impacting the use of nuclear transfertechnology or human embryonic material.** Our business is focused onhuman cell therapy, which includes the production of human differentiated cellsfrom stem cells and involves the use of nuclear transfer technology, human oocytes,and embryonic material as well as adult stem cells. Nuclear transfertechnology, commonly known as therapeutic cloning, and research utilizingembryonic stem cells are controversial subjects, and are currently subject tointense scrutiny, both in the United States, the United Nations and throughoutthe world, particularly in the area of nuclear transfer of human cells and theuse of human embryonic material.

 

We cannot assure you that our operations will not be harmed by anylegislative or administrative efforts by politicians or groups opposed to thedevelopment of nuclear transfer technology generally or the use of nucleartransfer for therapeutic cloning of human cells specifically. Further, wecannot assure you that legislative or administrative restrictions directly orindirectly delaying, limiting or preventing the use of nuclear transfer 

 

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technologyor human embryonic material or the sale, manufacture or use of products orservices derived from nuclear transfer technology or human embryonic materialwill not be adopted in the future.

 

**Restrictions on the use of human embryonic stem cells,and the ethical, legal and social implications of that research, could preventus from developing or gaining acceptance for commercially viable products inthese areas.** Some of our most important programs involve the useof stem cells that are derived from human embryos. The use of human embryonicstem cells gives rise to ethical, legal and social issues regarding theappropriate 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 the federal or statelevel related to our technology could limit our activities and ability todevelop products for commercial sales, depriving us of our anticipated sourceof future revenues. Legislative bills could be introduced in the future aimingto prohibit the use or commercialization of somatic cell nuclear transfertechnology or of any products resulting from it, including those related tohuman therapeutic cloning and regenerative medicine. Such legislation couldhave a significant influence on our ability to pursue our research, developmentand commercialization plans in the United States.

 

Any future or additional government-imposed restrictions in these orother jurisdictions with respect to use of embryos or human embryonic stemcells in research and development could have a material adverse effect on us,by, among other things:

 

·                  harming our ability toestablish critical partnerships and collaborations,

 

·                  delaying or preventingprogress in our research and development,

 

·                  limiting or preventing thedevelopment, sale or use of our products, and

 

·                  causing a decrease in theprice 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 UnitedStates and governments in other countries have significant regulations in placethat govern many of our activities. We are or may become subject to variousfederal, state and local laws, regulations and recommendations relating to safeworking conditions, laboratory and manufacturing practices, the experimentaluse of animals and the use and disposal of hazardous or potentially hazardoussubstances used in connection with our research and development work. Thepreclinical testing and clinical trials of the products that we or ourcollaborators develop are subject to extensive government regulation 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 comply with theseregulations, our ability to earn revenues will be materially and negativelyimpacted. The regulatory process, particularly in the biotechnology field, isuncertain, 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 

 

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plannedand intended business operations, see “DESCRIPTION OF BUSINESS—*Government Regulation*” set forth in theCompany’s Annual report on Form 10-KSB for the period ended December 31,2007.

 

Our products may not receive FDA approval, which would prevent us fromcommercially marketing our products and producing revenues. The FDA andcomparable 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 assure you that FDA approvals for any productsdeveloped by us will be granted on a timely basis, if at all. Any such delay inobtaining, or failure to obtain, such approvals could have a material adverseeffect on the marketing of our products and our ability to generate productrevenue. For additional information about governmental regulations that willaffect our planned and intended business operations, see “DESCRIPTION OF BUSINESS—*Government Regulation*” set forth in theCompany’s Annual report on Form 10-KSB for the period ended December 31,2007.

 

**For-profit entities may be prohibited from benefitingfrom grant funding.** There has been much publicity about grant resourcesfor stem cell research, including Proposition 71 in California, which isdescribed more fully under the heading “DESCRIPTION OF BUSINESS—*California Proposition 71*” set forthin the Company’s Annual report on Form 10-KSB for the period ended December 31,2007. Rules and regulations related to any funding that may ultimately beprovided, the type of entity that will be eligible for funding, the science tobe funded, and funding details have not been finalized. As a result of theseuncertainties regarding Proposition 71, we cannot assure you that funding,if any, will be available to us, or any for-profit entity.

 

**The government maintains certain rights in technologythat we develop using government grant money and we may lose the revenues fromsuch technology if we do not commercialize and utilize the technology pursuantto established government guidelines.** Certain of our and ourlicensors’ research has been or is being funded in part by government grants.In connection with certain grants, the U.S. government retains rights in thetechnology developed with the grant. These rights could restrict our ability tofully capitalize upon the value of this research.

 

**Risks Relating to Our 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 strategyfor the development, clinical testing and commercialization of our proposedproducts requires that we enter into collaborations with corporate partners,licensors, licensees and others. We are dependent upon the subsequent successof these other parties in performing their respective responsibilities and thecontinued cooperation of our partners. Our collaborators may not cooperate withus or perform their obligations under our agreements with them. We cannotcontrol the amount and timing of our collaborators’ resources that will bedevoted to our research and development activities related to our collaborativeagreements with them. Our collaborators may choose to pursue existing oralternative technologies in preference to those being developed incollaboration with us.

 

Under agreements with collaborators, we may rely significantly on suchcollaborators to, among other things:

 

·                  design and conduct advancedclinical trials in the event that we reach clinical trials,

 

·                  fund research anddevelopment activities with us,

 

·                  pay us fees upon theachievement of milestones, and

 

·                  market with us anycommercial products that result from our collaborations.

 

The development and commercialization of potential products will bedelayed if collaborators fail to conduct these activities in a timely manner orat all. In addition, our collaborators could terminate their agreements 

 

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withus and we may not receive any development or milestone payments. If we do notachieve milestones set forth in the agreements, or if our collaborators breachor terminate their collaborative agreements with us, our business may bematerially harmed.

 

**Our reliance on the activities of our non-employeeconsultants, research institutions, and scientific contractors, whoseactivities are not wholly within our control, may lead to delays in developmentof 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 as otherwiserequired by our collaboration and consulting agreements to the extent theyexist, can expect only limited amounts of their time to be dedicated to ouractivities.

 

In addition, we have formed research collaborations with academic andother research institutions throughout the world. These research facilities mayhave commitments to other commercial and non-commercial entities. We havelimited control over the operations of these laboratories and can expect onlylimited amounts of time to be dedicated to our research goals.

 

We also rely on other companies for certain process development orother technical scientific work. We have contracts with these companies thatspecify the work to be done and results to be achieved, but we do not havedirect control over their personnel or operations. If any of these thirdparties are unable or refuse to contribute to projects on which we need theirhelp, our ability to generate advances in our technologies and develop ourproducts could be significantly harmed.

 

**General Risks Relating to Our Business**

 

**We may be subject to litigation that will be costly todefend or pursue and uncertain in its outcome.** Our business may bring usinto conflict with our licensees, licensors, or others with whom we havecontractual or other business relationships, or with our competitors or otherswhose interests differ from ours. If we are unable to resolve those conflictson terms that are satisfactory to all parties, we may become involved inlitigation brought by or against us. That litigation is likely to be expensiveand may require a significant amount of management’s time and attention, at theexpense of other aspects of our business. The outcome of litigation is alwaysuncertain, and in some cases could include judgments against us that require usto pay damages, enjoin us from certain activities, or otherwise affect ourlegal or contractual rights, which could have a significant adverse effect onour business. See “LEGAL PROCEEDINGS” set forth in Part II, Item 1 ofthis Quarterly Report for a more complete discussion of currently pendinglitigation against the Company.

 

**We may not be able to obtain third-party patientreimbursement or favorable product pricing, which would reduce our ability tooperate profitably.** Our ability to successfully commercialize certainof our proposed products in the human therapeutic field may depend to asignificant degree on patient reimbursement of the costs of such products andrelated treatments at acceptable levels from government authorities, private healthinsurers and other organizations, such as health maintenance organizations. Wecannot assure you that reimbursement in the United States or foreign countrieswill be available for any products we may develop or, if available, will not bedecreased in the future, or that reimbursement amounts will not reduce thedemand for, or the price of, our products with a consequent harm to ourbusiness. We cannot predict what additional regulation or legislation relatingto the health care industry or third-party coverage and reimbursement may beenacted in the future or what effect such regulation or legislation may have onour business. If additional regulations are overly onerous or expensive, or ifhealth care related legislation makes our business more expensive or burdensomethan originally anticipated, we may be forced to significantly downsize ourbusiness plans or completely abandon our business model.

 

**Our products are likely to be expensive tomanufacture, and they may not be profitable if we are unable to control thecosts to manufacture them.** Our products are likely tobe significantly more expensive to manufacture than most other drugs currentlyon the market today. Our present manufacturing processes produce modestquantities of product intended for use in our ongoing research activities, andwe have not developed processes, procedures and capability to producecommercial volumes of product. We hope to substantially reduce manufacturingcosts through process improvements, development of new science, increases inmanufacturing scale 

 

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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.

 

**To be successful, our proposed products must beaccepted by the health care community, which can be very slow to adopt orunreceptive to new technologies and products.** Our proposed products andthose developed by our collaborative partners, if approved for marketing, maynot achieve market acceptance since hospitals, physicians, patients or themedical community in general may decide not to accept and utilize theseproducts. The products that we are attempting to develop represent substantialdepartures from established treatment methods and will compete with a number ofmore conventional 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:

 

·                  our establishment anddemonstration to the medical community of the clinical efficacy and safety ofour proposed products,

 

·                  our ability to createproducts that are superior to alternatives currently on the market,

 

·                  our ability to establish inthe medical community the potential advantage of our treatments overalternative treatment methods, and

 

·                  reimbursement policies ofgovernment and third-party payors.

 

If the health care community does not accept our products for any ofthe foregoing reasons, or for any other reason, our business would bematerially harmed.

 

**Our current source of revenues depends on thestability and performance of our sublicensees.** Our ability to collectroyalties on product sales from our sublicensees will depend on the financialand operational success of the companies operating under a sublicense. Revenuesfrom those licensees will depend upon the financial and operational success ofthose third parties. We cannot assure you that these licensees will besuccessful in obtaining requisite financing or in developing and successfullymarketing their products. These licensees may experience unanticipatedobstacles including regulatory hurdles, and scientific or technical challenges,which could have the effect of reducing their ability to generate revenues andpay us royalties.

 

**We depend on key personnel for our continuedoperations and future success, and a loss of certain key personnel couldsignificantly hinder our ability to move forward 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, or scientific officers,would be significantly detrimental to us. In addition, recruiting and retainingqualified scientific personnel to perform research and development work iscritical to our success. Our anticipated growth and expansion into areas andactivities requiring additional expertise, such as clinical testing, regulatorycompliance, manufacturing and marketing, will require the addition of newmanagement personnel and the development of additional expertise by existingmanagement personnel. There is intense competition for qualified personnel inthe areas of our present and planned activities, and there can be no assurancethat we will be able to continue to attract and retain the qualified personnelnecessary for the development of our business. The failure to attract andretain such personnel or to develop such expertise would adversely affect our business.

 

**Our credibility as a business operating in the fieldof human embryonic stem cells is largely dependent upon the support of ourEthics Advisory Board.** Because the use of human embryonic stemcells gives rise to ethical, legal and social issues, we have instituted anEthics Advisory Board. Our Ethics Advisory Board is made up of highly qualifiedindividuals with expertise in the field of human embryonic stem cells. Wecannot assure you that these members will continue to serve on our EthicsAdvisory Board, and the loss of any such 

 

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membermay affect the credibility and effectiveness of the Board. As a result, ourbusiness may be materially harmed in the event of any such loss.

 

**Our insurance policies may be inadequate andpotentially expose us to unrecoverable risks.** We have limited directorand officer insurance and commercial insurance policies. Any significantinsurance claims would have a material adverse effect on our business,financial condition and results of operations. Insurance availability, coverageterms and pricing continue to vary with market conditions. We endeavor toobtain appropriate insurance coverage for insurable risks that we identify,however, we may fail to correctly anticipate or quantify insurable risks, wemay not be able to obtain appropriate insurance coverage, and insurers may notrespond as we intend to cover insurable events that may occur. We have observedrapidly changing conditions in the insurance markets relating to nearly allareas of traditional corporate insurance. Such conditions have resulted inhigher premium costs, higher policy deductibles, and lower coverage limits. Forsome risks, we may not have or maintain insurance coverage because of cost oravailability.

 

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

 

We cannot assure you that adequate insurance coverage will be availablein the future on acceptable terms, if at all, or that, if available, we will beable to maintain any such insurance at sufficient levels of coverage or thatany such insurance will provide adequate protection against potentialliabilities. Whether or not a product liability insurance policy is obtained ormaintained in the future, any product liability claim could harm our businessor financial condition.

 

**We presently have members of management and other keyemployees located in various locations throughout the country which addscomplexities to the operation of the business.** Presently, we have membersof management 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 currentlymaintain a small corporate office in Los Angeles, California.

 

**We face risks related to compliance with corporategovernance laws and financial reporting standards.** TheSarbanes-Oxley Act of 2002, as well as related new rules and regulationsimplemented by the Securities and Exchange Commission and the Public CompanyAccounting Oversight Board, require changes in the corporate governancepractices and financial reporting standards for public companies. These newlaws, rules and regulations, including compliance with Section 404 ofthe Sarbanes-Oxley Act of 2002 relating to internal control over financialreporting, referred to as Section 404, have materially increased our legaland financial compliance costs and made some activities more time-consuming andmore burdensome. Section 404 requires that our management assess ourinternal control over financial reporting annually and, commencing with thefiling of the Annual Report for the year ended December 31, 2007, include areport on its assessment. In 2008 our independent registered public accountingfirm may be required to audit both the design and operating effectiveness ofour internal controls and management’s assessment of the design and theoperating effectiveness of our internal control over financial reporting.

 

**Risks Relating to Our Common Stock**

 

**Stock prices for biotechnology companies havehistorically tended to be very volatile.**  Stock prices and trading volumes for manybiotechnology companies fluctuate widely for a number of reasons, including butnot limited to the following factors, some of which may be unrelated to theirbusinesses or results of operations:

 

·                  clinical trial results,

 

·                  the amount of cash resourcesand ability to obtain additional funding,

 

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·                  announcements of researchactivities, business developments, technological innovations or new products bycompanies or their competitors,

 

·                  entering into or terminatingstrategic relationships,

 

·                  changes in governmentregulation,

 

·                  disputes concerning patentsor proprietary rights,

 

·                  changes in revenues orexpense levels,

 

·                  public concern regarding thesafety, efficacy or other aspects of the products or methodologies beingdeveloped,

 

·                  reports by securitiesanalysts,

 

·                  activities of variousinterest groups or organizations,

 

·                  media coverage, and

 

·                  status of the investmentmarkets.

 

This market volatility, as well as general domestic or internationaleconomic, market and political conditions, could materially and adverselyaffect the market price of our common stock and the return on your investment.

 

**A significant number of shares of our common stockhave become available for sale and their sale could depress the price of ourcommon stock.**  On March 1,2008, a significant number of our outstanding securities (including the 2007Debentures and the 2007 Warrants and the shares of common stock underlying suchsecurities) that were previously restricted became eligible for sale under Rule 144of the Securities Act, and their sale will not be subject to any volumelimitations.

 

Not including the shares of common stock underlying the Debentures andWarrants issued in connection with the 2005, 2006, 2007, and 2008 financings,as of May 15, 2008, there are presently approximately 22,103,785outstanding options, warrants and other securities convertible or exercisableinto shares of our common stock.

 

We may also sell a substantial number of additional shares of ourcommon stock in connection with a private placement or public offering ofshares of our common stock (or other series or class of capital stock to bedesignated in the future). The terms of any such private placement would likelyrequire us to register the resale of any shares of capital stock issued orissuable in the transaction. We have also issued common stock to certainparties, such as vendors and service providers, as payment for products andservices. 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 your interest in the company.

 

Sales of a substantial number of shares of our common stock under anyof the circumstances described above could adversely affect the market pricefor our common stock and make it more difficult for you to sell shares of ourcommon stock at times and prices that you feel are appropriate.

 

**We do not intend to pay cash dividends on our commonstock in the foreseeable future.**  Any payment of cash dividends will dependupon our financial condition, results of operations, capital requirements andother factors and will be at the discretion of our board of directors. We donot anticipate paying cash dividends on our common stock in the foreseeablefuture. Furthermore, we may incur additional indebtedness that may severelyrestrict or prohibit the payment of dividends.

 

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**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.**  Our securities are currently quoted on theOTC Bulletin Board, an NASD-sponsored and operated inter-dealer automatedquotation system for equity securities not included in the Nasdaq Stock Market.Quotation of our securities on the OTC Bulletin Board 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. Some investors may perceiveour securities to be less attractive because they are traded in theover-the-counter market. In addition, as an OTC Bulletin Board listed company,we do not attract the extensive analyst coverage that accompanies companieslisted on Nasdaq or any other regional or national exchange. Further,institutional and other investors may have investment guidelines that restrictor prohibit investing in securities traded in the over-the-counter market.These factors may have an adverse impact on the trading and price of oursecurities.

 

**Ourcommon stock is subject to “penny stock” regulations and restrictions oninitial and secondary broker-dealer sales.**  The Securities and Exchange Commission hasadopted regulations which generally define “penny stock” to be any listed,trading equity 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 your abilityto sell your shares of our common stock in the secondary market.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Not applicable.

 

**ITEM 4. CONTROLS ANDPROCEDURES**

** **

**DisclosureControls and Procedures**

 

We maintaindisclosure controls and procedures designed to ensure that information requiredto be disclosed in the reports we file pursuant to the Exchange Act arerecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission, and thatsuch information is accumulated and communicated to our Chief Executive Officer(“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”),to allow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, can onlyprovide a reasonable assurance of achieving the desired control objectives, andin reaching a reasonable level of assurance, management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Management designed the disclosure controlsand procedures to provide reasonable assurance of achieving the desired controlobjectives.

 

We carried out anevaluation, under the supervision and with the participation of our management,including our CEO and PFO, of the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the period covered bythis Quarterly Report.  We havedetermined that the loss of certain personnel in our legal, accounting andfinance departments, when considered collectively in light of the number andcomplexity of accounting matters requiring consideration, created a possibilitythat a material misstatement of our financial statements could occur and maynot be prevented or detected.  Inaddition, we have identified material weaknesses in internal control overfinancial reporting as discussed in our most recent annual report filed on Form 10-KSB.  As a result, our disclosure controls andprocedures were not effective as of March 31, 2008.  To address these material weaknesses, we haveretained an outside accounting consulting firm to assist the Company inpreparing and reviewing the restatements and preparing this Quarterly Report onForm 10-Q.  We are also initiating anemployment search process to fill open positions.

 

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Nothwithstandingany material weaknesses identified above, we believe our financial statementsfairly present in all material respects the financial position, results ofoperations and cash flows for the interim periods presented in our quarterlyreport on Form 10-Q.

 

**Changesin Internal Control over Financial Reporting**

 

During the quarterended March 31, 2008, both our principal financial/accounting officer andour general counsel resigned from their positions with the company.  Our Chief Executive Officer has assumed theduties of our principal financial/accounting officer and will continue to do sountil a replacement is hired.

 

 Except as noted above, there have been noother significant changes in our internal controls over financial reporting (assuch term is defined in Rule 13a-15(f) and 15d-15(f) under theSecurities Exchange Act) during the quarter ended March 31, 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II. OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS**

 

*GaryD. Aronson v. Advanced Cell Technology, Inc., Superior Court ofCalifornia, County of Alameda,* Case No. RG07348990. *John S. Gorton v. Advanced Cell Technology, Inc,Superior Court of California, County of Alameda* Case No. RG07350437.On October 1, 2007 Gary D. Aronson brought suit against the Company withrespect to a dispute over the interpretation of the anti-dilution provisions ofthe Company’s warrants issued to Mr. Aronson on or aboutSeptember 14, 2005. John S. Gorton initiated a companion suit onOctober 10, 2007. The two cases have been consolidated. The plaintiffsallege that the Company breached warrants to purchase securities issued by theCompany to these individuals by not timely issuing stock after the warrantswere exercised and by failing to issue additional shares of stock in accordancewith anti-dilution provisions in the warrants. Plaintiffs are seeking anunspecified amount in damages. No discovery has been taken regarding theforegoing claims, and therefore no analysis has been done to determine theCompany’s potential exposure and no conclusions reached whether the Company hasliability.****The Superior Court has ordered a “CaseManagement Conference” for August 20, 2008. The Company is currently replacing its legal counsel for thismatter.  

 

*Alexandria Real Estate-79/96**Charlestown Navy Yard v. Advanced Cell Technology, Inc. and Mytogen,Inc. (Suffolk County, Massachusetts)*:  The Company and its subsidiary Mytogen, Inc.are currently defending themselves against a civil action brought in SuffolkSuperior Court, No. 08-0937-H, by their former landlord at 79/96 ThirteenthStreet, Charlestown, Massachusetts, a property vacated by the Company and Mytogeneffective May 31, 2008. In that action, Alexandria Real Estate-79/96Charlestown Navy Yard is seeking a damages award consisting of presently duerent and other expenses incurred between January and June 2008, and of the netpresent value of the future rental income stream.  A motion for partial summary judgmentrelating to presently due rent and other expenses is currently pending beforethe Superior Court.  A trial is scheduledfor September 2, 2008.  The Company andMytogen are defending against the damages claim.

 

*Dr. Pedro Huertas v. Advanced Cell Technology, Inc.and William Caldwell*, No. 11 166  01101 08, American ArbitrationAssociation.  On May 30, 2008, Dr. PedroHuertas, the Company’s former Chief Development Officer, filed an arbitrationclaim in which he alleges that the Company has (1) breached his employmentagreement by refusing to pay one year’s severance pay and other benefits and (2) violatedthe California Whistleblower Statute, Cal. Labor Code, Section 1102.5 aswell as Massachusetts and federal law by treating his email correspondence in October of2007 as a resignation after he took certain positions on regulatory issues andrefused an alleged request to terminate the employment of a woman who claimedthat she had been sexually harassed. Huertas previously filed administrative claims in California andMassachusetts but asked the relevant agencies to dismiss his claims in order topursue direct claims against the Company in arbitration.  Huertas is seeking damages in excess of$340,000 as well as attorneys’ fees.

 

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

** **

The issuances ofthe equity securities described below were made in reliance upon the exemptionfrom registration under Section 4(2) of the Securities Act of 1933,as amended, relating to sales by an issuer not involving a public offering,and/or pursuant to the requirements of one or more of the safe harbors providedin Regulation D under the Securities Act.

 

We issued and sold a $600,000 unsecured convertiblenote dated as of February 15, 2008 (“Note A”) to JMJ Financial, for a netpurchase price of $500,000 (reflecting a 16.66% original issue discount) in aprivate placement. Note A bears interest at the rate of 12% per annum, and isdue by February 15, 2010. At any time after the 180th day following theeffective date of Note A, the holder may at its election convert all or part ofNote A plus accrued interest into shares of our common stock at the conversionrate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of thethree lowest trade prices in the 20 trading days prior to the conversion.Pursuant to the Use of Proceeds Agreement entered into in connection with theissuance of Note A, we are required to use the proceeds from Note A solely forresearch and development dedicated to adult stem cell research.

 

Effective February 15, 2008, in exchange for$1,000,000 in the form of a Secured & Collateralized Promissory Note (the “JMJNote”) issued by JMJ Financial to the Company, we issued and sold an unsecuredconvertible note (“Note B”) to JMJ Financial in the aggregate principal amountof $1,200,000 or so much as may be paid towards the balance of the JMJ Note.Note B bears interest at the rate of 10% per annum, and is due by February 15,2010. At any time following the effective date of Note B, the holder may at itselection convert all or part of Note B plus accrued interest into shares of ourcommon stock at the conversion rate of the lesser of: (a) $0.38 per share, or(b) 80% of the average of the three lowest trade prices in the 20 trading daysprior to the conversion. In connection with the issuance of Note B, we enteredinto a Collateral and Security Agreement dated as of February 15, 2008 with JMJFinancial pursuant to which JMJ Financial granted the Company a securityinterest in certain of its assets securing the JMJ Note. As of March 31, 2008, wehad drawn down and received the following amounts under Note B:

 

• On March 17, 2008 — $60,000 for a net purchase priceof $50,000 (reflecting a 16.66% original issue discount).

 

Pursuant to the Use of Proceeds Agreement entered intoin connection with the issuance of Note B, we are required to use the proceedsfrom Note B solely for research and development dedicated to adult stem cellresearch.

 

As described inour Current Report on Form 8-K filed with the Securities and ExchangeCommission on April 1, 2008, as amended on April 9, 2008, we issued seniorsecured convertible debentures dated March 31, 2008 in the aggregate principalamount of $4,038,880 with an original issue discount of 20.3187%.  The closing escrow established in connectionwith the transaction was released April 4, 2008. In connection with the closingof the issuance and sale of convertible debentures, we received gross proceedsof $2,527,231, excluding refinancing of bridge debt and in-kind paymentsincluding in-kind payments incurred in anticipation of the financing. Theconvertible debentures are due and payable one year from the date of issuance,unless sooner converted into shares of our common stock.   At any time from the closing date until thematurity date of the debentures, the Purchasers have the right to convert thedebentures, in whole or in part, into common stock of the Company at the theneffective conversion price. The debentures are initially convertible into 26,925,867shares of common stock at a price of $0.15 per share. In connection with theclosing of the 2008 financing, we also issued to the investors warrants topurchase an aggregate of 26,925,867 shares of our common stock. The term of thewarrants is five years and the exercise price is $0.165 per share, subject toanti-dilution and other customary adjustments.

 

In connection withthe closing of the 2008 financing described above, we issued (i) warrants topurchase an aggregate of 6,399,806 shares of common stock of the Company at anexercise price of $0.165 to T.R. Winston & Company, LLC as considerationfor placement agent services provided in connection with the 2008 financing,(ii) a debenture in the principal amount of $250,000 to T.R. Winston &Company, LLC in order to satisfy certain outstanding payables owed by theCompany, (iii) a debenture in the principal amount of $250,000 to Pierce AtwoodLLP in order to satisfy certain outstanding payables owed by the Company, and(iv) a debenture in the principal amount of $61,000 to PDPI, LLC in order tosatisfy certain outstanding payables owed by the Company to one of theirpartners (Green Mountain Finance LLC). The debentures and warrants describedabove contained the same terms and conditions as those issued to the investorsin the 2008 financing.

 

On March 21,2008, we issued and sold an aggregate of $130,000 in unsecured convertiblenotes (the “Bridge Notes”) to PDPI LLC and The Shapiro Family Trust. Dr. Shapiro,one of the Company’s directors, may be deemed the beneficial owner of thesecurities owned by The Shapiro Family Trust. The net outstanding amount ofprincipal plus interest of the Notes was converted into common stock of theCompany in connection with the 2008 Financing described above.

 

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.

 

48

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**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

** **

None.

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

** **

None.

 

**ITEM 5. OTHER INFORMATION**

** **

None.

 

**ITEM 6. EXHIBITS**

 

**Exhibit Description**

** **
| 10.1   |   | Securities Purchase Agreement dated March 31,  2008, by and among the Company and the investors party thereto. *                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 10.2   |   | Security Agreement dated March 31, 2008, by and  among the Company and the investors party thereto.*                                                                            |
|   |   |                                                                                                                                                                                 |
| 10.3   |   | Form of Common Stock Purchase Warrant issued in  connection with March 31, 2008 Securities Purchase Agreement.*                                                            |
|   |   |                                                                                                                                                                                 |
| 10.4   |   | Form of Amortizing Convertible Debenture issued  in connection with March 31, 2008 Securities Purchase Agreement.*                                                         |
|   |   |                                                                                                                                                                                 |
| 10.5   |   | Subsidiary Guarantee dated March 31, 2008.*                                                                                                                                     |
|   |   |                                                                                                                                                                                 |
| 10.6   |   | Convertible Note, dated as of March 17, 2008,  issued by the Company to PDPI LLC.*                                                                                              |
|   |   |                                                                                                                                                                                 |
| 10.7   |   | Bridge Note, dated as of March 17, 2008, issued  by the Company to The Shapiro Family Trust Dated September 25, 1989.*                                                     |
|   |   |                                                                                                                                                                                 |
| 10.8   |   | License Agreement, dated as of February 25,  2008, by and between the Company and Pharming Technologies B.V.*                                                                   |
|   |   |                                                                                                                                                                                 |
| 10.9   |   | Convertible Promissory Note A, dated as of February 15,  2008, issued by the Company to JMJ Financial.*                                                                         |
|   |   |                                                                                                                                                                                 |
| 10.10  |   | Convertible Promissory Note B, dated as of February  15, 2008, issued by the Company to JMJ Financial, and Amendment to  Convertible Promissory Note B, dated as of March 17, 2008.* |
|   |   |                                                                                                                                                                                 |
| 10.11  |   | Secured & Collateralized Promissory Note, dated  as of February 15, 2008, issued by JMJ Financial to the Company.*                                                               |
|   |   |                                                                                                                                                                                 |
| 10.12  |   | Collateral & Security Agreement, dated as of  February 15, 2008, by and between the Company and JMJ Financial. *                                                                 |
|   |   |                                                                                                                                                                                 |
| 31.1   |   | Section 302  Certification of Chief Executive Officer and Principal Financial Officer.*                                                                                         |

 

49

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| 32.1 |   | Certification  of Chief Executive Officer and Principal Financial Officer pursuant to 18  U.S.C. Section 1350.* |
|------|--------|----------------------------------------------------------------------------------------------------------------------|

 

----

*                    Filedherewith

 

50

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** **

**SIGNATURE**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 
|                           | ** ** | **ADVANCED CELL TECHNOLOGY, INC.** |
|---------------------------|------------|------------------------------------|
| ** **                | ** ** | ** **                         |
|                      |       | By:                                |  /s/ William M. Caldwell, IV |
|                      |       |                               | William M. Caldwell, IV |
|                      |       |                               | Chief Executive Officer |
| Dated: July 14, 2008 |       |                               |   |

 

51

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**Exhibit Description**

** **
| 10.1   | Securities Purchase Agreement dated March 31,  2008, by and among the Company and the investors party thereto. *                                                                 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                  |
| 10.2   | Security Agreement dated March 31, 2008, by and  among the Company and the investors party thereto.*                                                                             |
|   |                                                                                                                                                                                  |
| 10.3   | Form of Common Stock Purchase Warrant issued in  connection with March 31, 2008 Securities Purchase Agreement.*                                                             |
|   |                                                                                                                                                                                  |
| 10.4   | Form of Amortizing Convertible Debenture issued  in connection with March 31, 2008 Securities Purchase Agreement.*                                                          |
|   |                                                                                                                                                                                  |
| 10.5   | Subsidiary Guarantee dated March 31, 2008.*                                                                                                                                      |
|   |                                                                                                                                                                                  |
| 10.6   | Convertible Note, dated as of March 17, 2008,  issued by the Company to PDPI LLC.*                                                                                               |
|   |                                                                                                                                                                                  |
| 10.7   | Bridge Note, dated as of March 17, 2008, issued  by the Company to The Shapiro Family Trust Dated September 25, 1989.*                                                      |
|   |                                                                                                                                                                                  |
| 10.8   | License Agreement, dated as of February 25,  2008, by and between the Company and Pharming Technologies B.V.*                                                                    |
|   |                                                                                                                                                                                  |
| 10.9   | Convertible Promissory Note A, dated as of  February 15, 2008, issued by the Company to JMJ Financial.*                                                                          |
|   |                                                                                                                                                                                  |
| 10.10  | Convertible Promissory Note B , dated as of February  15, 2008, issued by the Company to JMJ Financial, and Amendment to  Convertible Promissory Note B, dated as of March 17, 2008.* |
|   |                                                                                                                                                                                  |
| 10.11  | Secured & Collateralized Promissory Note, dated  as of February 15, 2008, issued by JMJ Financial to the Company.*                                                                |
|   |                                                                                                                                                                                  |
| 10.12  | Collateral & Security Agreement, dated as of  February 15, 2008, by and between the Company and JMJ Financial.*                                                                   |
|   |                                                                                                                                                                                  |
| 31.1   | Section 302  Certification of Chief Executive Officer and Principal Financial Officer.*                                                                                          |
|   |                                                                                                                                                                                  |
| 32.1   | Certification  of Chief Executive Officer and Principal Financial Officer pursuant to 18  U.S.C. Section 1350.*                                                                  |
|   |                                                                                                                                                                                  |

----

| * | Filed  herewith |
|---|-----------------|

 

52

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