**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

 

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**FORM 10-QSB****/A**

 

**Amendment No. 1 to**

 

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| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                              |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                |
| ** ** | **FOR THE  PERIOD ENDED MARCH 31, 2005**                                                                                                                       |
| ** ** | ** **                                                                                                                                                          |
| ** ** | **OR**                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                             |
|       |                                                                                                                                                                |
|       | **FOR  THE TRANSITION PERIOD FROM             TO            .** |

 

**COMMISSIONFILE NUMBER: 0-50295**

 

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**ADVANCEDCELL TECHNOLOGY, INC.**

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

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

 

**381PLANTATION STREET, WORCESTER, MA 01605**

(ADDRESS, INCLUDING ZIPCODE, OF PRINCIPAL EXECUTIVE OFFICES)

 

REGISTRANT’S TELEPHONENUMBER, INCLUDING AREA CODE: **(508) 756-1212**

 

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

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT: **NONE**

 

Indicate by check markwhether the small business issuer (1) has filed all reports required to befiled by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the small business issuer was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý       Noo

 

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

 
| **Class:**                                | ** ** | **Outstanding at May 20, 2005:** |
|-------------------------------------------|------------|---------------------------------------|
| Common  Stock, $0.001 par value per share |       | 23,213,212  shares                    |

 

Transitional Small BusinessDisclosure format (check one)

 

Yes o       Noý

 

 

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**Advanced CellTechnology, Inc.**

** **

**INDEX**

 
| RECENT DEVELOPMENTS OF SMALL  BUSINESS ISSUER                           |   |
|-------------------------------------------------------------------------|--------|
| PART I. FINANCIAL INFORMATION                                      |   |
| ITEM 1. CONSOLIDATED 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 AND REPORTS  ON FORM 8-K                          |   |
| SIGNATURE                                                               |   |

 

2

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## **EXPLANATORY NOTE**

 

This Amendment No. 1 to ourQuarterly Report on Form 10-QSB/A (“Form 10-QSB/A”) amends andrestates the Quarterly Report on Form 10-QSB for the period ended March 31,2005, as filed with the Securities and Exchange Commission on May 23, 2005(“Form 10-QSB”).  The purpose ofthis Form 10-QSB/A is to expand upon some of the disclosures contained inthe original filing.  In particular, thisForm 10-QSB/A provides additional explanatory information with regard tothe following areas: 

 

•                  We have expanded ourdisclosure with regard to our research and development expenses discussed inItem 2, “Management’s Discussion and Analysis and Results of Operations.” 

•                  We have added clarifyinglanguage to the description of our products under “Potential CommercialApplications of our Technologies” in Item 5, under “Business.” 

•                  While risks relating to ourtechnology were fully disclosed in the original filing in Item 2, under “RiskFactors That May Affect Our Business,” we have incorporated a discussionof these risk factors into a more complete description of the strengths of ourintellectual property portfolio in Item 5, under “Business.” 

•                  We have expanded thedisclosure with regard to our patents by indicating the expiration date of eachpatent in the patent table in Item 5, under “Our Intellectual Property.” 

•                  We have further expanded thedisclosure with regard to our intellectual property by expanding the discussionof the material terms of our research and license agreements in Item 5, under “Researchand License Agreements.” 

 

**RECENT DEVELOPMENTS OF SMALL BUSINESS IS****SUER**

 

On January 31, 2005,Advanced Cell Technology, Inc. (formerly known as A.C.T.Holdings, Inc.) (the “Company”)completed a merger transaction with Advanced Cell, Inc. (formerly known as AdvancedCell Technology, Inc.), a Delaware corporation (“ACT”), pursuant to whicha wholly-owned subsidiary of the Company merged with and into ACT (the “Merger”),with ACT remaining as the surviving corporation and a wholly-owned subsidiaryof the Company.  Upon the completion ofthe Merger, the Company ceased all of its pre-Merger operations and adopted thebusiness of ACT.  In this report, AdvancedCell Technology, Inc. and its subsidiaries are collectively referred to as the “Company,”“we,” or “us.”  Advanced Cell, Inc.is referred to separately as “ACT.”

 

Investorsare cautioned that, prior to the Merger, the Company had minimal business,operations, revenues and assets, and has been involved in an industry entirelyunrelated to the business of ACT. Therefore, the acquisition of ACT by the Company represented a completechange in the nature of the Company’s business and operations, and changed thenature of any prior investment in the Company. Prior to the Merger, ACT, as a privately held Company, had not beensubject to the reporting requirements of the Securities Exchange Act of 1934,(the “Exchange Act”) and, therefore, there was little public information aboutACT available.  In light of this fact, wehave elected to set forth additional disclosure regarding the business of theCompany under Part II, Item 5 of this Quarterly Report on Form 10-QSB.  Although such disclosure is not required inthis Quarterly Report on Form 10-QSB, we have provided this additionaldisclosure as we believe that it is helpful to investors.

 

**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

Certainstatements contained in this Quarterly Report on Form 10-QSB and theexhibits hereto containing the words “may,” “assumes,” “forecasts,” “positions,”“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,”“projects,” “intends,” “plans,” “budgets,” “potential,” “continue” andvariations thereof, and other statements contained in this Quarterly Report on Form 10-QSBand the exhibits hereto regarding matters that are not historical facts areforward-looking statements. Because these statements involve risks anduncertainties, as well as certain assumptions, actual results may differmaterially from those expressed or implied by such forward-lookingstatements.  Factors that could causeactual results to differ materially include, but are not limited to, risksinherent in:  our early stage ofdevelopment, including a lack of operating history, lack of profitableoperations and the need for significant additional capital resources in orderto sustain our business; the development and commercialization of largely noveland unproven technologies and products; our ability to protect, maintain, anddefend our intellectual property rights; our ability to retain key members ofour management and scientific teams; and uncertainty regarding our overallability to compete effectively in a highly complex, rapidly developing, capitalintensive and competitive industry.  See *“*RISK FACTORS THAT MAY AFFECT OURBUSINESS*”* set forth in Part I,Item 2 of this Quarterly Report on Form 10-QSB for a more completediscussion of these factors.  Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date that they are made.  We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

Forward-looking statements include our plans and objectives for future operations, including plans and objectives relating to our products and our future economic performance.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, we cannot assure you that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of any such statement should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

 

3

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**PART I. FINANCIALINFORMATION**

 

## **ITEM1.**CONSOLIDATED FINANCIAL STATEMENTS

## ** **

**ADVANCED CELLTECHNOLOGY, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                               |       |                     |       |                        |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Current  assets:                                                                                                                     |       |                     |       |                        |       |
| Cash and  cash equivalents                                                                                                           |       | $                        | 5,368,281  |                        | $          | — |   |
| Cash held  in escrow for stock subscriptions                                                                                         |       | —                   |       | 3,676,000                   |       |
| Accounts  receivable, net of allowance for doubtful accounts of $161,399 and $128,684                                                |       | 260,810                  |       | 104,150                     |       |
| Prepaid  expenses                                                                                                                    |       | 74,619                   |       | 31,300                      |       |
| Deferred  royalty fees, current portion                                                                                              |       | 153,513                  |       | 119,763                     |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  current assets                                                                                                                |       | 5,857,223                |       | 3,931,213                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Property  and equipment, net                                                                                                         |       | 242,798                  |       | 98,455                      |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Due from  stockholder                                                                                                                |       | 586,969                  |       | 394,015                     |       |
| Deferred  royalty fees, less current portion                                                                                         |       | 688,633                  |       | 718,573                     |       |
| Deposits                                                                                                                             |       | 17,954                   |       | 17,954                      |       |
| Deferred  offering costs                                                                                                             |       | —                   |       | 12,000                      |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  assets                                                                                                                        |       | $                        | 7,393,577  |                        | $          | 5,172,210 |   |
|                                                                                                                                 |       |                     |       |                        |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                          |       |                     |       |                        |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Current  liabilities:                                                                                                                |       |                     |       |                        |       |
| Accounts  payable                                                                                                                    |       | $                        | 3,071,263  |                        | $          | 3,246,482 |   |
| Accrued  expenses                                                                                                                    |       | 576,616                  |       | 507,570                     |       |
| Cash  overdraft                                                                                                                      |       | —                   |       | 1,409                       |       |
| Deferred  revenue, current portion                                                                                                   |       | 332,508                  |       | 332,508                     |       |
| Interest  payable                                                                                                                    |       | 61,424                   |       | 111,821                     |       |
| Interest  payable - stockholder                                                                                                      |       | 326,877                  |       | 296,877                     |       |
| Advances  payable - other                                                                                                            |       | 130,000                  |       | 130,000                     |       |
| Note  payable - stockholder                                                                                                          |       | 1,000,000                |       | 1,000,000                   |       |
| Notes  payable - other                                                                                                               |       | 228,014                  |       | 967,014                     |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  current liabilities                                                                                                           |       | 5,726,702                |       | 6,593,681                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Deferred  revenue, net of current portion                                                                                            |       | 1,911,922                |       | 1,995,049                   |       |
| Preferred  units subscribed                                                                                                          |       | —                   |       | 4,175,999                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  liabilities                                                                                                                   |       | 7,638,624                |       | 12,764,729                  |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Stockholders’  deficit:                                                                                                         |       |                     |       |                        |       |
| Preferred  stock, $0.001 par value; 5,000,000 shares authorized, none issued and  outstanding                                        |       | —                   |       | —                      |       |
| Common  stock, $0.001 par value; 50,000,000 shares authorized, 23,213,212 and  8,325,883 shares issued and outstanding, respectively |       | 23,213                   |       | 8,326                       |       |
| Additional  paid-in capital                                                                                                          |       | 14,677,458               |       | 6,158,954                   |       |
| Deferred  compensation                                                                                                               |       | (21,586                  | )          | —                      |       |
| Accumulated  deficit                                                                                                                 |       | (14,924,132              | )          | (13,759,799                 | )          |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  stockholders’ deficit                                                                                                    |       | (245,047                 | )          | (7,592,519                  | )          |
|                                                                                                                                 |       |                     |       |                        |       |
| Total  liabilities and stockholders’ deficit                                                                                    |       | $                        | 7,393,577  |                        | $          | 5,172,210 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

4

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**ADVANCEDCELL TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenue:                                                |       |                                  |       |   |   |
| License  fees and royalties                             |       | $                                     | 108,127    |   | $ | 183,236 |   |
|                                                    |       |                                  |       |   |   |
| Cost of  revenue                                        |       | 45,691                                |       | 69,166 |   |
|                                                    |       |                                  |       |   |   |
| Gross  profit                                           |       | 62,436                                |       | 114,070 |   |
|                                                    |       |                                  |       |   |   |
| Operating  expenses:                                    |       |                                  |       |   |   |
| Research  and development                               |       | 276,595                               |       | 293,570 |   |
| Grant  reimbursements                                   |       | (235,810                              | )          | (140,171 | ) |
| General  and administrative                             |       | 1,204,480                             |       | 492,525 |   |
|                                                    |       |                                  |       |   |   |
| Total  operating expenses                               |       | 1,245,265                             |       | 645,924 |   |
|                                                    |       |                                  |       |   |   |
| Loss from  operations                                   |       | (1,182,829                            | )          | (531,854 | ) |
|                                                    |       |                                  |       |   |   |
| Other  income (expense):                                |       |                                  |       |   |   |
| Interest  income                                        |       | 12,107                                |       | — |   |
| Gain on  settlement of debt                             |       | 86,513                                |       | — |   |
| Interest  expense and late fees                         |       | (50,124                               | )          | (19,062 | ) |
| Interest  expense - stockholder                         |       | (30,000                               | )          | (30,000 | ) |
|                                                    |       |                                  |       |   |   |
| Total  other income (expense)                           |       | 18,496                                |       | (49,062 | ) |
|                                                    |       |                                  |       |   |   |
| Net loss                                                |       | $                                     | (1,164,333 | ) | $ | (580,916 | ) |
|                                                    |       |                                  |       |   |   |
| Net loss  per share, basic and diluted                  |       | $                                     | (0.06      | ) | $ | (0.07 | ) |
|                                                    |       |                                  |       |   |   |
| Weighted  average shares outstanding, basic and diluted |       | 18,250,769                            |       | 8,325,883 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

5

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**ADVANCEDCELL TECHNOLOGY, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**CHANGE IN CASH AND CASHEQUIVALENTS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                              |       |                                  |       |   |   |
| Net loss                                                                                                                                                                                            |       | $                                     | (1,164,333 | ) | $ | (580,916 | ) |
| Adjustments  to reconcile net loss to net cash (used in) provided by operating activities:                                                                                                          |       |                                  |       |   |   |
| Depreciation  and amortization                                                                                                                                                                      |       | 21,794                                |       | 35,364 |   |
| Bad debt                                                                                                                                                                                            |       | 32,715                                |       | — |   |
| Amortization  of deferred charges                                                                                                                                                                   |       | 29,940                                |       | 29,061 |   |
| Amortization  of deferred revenue                                                                                                                                                                   |       | (83,127                               | )          | (78,236 | ) |
| Stock  based compensation                                                                                                                                                                           |       | 50,768                                |       | — |   |
| Gain on  settlement of accounts payable                                                                                                                                                             |       | (86,513                               | )          | — |   |
| Shares  issued for services                                                                                                                                                                         |       | 15,000                                |       | — |   |
| Changes  in operating assets and liabilities:                                                                                                                                                       |       |                                  |       |   |   |
| (Increase)  decrease in:                                                                                                                                                                            |       |                                  |       |   |   |
| Accounts  receivable                                                                                                                                                                                |       | (189,375                              | )          | 341,245 |   |
| Prepaid  expenses                                                                                                                                                                                   |       | (43,319                               | )          | 16,046 |   |
| Other  current assets                                                                                                                                                                               |       |                                  |       | 5,000 |   |
| Deferred  charges                                                                                                                                                                                   |       | (33,750                               | )          | (60,319 | ) |
| Increase  (decrease) in:                                                                                                                                                                            |       |                                  |       |   |   |
| Accounts  payable and accrued expenses                                                                                                                                                              |       | (72,935                               | )          | 344,970 |   |
| Interest  payable                                                                                                                                                                                   |       | 56,986                                |       | 46,416 |   |
| Deferred  revenue                                                                                                                                                                                   |       | —                                |       | 75,000 |   |
| Related  party advances                                                                                                                                                                             |       | (192,954                              | )          | (47,287 | ) |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Net cash  (used in) provided by operating activities                                                                                                                                                |       | (1,659,103                            | )          | 126,344 |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                                                                                                              |       |                                  |       |   |   |
| Cash  acquired in acquisition                                                                                                                                                                       |       | 10,000                                |       | — |   |
| Purchases  of property and equipment                                                                                                                                                                |       | (166,137                              | )          | (228 | ) |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Net cash  used in investing activities                                                                                                                                                              |       | (156,137                              | )          | (228 | ) |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                              |       |                                  |       |   |   |
| Proceeds  from preferred unit subscriptions, net of cost                                                                                                                                            |       | 3,658,930                             |       | — |   |
| Payments  on notes and leases                                                                                                                                                                       |       | (150,000                              | )          | (23,752 | ) |
| Cash  overdraft                                                                                                                                                                                     |       | (1,409                                | )          | — |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Net cash  provided by (used in) financing activities                                                                                                                                                |       | 3,507,521                             |       | (23,752 | ) |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Net  increase in cash                                                                                                                                                                               |       | 1,692,281                             |       | 102,364 |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Cash and  cash equivalents, beginning of period                                                                                                                                                     |       | $                                     | 3,676,000  |   | 3,782 |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Cash and  cash equivalents, end of period                                                                                                                                                           |       | $                                     | 5,368,281  |   | $ | 106,146 |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Cash paid  for:                                                                                                                                                                                     |       |                                  |       |   |   |
| Interest                                                                                                                                                                                            |       | $                                     | —     |   | $ | 1,247 |   |
| Income  taxes                                                                                                                                                                                       |       | —                                |       | — |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| Supplemental  schedule of non-cash financing activities:                                                                                                                                       |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| During  the three months ended March 31, 2005:                                                                                                                                                 |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| 105,177  Preferred Units, valued at $89,400, were issued in partial settlement of accounts  payable.                                                                                                |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| 616,124  shares of common stock, and 306,062 common stock purchase warrants, were  issued upon conversion of $500,000 of notes payable and $23,708 of accrued  interest.                            |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| 469,247  shares of common stock, and 234,629 common stock purchase warrants, valued at  an aggregate of $398,860, were issued in consideration of services related to  the Preferred Unit Offering. |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| A note  for $150,000 was issued as a part of a settlement of a note payable of  $339,000 and related accrued interest of $53,675.                                                                   |       |                                  |       |   |   |
|                                                                                                                                                                                                |       |                                  |       |   |   |
| 9,411,778  shares of preferred stock converted to 9,411,778 shares of common stock in  the Merger.                                                                                                  |       |                                  |       |   |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

6

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**ADVANCEDCELL TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ DEFICIT**

**FOR THE THREE MONTH PERIOD ENDED MARCH 31,2005**

**(UNAUDITED)**

 
| ** **                                         | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Compensation**              | ** ** | **Deficit** | ** ** | **Deficit** | ** ** |
| ** **                                         |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Balance, December 31,  2004                   |       | —              |       | —           |       | 8,325,883               |       | 8,326        |       | 6,158,954       |       | —                        |       | (13,759,799 | ) | (7,592,519 | ) |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Sale of  preferred units for cash                  |       | 9,306,601           |       | 9,306            |       | —                  |       | —       |       | 7,901,294       |       | —                        |       | — |   | 7,910,600 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Issuance  of preferred units for services provided |       | 105,177             |       | 105              |       | —                  |       | —       |       | 89,295          |       | —                        |       | — |   | 89,400 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Issuance  of shares for debt conversion            |       | —              |       | —           |       | 616,124                 |       | 616          |       | 523,092         |       | —                        |       | — |   | 523,708 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Issuance  of shares for services                   |       | —              |       | —           |       | 17,647                  |       | 18           |       | 14,982          |       | —                        |       | — |   | 15,000 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Issuance  of units for offering services           |       | —              |       | —           |       | 469,247                 |       | 469          |       | 398,391         |       | —                        |       | — |   | 398,860 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Conversion  of preferred                           |       | (9,411,778          | )          | (9,411           | )          | 9,411,778               |       | 9,411        |       | —          |       | —                        |       | — |   | — |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Cost of  offering                                  |       | —              |       | —           |       | —                  |       | —       |       | (486,530        | )          | —                        |       | — |   | (486,530 | ) |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Shares  retained by public shareholders            |       | —              |       | —           |       | 4,374,007               |       | 4,374        |       | 5,626           |       | —                        |       | — |   | 10,000 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Fair value  of consultant options                  |       | —              |       | —           |       | —                  |       | —       |       | 72,354          |       | (21,586                       | )          | — |   | 50,768 |   |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Shares  cancelled                                  |       | —              |       | —           |       | (1,474                  | )          | (1           | )          | —          |       | —                        |       | — |   | (1 | ) |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Net loss                                           |       | —              |       | —           |       | —                  |       | —       |       | —          |       | —                        |       | (1,164,333 | ) | (1,164,333 | ) |
|                                               |       |                |       |             |       |                    |       |         |       |            |       |                          |       |   |   |   |   |
| Balance, March 31,  2005                      |       | —              |       | —           |       | 23,213,212              |       | $            | 23,213     |            | $          | 14,677,458                    |       | $ | (21,586 | ) | $ | (14,924,132 | ) | $ | (245,047 | ) |
|                                                    |            |                     |            |                  |            |                         |            |              |            |                 |            |                               |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

7

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**ADVANCEDCELL TECHNOLOGY, INC.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTSMARCH 31, 2005(UNAUDITED)**

 

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

###### ** **

**Organization**

 

On January 31, 2005,Advanced Cell Technology, Inc., a Nevada corporation(formerly known as A.C.T. Holdings, Inc.) (the “Company”) completed the Merger with Advanced Cell,Inc., a Delaware corporation (formerly known as Advanced Cell Technology, Inc.)(“ACT”), pursuant to which a wholly-owned subsidiary of the Company merged withand into ACT, with ACT remaining as the surviving corporation and awholly-owned subsidiary of the Company. 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 Companyhad minimal business, operations, revenues and assets, and has been involved inan industry entirely unrelated to the business of ACT. Therefore, theacquisition of ACT by the Company represented a complete change in the natureof the Company’s business and operations, and changed the nature of any priorinvestment in the Company.

 

The transaction has been accountedfor as a recapitalization of ACT, the accounting acquirer. The historicalfinancial statements presented for periods prior to the merger are those ofACT. The consolidated accounts of the Company have been included from January 31,2005.  All comparisons of financialresults for periods prior to the Merger are to the financial results ofACT.  Any differences that would resultfrom the inclusion of the pre-Merger financial results of the Company would notbe material.

 

**Nature of Business**

** **

The Company is a biotechnologycompany focused on developing and commercializing human stem cell technology inthe emerging fields of regenerative medicine and stem cell therapy. Principalactivities to date have included obtaining financing, securing operatingfacilities and conducting 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’sability to continue its research and development activities is dependent uponthe ability of management to obtain additional financing as required.

 

**Basis of Presentation**

** **

The accompanying unaudited financial statements as of March 31, 2005 andfor the three month periods ended March 31, 2005 and 2004 have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), including Form 10-QSB and Regulation S-B. Theinformation furnished herein reflects all adjustments (consisting of normalrecurring accruals and adjustments), which are, in the opinion of management,necessary to fairly present the operating results for the respective periods.Certain information and footnote disclosures normally present in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been omitted pursuantto such rules and regulations. The Company believes that the disclosuresprovided are adequate to make the information presented not misleading. Thesefinancial statements should be read in conjunction with the audited financialstatements and explanatory notes for the year ended December 31, 2004 asdisclosed in the Company’s annual report on Form 10-KSB for that year asfiled with the SEC, as it may be amended and in conjunction with ACT’s audited financial statements and explanatory notesfor the year ended December 31, 2004 as disclosed in the Company’s currentreport on Form 8-K/A as filed with the SEC on April 18, 2005.

 

8

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###### **2.**                          SIGNIFICANT ACCOUNTINGPOLICIES

###### ** **

***Useof Estimates—***Thesefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States and, accordingly, requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  Specifically, our management has estimatedthe expected economic life and value of our licensed technology, our netoperating loss for tax purposes and our stock, option and warrant expensesrelated to compensation to employees and directors, consultants and investmentbanks.  Actual results could differ fromthose estimates.

 

***RevenueRecognition—***Ourrevenues are generated from license and research agreements with collaborators.Licensing revenue is recognized ratably over the shorter of the life of thelicense or the estimated economic life of the patents related to the license.Deferred revenue represents the portion of the license and other paymentsreceived that has not been earned. Costs associated with the license revenueare deferred and recognized over same term as the revenue. Reimbursements ofresearch expense pursuant to grants are recorded as a reduction of research anddevelopment expense in the period during which collection of the reimbursementis reasonably assured, because the reimbursements are subject to approval.

 

***Researchand Development Costs—***Research and development costs consist of expenditures forthe research and development of patents and technology, which are not capitalizable. Our research and development costs consistmainly of payroll and payroll related expenses, research supplies and researchgrants.

 

Reimbursements of research expensepursuant to grants are recorded as a reduction of research and developmentexpense in the period received.

 

***StockBased Compensation—***SFAS No. 123, “*Accounting for Stock-Based Compensation*,”establishes and encourages the use of the fair value based method of accountingfor stock-based compensation arrangements under which compensation cost isdetermined using the fair value of stock-based compensation determined as ofthe date of the grant or the date at which the performance of the services iscompleted and is recognized over the periods in which the related services arerendered.  The statement also permitscompanies to elect to continue using the current intrinsic value accountingmethod specified in Accounting Principles Board (“*APB*”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” to account for stock-basedcompensation to employees.  We haveelected to use the intrinsic value based method for grants to our employees anddirectors and have disclosed the pro forma effect of using the fair value basedmethod to account for our stock-based compensation to employees.

 

The Company uses the fair valuemethod for equity instruments granted to non-employees and uses the Black Scholes model for measuring the fair value.  The stock based fair value compensation isdetermined as of the date of the grant or the date at which the performance ofthe services is completed (measurement date) and is recognized over the periodsin which the related services are rendered.

 

**Pro Forma Information**

** **

***Employeeand Director Common Share Purchase Options—***Pro forma informationregarding the effects on operations of employee and director common sharepurchase options as required by SFAS No. 123 andSFAS No. 148 has been determined as if theCompany had accounted for those options under the fair value method. Pro formainformation is computed using the Black Scholesmethod at the date of grant of the options based on the following assumptionsranges for the three month period ended March 31, 2005: (1) risk freeinterest rate of 2.75% - 3.25; (2) dividend yield of 0%; (3) expectedvolatility factor of 0%; and (4) an expected life of the options of 2-3years.  The foregoing option valuationmodel requires input of highly subjective assumptions.  Because common share purchase options grantedto employees and directors have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value of estimate, the existingmodel does not in the opinion of our management necessarily provide a reliablesingle measure of fair value of common share purchase options we have grantedto our employees and directors.

 

9

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Pro forma information relating toemployee and director common share purchase options is as follows:

 
| ** **                                      | ** ** | **For the  Three Months  Ended  March 31, 2005** | ** ** | **For The  Three Months  Ended  March 31, 2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net loss  as reported                           |       | $                                                     | (1,164,333 | )                                                     | $          | (580,916 | ) |
| Current  period expense calculated under APB 25 | ** ** | **—**                                            | ** ** | **—**                                            | ** ** |
| Stock  compensation calculated under SFAS 123   |       | (126,481                                              | )          | **—**                                            | ** ** |
| Pro forma  net loss                             |       | $                                                     | (1,290,814 | )                                                     | $          | (580,916 | ) |
| Basic and  diluted historical loss per share    |       | $                                                     | (0.06      | )                                                     | $          | (0.07 | ) |
| Pro forma  basic and diluted loss per share     |       | $                                                     | (0.07      | )                                                     | $          | (0.07 | ) |

 

***NetLoss Per Share—***We use SFASNo. 128, “*Earnings Per Share*”for calculating the basic and diluted loss per share.  We compute basic loss per share by dividing netloss and net loss attributable to common shareholders by the weighted averagenumber of common shares outstanding. Diluted loss per share is computed similar to basic loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential shares had beenissued and if the additional shares were dilutive. Common equivalent shares areexcluded from the computation of net loss per share if their effect isanti-dilutive.

 

For the three months ended March 31,2005, 23,090,952 potential shares were excluded from the shares used tocalculate diluted earnings per share as their inclusion would reduce net lossper share. There were no potentially dilutive shares at March 31, 2004.

 

###### **3.**                          PROPERTY AND EQUIPMENT

###### ** **

Our property and equipment as of March 31,2005 is as follows:

 
| Machinery  and equipment        |   | $       | 803,890 |   |
|---------------------------------|--------|---------|---------|--------|
| Computers  and office equipment |   | 129,838 |    |
| Leasehold  improvements         |   | 21,451  |    |
| Furniture  and fixtures         |   | 24,216  |    |
| Total  property and equipment   |   | 979,395 |    |
| Accumulated  depreciation       |   | 736,597 |    |
| Property  and equipment, net    |   | $       | 242,798 |   |
|                                 |        |         |         |        |  |

 

Depreciation expense amounted to$21,794 and $35,364 during the three months ended March 31, 2005 and 2004,respectively.

 

###### **4.**                          CONVERTIBLE NOTES PAYABLE

###### ** **

During 2004, we issued promissorynotes aggregating $500,000 face value for cash proceeds of $450,000 and theassumption of $50,000 of debt owed by our parent to one of the investors. As aresult of the assumption of

 

10

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the $50,000 of debt, we haverecorded a financing cost in that amount. The notes bear interest at 10% peryear. $350,000 of notes matured on December 31, 2004 and $150,000 matureson September 30, 2005. The notes are convertible at the option of theholder into shares of our capital stock sold in a subsequent financing, at anamount equal to the lowest per share selling price of shares of that stockissued in such financing (see Note 7).

 

As additional consideration for thepurchase of the notes, we granted to the note holders warrants entitling themto purchase 700,000 common shares at an exercise price of $0.05. Warrants for300,000 shares were exercisable immediately upon issuance and expire two yearsfrom the date of issue.  Warrants for400,000 shares are exercisable on or after February 1, 2006 and expire February 1,2008. The fair value of the warrants was estimated at $0, using the Black Scholes option pricing model. The assumptions used in theBlack Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 0%, (3) risk-free interestrate of 2.75%, and (4) expected life of 2 years. Pursuant to EITF 98-6 and EITF 00-27, therehas been no allocation of the proceeds of the notes to the warrants and nobeneficial conversion feature, because the conversion rate is unknown at thedate of issue and is presumed to be at market value.

 

During the first quarter of 2005,the $500,000 of notes, plus accrued interest of $23,708, were converted intoinvestment units consisting of 616,124 shares of common stock, plus 308,063common stock purchase warrants, exercisable at $1.27 per share.

 

###### **5.**                          OTHER NOTES PAYABLE

###### ** **

On July 1, 2003, we issued apromissory note with a face amount of $339,000 to a law firm as a payment offees due them. The note bears interest at a rate of 10% per year. The note wasdue on October 1, 2003. During the first quarter of 2005, the note, plusaccrued interest of $53,675, was settled through (i) theissuance of 105,177 shares of preferred stock and 52,589 warrants pursuant tothe preferred stock offering described in Note 7, valued at $89,400, (ii) acash payment of $100,000, and (iii) a new note with a face value of$150,000. The new note bears interest at 10%, is due in 3 monthly payments of50,000 each and matures on May 1, 2005. There was a balance due on thenote of $100,000 at March 31, 2005.

 

On July 8, 2003, we issued apromissory note with a face amount of $272,108 to a law firm as a payment offees due them. The note bears interest at a rate of 5% per year. The note ispayable in monthly installments of $25,000, including interest. The notematured on October 1, 2003. We made payments through January, 2004. At March 31,2005 there is a remaining principal balance of $128,014, as well as accrued interestof $7,632 and accrued late fees of $50,000, included in accrued interest. Latefees accrue at the rate of $2,500 per month.

 

###### **6.**                          NOTE PAYABLE – STOCKHOLDER

###### ** **

On July 12, 2002, we issued apromissory note with a face amount of $1,000,000 to our majority stockholder asa repayment of advances received from the stockholder. The note bears interestat a rate of 12% per year. The note matures on December 31, 2005.

 

###### **7.**                          STOCKHOLDERS’ EQUITYTRANSACTIONS

###### ** **

We are authorized to issue twoclasses of capital stock, to be designated, respectively, Preferred Stock andCommon Stock.  The total number of sharesof capital stock which we are authorized to issue is 55,000,000.  The total number of shares of Preferred Stockwe are authorized to issue is 5,000,000, par value $0.001 per share.  The total number of shares of Common Stock weare authorized to issue is 50,000,000, par value $0.001 per share.  We had no Preferred Stock outstanding as of March 31,2005.  We had 23,213,212 shares of CommonStock outstanding as of March 31, 2005.

 

On January 31, 2005, theCompany closed the Merger described in Note 1. As a result of the Merger, all of the outstanding shares of the capitalstock of ACT were converted, on a pro rata basis, into the right to receive

 

11

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an aggregate of approximately18,000,000 shares of the Company’s Common Stock.  In addition, all outstanding options andwarrants to acquire shares of the capital stock of ACT were converted into theright to receive shares of the Company’s Common Stock, and the Company hasadopted the ACT stock option plans and all options granted thereunder.

 

On or about January 27, 2005,the Company issued 616,124 shares of its common stock and granted associatedwarrants to purchase 308,062 shares of common stock at a per share price of$1.27 to five holders of $500,000 aggregate principal amount of short-termpromissory notes, plus interest of $23,708 in exchange for and in retirement ofthe notes. The fair value of the warrants was estimated at $0, using the Black Scholes option pricing model. The assumptions used in theBlack Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 0%, (3) risk-free interestrate of 3.25%, and (4) expected life of 2 years.

 

On or about January 15, 2005,the Company issued 17,647 shares of common stock, valued at $15,000, inconsideration of accounting services provided to the Company.

 

During the period beginning January 3,2005 through January 31, 2005, ACT completed a preferred unit offering inwhich ACT sold 4,705,890 investment units to a group of accredited investors(within the meaning of Rule 501 of Regulation D) for total considerationof $8,000,000. ACT received gross cash proceeds of $7,910,600 and the balanceof $89,400 was for payment of non-Merger related legal fees.  The completion of the offering resulted inthe issuance of 9,411,788 shares of ACT’s Series APreferred Stock and associated warrants to purchase 4,705,890 shares of commonstock at a per share price of $1.27.  Inconsideration of services rendered in connection with the preferred unitoffering, ACT paid consultants to the preferred unit offering 469,247investment units, which resulted in the issuance by the Company of 469,247shares of Common Stock and associated warrants to purchase 234,629 shares ofcommon stock at a per share price of $1.27. All preferred shares issuedpursuant to the preferred offering were converted into common stock prior tothe Merger.

 

On December 30, 2004, ACTgranted warrants to purchase 1,833,260 shares of common stock at a per shareprice of $0.85 and warrants to purchase 1,291,615 shares of common stock at aper share price of $2.00. These warrants are exercisable on or after December 30,2005 and lapse if unexercised on December 30, 2014. The warrants weregranted as a portion of consideration for services provided in connection withthe Merger.  The recipients of thewarrants received other fair value consideration for services rendered, withwarrants providing incentive compensation, the value of which is not readilydeterminable or separable from the overall compensation arrangement; therefore,the Company has utilized a Black Scholes analysis asthe most readily determinable measure of value. The warrants have been valued at $0, using the Black Scholespricing model with the following assumptions: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 2.75%, and (4) expectedlife of 3 years. 

 

On December 13, 2004, ACTgranted warrants to purchase 1,954,000 shares of common stock at a per shareprice of $0.25. Of these warrants, 1,488,000 are exercisable on February 1,2006 and lapse if unexercised on December 13, 2014 and 546,000 areexercisable immediately upon issuance and lapse if unexercised on December 13,2006. The warrants were granted as a portion of consideration for servicesprovided.  The recipients of the warrantsreceived other fair value consideration for services rendered, with warrantsproviding incentive compensation, the value of which is not readilydeterminable or separable from the overall compensation arrangement; therefore,the Company has utilized a Black Scholes analysis asthe most readily determinable measure of value. The warrants have been valued at $0, using the Black Scholespricing model with the following assumptions: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 2.75%, and (4) expectedlife of 3 years.

 

On November 30, 2004, ACTgranted warrants to purchase 100,000 shares of common stock at a per shareprice of $0.25. The warrants are exercisable on or after April 1, 2005 andlapse if unexercised on April 1, 2010. The warrants were granted as aportion of severance in connection with the termination of an employment contract. The recipient received the warrants aspart of a negotiated settlement package, including other consideration, thevalue of which is not readily determinable or separable from the overall severancepackage; therefore, the Company has utilized a Black Scholesanalysis as the most readily determinable measure of value.  The warrants have been valued at $0, usingthe Black Scholes pricing model with the followingassumptions: (1) dividend yield of 0%; (2) expected volatility of 0%,(3) risk-free interest rate of 2.75%, and (4) expected life of 3years.

 

On November 26, 2004, ACTgranted warrants to purchase 250,000 shares of common stock at a per shareprice of $0.05. The warrants are exercisable immediately upon issuance andlapse if unexercised on November 26, 2006. The warrants were granted asconsideration for the early release of funds from escrow, related to thepreferred unit offering. The warrants have been valued at $983, using the BlackScholes pricing model with the following assumptions:(1) dividend yield of 0%; (2) expected volatility of 0%, (3) risk-freeinterest rate of 2.75%, and (4) expected life of 2 years.

 

12

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###### **8.**                          OPTIONS OUTSTANDING

###### ** **

**Stock Plans**

** **

On August 12, 2004, ACT’s Board of Directors approved the establishment of the2004 Stock Option Plan (the “*2004 Stock Plan*”),subject to approval by ACT’s stockholders on orbefore August 12, 2005. Stockholder approval was received on December 13,2004. The total number of common shares available for grant and issuance underthe plan may not exceed 2,800,000 shares, subject to adjustment in the event ofcertain recapitalizations, reorganizations and similar transactions.  Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by the Boardof Directors or a committee established by the Board of Directors.  At December 31, 2004, ACT had granted2,604,000 common share purchase options under the plan.

 

On December 13, 2004, ACT’s Board of Directors and stockholders approved theestablishment of the 2004 Stock Option Plan II (the “*2004 Stock Plan II*”). The total number of common sharesavailable for grant and issuance under the plan may not exceed 1,301,161shares, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. Common stock purchase options may be exercisable by the payment of cashor by other means as authorized by the Board of Directors or a committee establishedby the Board of Directors.  At December 31,2004, ACT had granted 1,301,161 common share purchase options under the plan.

 

On January 31, 2005, theCompany’s Board of Directors approved the establishment of the 2005 StockIncentive Plan (the “2005 Plan”), subject to approval of our shareholders.  The total number of common shares availablefor grant and issuance under the plan may not exceed 9 million shares, plus anannual increase on the fist day of each of the Company’s fiscal years beginningin 2006 equal to 5% of the number of shares of our common stock outstanding onthe last day of the immediately preceding fiscal year, subject to adjustment inthe event of certain recapitalizations, reorganizations and similartransactions.  Common stock purchaseoptions 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, 2005, wehad granted 7,808,335 common stock purchase options under the plan.

 

Pursuant to the 2005 Plan, on January 31,2005, we granted 7,273,335 common stock purchase options to our employees. Theoptions granted to employees have an exercise price of $0.85 per share and vestover periods not exceeding 4 years. The fair value of the options was estimatedat $385,472 for pro forma purposes using the Black Scholesoption pricing model. The assumptions used in the Black Scholesmodel are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 3.25%, and (4) expectedlife of 2 years.

 

Pursuant to the 2005 Plan, on January 31,2005, we granted 535,000 common stock purchase options to consultants. Theoptions have an exercise price of $0.85 per share and vest over periods notexceeding 4 years. The fair value of the options at the date of grant wasestimated at $28,354 using the Black Scholes optionpricing model. The assumptions used in the Black Scholesmodel are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 3.25%, and (4) expectedlife of 2 years. The fair value of the options will be expensed over thevesting period. During the three months ended March 31, 2005, $50,768 wasexpensed and $21,586 is deferred, based on the fair value as they vest. At March 31,2005, an addition $44,000 of expense was recognized based on the fair valueusing the Black Scholes option pricing model with thefollowing assumptions: (1) dividend yield of 0%; (2) expectedvolatility of 292%, (3) risk-free interest rate of 3.25%, and (4) expectedlife of 2 years

 

**Common ShareOptions and Warrants Issued**

 

The following table summarizesinformation on all common share purchase options and warrants of the Companyoutstanding as of March 31, 2005.

 
| ** **                                                         | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **Number**              | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| **Outstanding at beginning of the period**                         | ** ** | **10,034,036**          | ** ** | **$** | **0.51** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Option granted to employees and consultants during the  period** | ** ** | **7,808,335**           | ** ** | **0.85** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Warrants issued during the period**                              | ** ** | **5,248,581**           | ** ** | **1.27** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Exercise during the period**                                     | ** ** | **—**              | ** ** | **—** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Outstanding at end of the period**                               | ** ** | **23,090,952**          | ** ** | **0.80** | ** ** |
|                                                                    |            |                         |            |  |  |  |

 

###### **9.**                          COMMITMENTS ANDCONTINGENCIES

###### ** **

We are a party to a researchcollaboration agreement and license agreement with the University ofMassachusetts, as amended from time to time (the “UMassLicense”). Under the UMass License, we were grantedcertain exclusive rights to license and sublicense certain products andservices invented as part of the collaborative effort. The term of the UMass License extends to the later of the expiration of therelated patents or April 16, 2006. We are required to pay royalties ranging from 2.5% to 4.5% of net salesof licensed products and services, as defined. Minimum royalties of $45,000 per year must be paid to UMass.  For 2005 and2004, we have paid only the minimum royalty required. Additionally, we arerequired to pay

 

13

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sublicense fees of 18% for sublicenseincome, as defined. We are required to spend a minimum annual amount of$200,000 on research and development.

 

During 2004, we entered intolicense agreements with two parties, the terms of which provide for the initialpayment of the license fee through an aggregate of six promissory notestotaling $1,400,000. The notes mature as follows: $333,333 on December 1,2005; $666,667 on December 1, 2006; and $400,000 on June 1, 2007.There is no stated interest rate for $1,000,000 of notes, the remaining$400,000 bear interest at 10% per year, but only if the notes are not paid atmaturity. Because of the uncertainty of the ultimate collection of theprincipal amount of the notes, they have not been recorded in the financialstatements and will not be recorded until their collectibilityis reasonable assured.

 

We have entered into a lease forour office space commencing December 20, 2004 and expiring April 30,2010. Annual minimum lease payments are as follows:

 
| 2005 |   | $       | 218,346 |   |
|------|--------|---------|---------|--------|
| 2006 |   | 225,296 |    |
| 2007 |   | 232,246 |    |
| 2008 |   | 239,196 |    |
| 2009 |   | 246,146 |    |
| 2010 |   | 83,400  |    |

 

Rent expense recorded in thefinancial statements for the three month periods ended March 31, 2005 and2004 was $97,318 and $78,298, respectively.

 

We have entered into employmentcontracts with certain executives and research personnel. The contracts providefor salaries, bonuses and stock option grants, along with other employeebenefits. The employment contracts generally have no set term and can beterminated by either party. There is a provision for payments of three monthsto one year of annual salary as severance if we terminate a contract withoutcause, along with the acceleration of certain unvested stock option grants.Certain of the agreements provide for salary increases upon the closing of anequity funding of $10 million.

 

###### **10.**                   LEGAL PROCEEDINGS

 

**Geron****-Related Proceedings**

 

Campbell etal. v. Stice et al., Patent Interference Nos. 104,746and 105,192. These two interferenceproceedings were initiated January 30, 2002 at the request of Geron Corporation in an effort to obtain rights to U.S.Patent Nos. 5,945,577 and 6,235,970, which are licensed by the University ofMassachusetts exclusively to the Company. In both proceedings, the Board ofPatent Appeals and Interferences issued a decision adverse to the Company. Bothof these decisions are being challenged in proceedings described below. This proceedingand the two proceedings discussed immediately below are referred to as the “Geron-Related Proceedings.” Adverse determinations in thisproceeding would have a materially adverse effect on our business.

 

University of Massachusetts andAdvanced Cell Technology, Inc. v. RoslinInstitute (Edinburgh), Geron Corporation and ExeterLife Sciences, Inc., U.S. District Court for the District of Columbia. TheCompany filed an action on February 18, 2005 in the U.S. District Courtfor the District of Columbia. The Company brought this action under 35 U.S.C. 146 to reverse the decision of the Board of PatentAppeals and Interferences regarding a patent to a method of cloning non-humananimals. The patent, U.S. Patent No. 5,945,577, is licensed by theUniversity of Massachusetts exclusively to the Company. Defendants havereceived an extension until May 2, 2005 to answer or otherwise respond. Noother activities have taken place in this action. Adverse determinations inthis proceeding would have a materially adverse effect on our business.

 

University of Massachusetts andAdvanced Cell Technology, Inc. v. RoslinInstitute (Edinburgh), Geron Corporation and ExeterLife Sciences, Inc., U.S. District Court for the District of Columbia. TheCompany filed an action on April 7, 2005 in the U.S. District Court forthe District of Columbia. The Company brought this action under 35 U.S.C. 146 to reverse the decision of the Board of PatentAppeals and Interferences regarding a patent to a method of creating embryonicstem cells. The patent, U.S. Patent No. 6,235,970, is licensed by theUniversity of Massachusetts exclusively to the Company. Adverse determinationsin this proceeding would have a materially adverse effect on our business.

 

**Other LegalProceedings**

 

Gary D. Aronson and John Gorton v. A.C.T. Group, Inc., Advanced Cell Technology, Inc.,Michael D. West, and Gunnar L. Engstrom. Commonwealth ofMassachusetts Superior Court, Worcester. C.A. No. 040523B. This proceedingis a claim for breach of contract and failure to pay brought by two of theindividuals who hold Promissory Notes issued by ACT Group Inc., a Delawarecorporation (“ACT Group”). ACT is a named defendant in this proceeding. In April 2004,the court entered an order denying a request for a temporary restraining orderand preliminary injunction with respect to our subsidiary ACT. In its order,the Court stated that, based upon the record before the Court at that stage ofthe proceeding, ACT was “not legally responsible” for these ACT Groupobligations. In August 2004, the plaintiffs obtained a judgment againstACT Group for $690,040. The Company and certain officers and directors havebeen named as contemnors in a related contempt complaint seeking to enforce thejudgment against ACT Group. If ACT Group is unable to resolve this dispute onterms that are satisfactory to it and the Company, our business may bematerially adversely affected. Although our operations and those of ACT Groupare distinct and separate, with separate governance structures, and the twocompanies observe

 

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strict corporate formalities distinct to the respective entities, theplaintiffs in this action seek to pierce the corporate veil and hold usresponsible for ACT Group’s liabilities. To date, those claims have not beensuccessful. However, we cannot assure you that there will not be furtherattempts to pierce the corporate veil, or that they will be unsuccessful indoing so. If there are such future attempts, they could result in significantlegal expenses in defending such claims. Moreover, if the plaintiffs creditorsare successful in piercing the corporate veil and holding us responsible forthese ACT obligations, there will be a material adverse effect on our businessand operations. The Massachusetts Superior Court before which this proceedingis pending has entered an Order requiring all 6,811,146 shares of our stockheld by ACT Group be placed in escrow pending sale to satisfy this judgment.Although the Order specifies that the sale must be conducted in a commerciallyreasonable manner, we cannot assure you that the plaintiffs in this action willeffect the sale in a manner that will not have a materially adverse impact uponthe trading value of our stock.

 

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## **ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

## ** **

## **OVERVIEW**

## ** **

This Quarterly Report on Form 10-QSB contains 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” andvariations thereof, and other statements contained in quarterly report, and theexhibits hereto, regarding matters that are not historical facts and areforward-looking statements. Because these statements involve risks anduncertainties, as well as certain assumptions, actual results may differmaterially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results todiffer materially include, but are not limited to risks inherent in:  our early stage of development, including alack of operating history, lack of profitable operations and the need foradditional capital; the development and commercialization of largely novel andunproven technologies and products; our ability to protect, maintain, anddefend our intellectual property rights: uncertainties regarding our ability toobtain the capital resources needed to continue research and developmentoperations and to conduct research, preclinical development and clinical trialsnecessary for regulatory approvals; uncertainty regarding the outcome ofclinical trials and our overall ability to compete effectively in a highlycomplex, rapidly developing, capital intensive and competitive industry.  See *“*RISKFACTORS THAT MAY AFFECT OUR BUSINESS*”*set forth in Part I, Item 2 of this Quarterly Report on Form 10-QSBfor a more complete discussion of these factors.  Readers are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date that theyare made.  We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

## **The following discussionshould be read in conjunction with the consolidated financial statements andnotes thereto included in Part I, Item 1 of this quarterly report on Form 10-QSB.**

## ** **

## **We are a biotechnologycompany focused on developing and commercializing human stem cell technology inthe emerging fields of regenerative medicine and stem cell therapy as discussedin more detail in Part II, Item 5 “Other Information” of this QuarterlyReport on Form 10-QSB.**

## ** **

## **SIGNIFICANT ACCOUNTING POLICIES**

## ** **

## **Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses. Note1 of the Notes to Consolidated Financial Statements describes the significantaccounting policies used in the preparation of the consolidated financialstatements. Certain of these significant accounting policies are considered tobe critical accounting policies, as defined below. We do not believe that therehave been significant changes to our accounting policies during the threemonths ended March 31, 2005, as compared to those policies disclosed inthe December 31, 2004 financial statements filed in our Current Report on Form 8-K/Awith the SEC on April 18, 2005.**

## ** **

## **A critical accounting policyis defined as one that is both material to the presentation of our financialstatements and requires management to make difficult, subjective or complexjudgments that could have a material effect on our financial condition andresults of operations. Specifically, critical accounting estimates have thefollowing attributes: 1) we are required to make assumptions about matters thatare highly uncertain at the time of the estimate; and 2) different estimates wecould reasonably have used, or changes in the estimate that are reasonablylikely to occur, would have a material effect on our financial condition orresults of operations.**

## ** **

## **Estimates and assumptionsabout future events and their effects cannot be determined with certainty. Webase our estimates on historical experience and on various other assumptionsbelieved to be applicable and reasonable under the circumstances. Theseestimates may change as new events occur, as additional information is obtainedand as our operating environment changes. These changes have historically beenminor and have been**

 

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included in theconsolidated financial statements as soon as they became known. Based on acritical assessment of our accounting policies and the underlying judgments anduncertainties affecting the application of those policies, management believesthat our consolidated financial statements are fairly stated in accordance withaccounting principles generally accepted in the United States, and present ameaningful presentation of our financial condition and results of operations.We believe the following critical accounting policies reflect our moresignificant estimates and assumptions used in the preparation of ourconsolidated financial statements:

## ** **

***Use ofEstimates -***These financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States and, accordingly, require management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Specifically, our management has estimatedthe expected economic life and value of our licensed technology, our netoperating loss for tax purposes and our stock, option and warrant expensesrelated to compensation to employees and directors, consultants and investmentbanks.  Actual results could differ from those estimates.

 

***Fair Value ofFinancial Instruments -***For certain of our financial instruments,including accounts receivable, accounts payable, accrued expenses, interestpayable, bank overdraft, advances payable and notes payable, the carryingamounts approximate fair value due to their relatively short maturities.

 

***Cash andEquivalents -***Cash equivalents are comprised of certainhighly liquid investments with maturity of three months or less whenpurchased.  We maintain our cash in bank deposit accounts, which at times,may exceed federally insured limits.  We have not experienced any lossesin such account.

 

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

 

***RevenueRecognition -***Our revenues are generated from licenseand research agreements with collaborators. Licensing revenue is recognizedratably over the life of the license. Deferred revenue represents the portionof the license and other payments received that has not been earned. Costsassociated with the license revenue are deferred and recognized over the sameterm as the revenue. Reimbursements of research expense pursuant to grants arerecorded as a reduction of research and development expense once thereimbursements are approved and the Company is assured of collectibility.

 

***Intangibleand Long-Lived Assets -***We follow SFAS No. 144, “*Accounting for Impairment of Disposal of Long-LivedAssets*”, which established a “primary asset” approach to determinethe cash flow estimation period for a group of assets and liabilities thatrepresents the unit of accounting for a long lived asset to be held andused.  Long-lived assets to be held and used are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable.  The carrying amount of a long-livedasset is not recoverable if it exceeds the sum of the undiscounted cash flowsexpected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carryingamount or fair value less cost to sell.  During the periods ended March 31,2005 and December 31, 2004, no impairment losses were recognized.

 

***Research andDevelopment Costs -***Research and development costs consist ofexpenditures for the research and development of patents and technology, which arenot capitalizable. Our research and development costs consist mainly of payrolland payroll related expenses, research supplies and costs incurred inconnection with specific research grants.

 

***Stock Based Compensation -***SFAS No. 123, “*Accounting for Stock-Based Compensation*,”establishes and encourages the use of the fair value based method of accountingfor stock-based compensation arrangements under which compensation cost isdetermined using the fair value of stock-based compensation determined as ofthe date of the grant or the date at which the performance of the services iscompleted and is recognized over the periods in which the related services arerendered.  The statement also permits companies to elect to continue usingthe current intrinsic value accounting method specified in *APB*Opinion No. 25, “*Accounting for Stock Issued to Employees*,”to account for stock-based compensation to employees.  We have elected touse the intrinsic value based method for grants to our employees and directorsand have disclosed the pro forma effect of using the fair value based method toaccount for our stock-based compensation to employees.

 

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

 

## **RESULTS OF OPERATIONS**

## ** **

***Revenues***

 

Revenues for the three months ended March 31, 2005 and March 31,2004 were approximately $108,000 and $183,000, respectively. These amountsrelate primarily to license fees and royalties collected that are beingamortized over the period of the license granted. The reduction in revenue wasdue to decreased revenue levels from licensee operations.  We recognized no revenues from collaborationsduring either of the periods presented.

 

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

##### *** ***

Research and developmentexpenses for the three months ended March 31, 2005 and March 31, 2004remained relatively flat at approximately $277,000 and $294,000,respectively.  These amounts consistmainly of payroll and payroll related expenses, research supplies and costsincurred in connection with specific research grants.

 

Our research and development expenses consist primarily of costsassociated with basic and pre-clinical research exclusively in the field ofhuman stem cell therapies and regenerative medicine, with focus on developmentof our technologies in cellular reprogramming, reduced complexity applications,and stem cell differentiation. These expenses represent both pre-clinicaldevelopment costs and costs associated with non-clinical support activitiessuch as quality control and regulatory processes. The cost of our research anddevelopment personnel is the most significant category of expense; however, wealso incur expenses with third parties, including license agreements, sponsoredresearch programs and consulting expenses.

 

We do not segregate research and development costs by project becauseour research is focused exclusively on human stem cell therapies as a unitaryfield of study.  Although we have threeprincipal areas of focus for our research, these areas are completelyintertwined and have not yet matured to the point where they are separate anddistinct projects.  The intellectualproperty, scientists and other resources dedicated to these efforts are notseparately allocated to individual projects, but rather are conducting ourresearch on an integrated basis.

 

We expect that research and development expenses will continue toincrease in the foreseeable future as we add personnel, expand our pre-clinicalresearch, begin clinical trial activities, and increase our regulatorycompliance capabilities. The amount of these increases is difficult to predictdue to the uncertainty inherent in the timing and extent of progress in ourresearch programs, and initiation of clinical trials. In addition, the resultsfrom our basic research and pre-clinical trials, as well as the results oftrials of similar therapeutics under development by others, will influence the number,size and duration of planned and unplanned trials. As our research effortsmature, we will continue to review the direction of our research based on anassessment of the value of possible commercial applications emerging from theseefforts.  Based on this continuingreview, we expect to establish discrete research programs and evaluate the costand potential for cash inflows from commercializing products, partnering withothers in the biotechnology or pharmaceutical industry, or licensing the technologiesassociated with these programs to third parties.

 

We believe that it is not possible at this stage to provide ameaningful estimate of the total cost to complete our ongoing projects andbring any proposed products to market. The use of human embryonic stem cells asa therapy is an emerging area of medicine, and it is not known what clinicaltrials will be required by the FDA in order to gain marketing approval. Coststo complete could vary substantially depending upon the projects selected fordevelopment, the number of clinical trials required and the number of patientsneeded for each study. It is possible that the completion of these studiescould be delayed for a variety of reasons, including difficulties in enrollingpatients, delays in manufacturing, incomplete or inconsistent data from thepre-clinical or clinical trials, and difficulties evaluating the trial results.Any delay in completion of a trial would increase the cost of that trial, whichwould harm our results of operations. Due to these uncertainties, we cannotreasonably estimate the size, nature nor timing of the costs to complete, orthe amount or timing of the net cash inflows from our current activities. Untilwe obtain further relevant pre-clinical and clinical data, we will not be ableto estimate our future expenses related to these programs or when, if ever, andto what extent we will receive cash inflows from resulting products.

 

Grant reimbursements for the three months ended March 31, 2005 andMarch 31, 2004 were approximately $236,000 and $140,000, respectively.These amounts represent approved reimbursements pursuant to a scientific grantfrom the US National Institute of Standards and Technology that expires in2006. At March 31, 2005, ACT had approximately $1,100,000 of fundsavailable under the grant that can be used to reimburse future approvedresearch expenditures.  We will lose theavailability of any unused funds upon the expiration of the grant.

 

##### ***General and Administrative Expenses***

##### *** ***

General and administrative expenses for the three months ended March 31,2005 and March 31, 2004 were approximately $1,204,000 and $493,000,respectively.  The principal increase inexpense in the current period versus the same period last year is a result ofadditional salary costs related to the addition of key personnel, increasedprofessional fees related to ACT’s merger into a public company, increasedprofessional fees related to audits for the years ended December 31, 2004and 2003, and costs of preparing documents and records for various publicfilings with the Securities and Exchange Commission.

 

***Other Income (Expense)***

 

Other income (expense) for the three months ended March 31, 2005and March 31, 2004 were approximately $18,000 and ($49,000),respectively.  The increase in other incomewas due to the fact that the quarter ended March 31, 2005 includedinterest income of approximately $12,000 as a result of cash balances from ACT’srecently completed financing and a gain on settlement of debt of approximately$87,000 related to resolution of certain outstanding legal bills.  These amounts were partially offset byincreases in interest expense and late fees the three months ended March 31,2005 as compared to the three months ended March 31, 2004, primarily as aresult of past due amounts owed to professionals and other suppliers to ACT.

 

##### ***Net Loss***

##### *** ***

Net loss for the three months ended March 31, 2005 and March 31,2004 was approximately $1,164,000 and $581,000, respectively.  The increased loss in the quarter ended March 31,2005 is the result of increased general and administrative expenses, offset inpart by increased interest income and the gain on settlement of debt.

 

## ***Recent AccountingPronouncements***

## ** **

## **In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 153, “Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions.” The amendments made by Statement 153 are based onthe principle that exchanges of nonmonetary**

 

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assets should bemeasured based on the fair value of the assets exchanged.  Further, the amendments eliminate the narrowexception for nonmonetary exchanges of similar productive assets and replace itwith a broader exception for exchanges of nonmonetary assets that do not havecommercial substance.  Previously,Opinion 29 required that the accounting for an exchange of a productive assetfor a similar productive asset or an equivalent interest in the same or similarproductive asset should be based on the recorded amount of the assetrelinquished.  Opinion 29 provided anexception to its basic measurement principle (fair value) for exchanges ofsimilar productive assets.  The FASBbelieves that exception required that some nonmonetary exchanges, althoughcommercially substantive, be recorded on a carryover basis.  By focusing the exception on exchanges thatlack commercial substance, the FASB believes this statement produces financialreporting that more faithfully represents the economics of the transactions.  SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occurring in fiscal periods beginning after thedate of issuance.  The provisions of SFAS153 shall be applied prospectively.  TheCompany has evaluated the impact of the adoption of SFAS 153, and does notbelieve the impact will be significant to the Company’s overall results ofoperations or financial position.

## ** **

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment”.  SFAS 123(R) will provide investorsand other users of financial statements with more complete and neutralfinancial information by requiring that the compensation cost relating toshare-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liabilityinstruments issued.  SFAS 123(R) covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans.  SFAS 123(R) replaces FASB Statement No. 123, “Accountingfor Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees”. SFAS 123, as originally issued in 1995,established as preferable a fair-value-based method of accounting forshare-based payment transactions with employees.  However, that statementpermitted entities the option of continuing to apply the guidance in Opinion25, as long as the footnotes to financial statements disclosed what net incomewould have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will berequired to apply SFAS 123(R) as of the first interim or annual reportingperiod that begins after June 15, 2005. SFAS 123(R) is applicable for ACTeffective the first interim period that starts after December 15, 2005.The Company has evaluated the impact of the adoption of SFAS 123(R), andbelieves that the impact may be significant to the Company’s overall results ofoperations and financial position (a pro forma effect, as estimated bymanagement, is disclosed earlier in this note).

 

In December 2004, the FASB issued SFAS No. 152, “Accountingfor Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66and 67 (SFAS 152)”. The amendments made by Statement 152 amend FASB Statement No. 066,“Accounting for Sales of Real Estate”, to reference the financial accountingand reporting guidance for real estate time-sharing transactions that isprovided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real EstateTime-Sharing Transactions”. This Statement also amends FASB Statement No. 67,“Accounting for Costs and Initial Rental Operations of Real Estate Projects”,to state that the guidance for (1) incidental operations and (2) costsincurred to sell real estate projects does not apply to real estatetime-sharing transactions. The accounting for those operations and costs issubject to the guidance in SOP 04-2. This statement is effective for financialstatements for fiscal years beginning after June 15, 2005, with earlierapplication encouraged. The Company has evaluated the impact of the adoption ofSFAS 152, and does not believe the impact will be significant to the Company’soverall results of operations or financial position since the Company does notenter into such transactions.

 

In December 2004, the FASB issued two FASB StaffPositions—FSP FAS 109-1, Application of FASB Statement 109 “Accounting forIncome Taxes” to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004. Neither of these affected the Company as itdoes not participate in the related activities.

 

In November 2004, the FASB issued SFAS No. 151, “InventoryCosts, an amendment of ARB No. 43, Chapter 4”. The amendments made byStatement 151 clarify that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized as currentperiod charges and require the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities. Theguidance is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. Earlier application is permitted forinventory costs incurred during fiscal years beginning after November 23,2004. The Company has evaluated the impact of the adoption of SFAS 151, anddoes not believe the impact will be significant to the Company’s overallresults of operations or financial position since the Company currently doesnot have any manufacturing operations or inventory.

 

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In March 2004, the FASB approved the consensus reachedon the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”The objective of this Issue is to provide guidance for identifyingimpaired investments. EITF 03-1 also provides new disclosure requirements forinvestments that are deemed to be temporarily impaired. The accountingprovisions of EITF 03-1 are effective for all reporting periods beginning afterJune 15, 2004, while the disclosure requirements for certain investmentsare effective for annual periods ending after December 15, 2003, and forother investments such disclosure requirements are effective for annual periodsending after June 15, 2004.

 

In December 2003, the SEC issued Staff AccountingBulletin (“SAB”) No. 104 (“SAB No. 104”), “Revenue Recognition.” SAB No. 104supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SABNo. 104, which was effective upon issuance, rescinded certain guidancecontained in SAB No. 101 related to multiple element revenue arrangements,and replaced such guidance with that contained in EITF 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104rescinded the SEC’s Revenue Recognition in Financial Statements FrequentlyAsked Questions and Answers issued with SAB No. 101. The revenuerecognition principles of SAB No. 101 remain largely unchanged by theissuance of SAB No. 104, and therefore the adoption of SAB No. 104did not have a material effect on the Company’s results of operations orfinancial condition.

 

In January 2003, the FASB issued FASB Interpretation No. (“FIN”)46, “Consolidation of Variable Interest Entities” (“FIN 46”). In December 2003,FIN 46 was replaced by FASB interpretation No. 46(R) “Consolidation ofVariable Interest Entities.” FIN 46(R) clarifies the application of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements,” to certainentities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46(R) requires an enterprise to consolidate avariable interest entity if that enterprise will absorb a majority of theentity’s expected losses, is entitled to receive a majority of the entity’sexpected residual returns, or both. FIN 46(R) is effective for entities beingevaluated under FIN 46(R) for consolidation no later than the end of the firstreporting period that ends after March 15, 2004. The Company does notcurrently have any variable interest entities that will be impacted by adoptionof FIN 46(R).

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We are financing our operations primarilywith the proceeds of the sale of $8,000,000 of investment units, consisting of Series APreferred Stock and associated warrants, by our subsidiary, ACT, in January 2005,prior to the closing of the Merger.  To asubstantially lesser degree, financing of our operations is provided throughgrant funding, payments received under license agreements, and interest earnedon cash and cash equivalents.

 

With the exception of 2002, when we soldcertain assets of a subsidiary resulting in a gain for the year, we haveincurred substantial net losses each year since inception as a result ofresearch and development and general and administrative expenses in support ofour operations. We anticipate incurring substantial net losses in the future.

 

Cash, cash equivalents, and cash held inescrow at March 31, 2005 and December 31, 2004 were approximately$5,386,000 and $3,676,000, respectively. None of our cash was held in escrow at March 31, 2005.  The increase in the current period is theresult of closing the financing described above, net of amounts spent forpayment of notes and accounts payable, increased legal and accounting fees, andincreases in other general and administrative expenses.

 

At March 31, 2005 and December 31,2004, we had a note payable in the principal amount of $1,000,000 to ACT Group,and related accrued interest of approximately $327,000 and $297,000,respectively.  As an offset to theseamounts owed to ACT Group, we had a receivable at March 31, 2005 and December 31,2004 of approximately $587,000 and $394,000, respectively, primarily related toexpenses incurred by ACT on behalf of ACT Group for salaries, legal fees andother costs incurred.

 

Our future cash requirements will depend onmany factors, including the pace and scope of our research and developmentprograms, the costs involved in filing, prosecuting, maintaining and enforcingpatents and other costs associated with commercializing our potentialproducts.  However, we expect to requiresubstantial additional funding.  We intendto seek additional funding primarily through public or private financing transactions,and, to a lesser degree, new licensing or scientific collaborations, grantsfrom governmental or other institutions, and other related transactions.  If we are unable to raise additional funds,we will be forced to either scale back our business

 

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efforts or curtail our business activities entirely. We anticipate thatour available cash and expected income will be sufficient to finance most ofour current activities for at least twelve months from the date of thefinancial 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. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS*”* set forth in Part I, Item 2 of thisQuarterly Report on Form 10-QSB for a more complete discussion of thesefactors.

 

# **RISKFACTORS THAT MAY AFFECT OUR BUSINESS**

# ** **

*Our business is subject to various risks, included but not limited to those described below.  You should carefully consider these factors, together with all the other information disclosed in this Quarterly Report on Form 10-QSB.  Any of these risks could materially adversely affect our business, operating results and financial condition.*

 

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

 

***We have a limited operating history on which potential investors may evaluate our operations and prospects for profitable operations.*****We have a limited operating history on which a potential investor may base an evaluation of us and our prospects.  If we are unable to begin and sustain profitable operations, investors may lose their entire investment in us. We are in the development stage, and our prospects must be considered speculative in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly in light of the uncertainties relating to the new, competitive and rapidly evolving markets in which we anticipate we will operate. To attempt to address these risks, we must, among other things, further develop our technologies, products and services, successfully implement our research, development, marketing and commercialization strategies, respond to competitive developments and attract, retain and motivate qualified personnel. A substantial risk is involved in investing in us because, as a development stage company,

 

**•**                  we have fewer resources than an established company;

**•**                  our management may be more likely to make mistakes at such an early stage; and

**•**                  we may be more vulnerable operationally and financially to any mistakes that may be made, as well as to external factors beyond our control.

 

These difficulties are compounded by our heavy dependence on emerging and sometimes unproven technologies.  In addition, the fact that some of our significant potential revenue sources involve ethically sensitive and controversial issues which could become the subject of legislation or regulations that could materially restrict our operations and, therefore, harm our financial condition, operating results and prospects for bringing our investors a return on their investment.

 

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

 

We have nocommercially marketable products and no immediate ability to generate revenuefrom commercial products, nor any assurance of being able to develop ourtechnologies for commercial applications. As a result, we may never be able to operate profitably. We are justbeginning to identify products available for pre-clinical trials and may notreceive significant revenues from commercial sales of our products for the nextseveral years, if at all, although we do generate revenues from licensingactivities.  We have marketed only alimited amount of services based on our technologies and have little experiencein doing so. Our technologies and any potential products or services that wemay develop will require significant additional effort and investment prior tomaterial commercialization and, in the case of any biomedical products,pre-clinical and clinical testing and regulatory approvals.  We cannot assure you that we will be able todevelop any such technologies or any products or services, or that suchtechnologies, products or services will prove to be safe and efficacious inclinical trials, meet applicable regulatory standards, be capable of beingproduced in commercial quantities at acceptable costs or be successfully

 

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marketed.  For that reason, we may not be able togenerate revenues from commercial production or operate profitably.

 

We have sold the agricultural portion of our business in order to finance operations.  The agricultural applications of our technology generally have a more rapid realization of revenues due to more limited regulatory requirements and testing.  Our ability to generate revenue from any agricultural applications of our technology is limited to existing license royalties.

 

***We will require substantial additional funds to continue operating which may not be available on acceptable terms, if at all.*****We believe our cash from all sources (cash, cash equivalents and anticipated revenue stream from licensing fees and sponsored research contracts) is sufficient for the Company to continue as a going concern through March 31, 2006.  However, without substantial additional financing during this period, we will need to significantly limit our capital and operational spending and therefore be limited in our ability to advance our scientific efforts or further our efforts to operate profitably.

 

We are evaluatingalternatives and sources for additional funding, which may include public orprivate investors, strategic partners, and grant programs available throughspecific states or foundations. Lack of necessary funds may require us todelay, scale back or eliminate some or all of our research and productdevelopment programs and/or our capital expenditures or to license ourpotential products or technologies to third parties.

 

In addition, our cash requirements may vary materially from those now planned because of results of research and development, potential relationships with strategic partners, changes in the focus and direction of our research and development programs, competition, litigation required to protect our technology, technological advances, the cost of pre-clinical and clinical testing, the regulatory process of the United States Food and Drug Administration, or FDA, and foreign regulators, whether any of our products become approved or the market acceptance of any such products and other factors.  Our current cash reserves are not sufficient to fund our operations through the commercialization of our first products or services.

 

***We have limited clinical testing, regulatory, manufacturing, marketing, distribution and sales capabilities which may limit our ability to generate revenues.*****Because of the relatively early stage of our research and development programs, we have not yet invested significantly in clinical testing, regulatory, manufacturing, or in marketing, distribution or product sales resources. We cannot assure you that we will be able to develop any such resources successfully or as quickly as may be necessary. The inability to do so may harm our ability to generate revenues or operate profitably.

 

**Risks Relating to Our Technology**

 

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

 

***The outcome of pre-clinical, clinical and product testing of our products is uncertain, and if we are unable to satisfactorily complete such testing, or if such testing yields unsatisfactory results, we will be unable to commercially produce our proposed products. ***Before obtaining regulatory approvals for the commercial sale of any potential human products, our products will be subjected to extensive pre-clinical and clinical testing to demonstrate their safety and efficacy in humans.  We cannot assure you that the clinical trials of our products, or those of our licensees or collaborators, will demonstrate the safety and efficacy of such products at all, or to the extent necessary to obtain appropriate regulatory approvals, or that the testing of such products will be completed in a timely manner, if at all, or without significant increases in costs, program delays or both, all of which could harm our ability to generate revenues.  In addition, our prospective products may not prove to be more effective for treating disease or injury than current therapies. Accordingly, we may have to delay or abandon efforts to research, develop or obtain regulatory approval to market our prospective products. Many companies involved in biotechnology research

 

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and development have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and could harm our ability to generate revenues, operate profitably or produce any return on an investment in us.

 

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

 

***We may not be able to commercially develop our technologies and proposed product lines, which, in turn, would significantly harm our ability to earn revenues and result in a loss of investment.*****Our ability to commercially develop our technologies will be dictated in large part by forces outside our control which cannot be predicted, including, but not limited to, general economic conditions, the success of our research and pre-clinical and field testing, the availability of collaborative partners to finance our work in pursuing applications of nuclear transfer technology and technological or other developments in the biomedical field which, due to efficiencies, technological breakthroughs or greater acceptance in the biomedical industry, may render one or more areas of commercialization more attractive, obsolete or competitively unattractive. It is possible that one or more areas of commercialization will not be pursued at all if a collaborative partner or entity willing to fund research and development cannot be located.  Our decisions regarding the ultimate products and/or services we pursue could have a significant adverse affect on our ability to earn revenue if we misinterpret trends, underestimate development costs and/or pursue that wrong products or services. Any of these factors either alone or in concert could materially harm our ability to earn revenues and could result in a loss of any investment in us.

 

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

 

***We may not be able to protect our proprietary technology, which could harm our ability to operate profitably.*****The biotechnology and pharmaceutical industries place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend, to a substantial degree, on our ability to obtain and enforce patent protection for our products, preserve any trade secrets and operate without infringing the proprietary rights of others. We cannot assure you that:

 

**•**                  we will succeed in obtaining any patents, obtain them in a timely manner, or that the breadth or degree of protection that any such patents will protect our interests;

**•**                  the use of our technology will not infringe on the proprietary rights of others;

**•**                  patent applications relating to our potential products or technologies will result in the issuance of any patents or that, if issued, such patents will afford adequate protection to us or not be challenged, invalidated or infringed; or

**•**                  patents will not issue to other parties, which may be infringed by our potential products or technologies.

 

We are aware of certain patents that have been granted to others and certain patent applications that have been filed by others with respect to nuclear transfer technologies.  The fields in which we operate have been characterized by significant efforts by competitors to establish dominant or blocking patent rights to gain a competitive advantage, and by considerable differences of opinion as to the value and legal legitimacy of competitors’ purported patent rights and the technologies they actually utilize in their businesses.

 

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

 

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Certain of such licenses also contain restrictions (e.g., limitations on our ability to grant sublicenses)  that could materially interfere with our ability to generate revenue through the licensing or sale to third parties of important and valuable technologies that we have, for strategic reasons, elected not to pursue directly.  The possibility exists that in the future we will require further licenses to complete and/or commercialize our proposed products.  We cannot assure you that we will be able to acquire any such licenses on a commercially viable basis.

 

***Certain of our technology is not protectable by patent.*****Certain parts of our know-how and technology are not patentable. To protect our proprietary position in such know-how and technology, we intend to require all employees, consultants, advisors and collaborators to enter into confidentiality and invention ownership agreements with us.  We cannot assure you, however, that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, competitors who independently develop substantially equivalent technology may harm our business.

 

***We may not be able to adequately protect against piracy of intellectual property in foreign jurisdictions.*** Considerable research in the areas of stem cells, cell therapeutics and regenerative medicine is being performed in countries outside of the United States, and a number of our competitors are located in those countries.  The laws protecting intellectual property in some of those countries may not provide protection for our trade secrets and intellectual property adequate to prevent our competitors from misappropriating our trade secrets or intellectual property.  If our trade secrets or intellectual property are misappropriated in those countries, we may be without adequate remedies to address the issue.

 

**Risks Relating to Government Regulation**

 

***Companies such as ours engaged in research using nuclear transfer and embryonic stem cells are currently subject to strict government regulations, and our operations could be harmed by any legislative or administrative efforts impacting the use of nuclear transfer technology or human embryonic material.**** *Our business is focused on human cell therapy, which includes the production of human differentiated cells from stem cells and involves the use of nuclear transfer technology, human oocytes, and embryonic material.  Nuclear transfer technology, commonly known as therapeutic cloning, and research utilizing embryonic stem cells are controversial subjects, and are currently subject to intense scrutiny, both in the United States, the United Nations and throughout the world, particularly in the area of nuclear transfer of human cells and the use of human embryonic material.

 

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

 

***Restrictions on the use of humanembryonic stem cells, and the ethical, legal and social implications of thatresearch, could prevent us from developing or gaining acceptance forcommercially viable products in these areas.***  Some of our most important programsinvolve the use of stem cells that are derived from human embryos. The use ofhuman embryonic stem cells gives rise to ethical, legal and social issuesregarding the appropriate use of these cells. In the event that our researchrelated to human embryonic stem cells becomes the subject of adverse commentaryor publicity, the market price for our common stock could be significantlyharmed.  Some political and religious groups havevoiced opposition to our technology and practices. We use stem cells derivedfrom human embryos that have been created for in vitro fertilization proceduresbut are no longer desired or suitable for that use and are donated withappropriate informed consent for research use. Many research institutions,including some of our scientific collaborators, have adopted policies regardingthe ethical use of human embryonic tissue. These policies may have the effectof limiting the scope of research conducted using human embryonic stem cells,thereby impairing our ability to conduct research in this field.

** **

***Potential and actual legislation and regulation related to our technology could limit our activities and ability to develop products for commercial sales, depriving us of our anticipated source of future revenues.*****In July, 2001, the House of Representatives of the United States Congress passed a bill, HR 2505, the “Human Cloning Prohibition Act of 2001”.  This bill was placed on the calendar of the U.S. Senate in August 2002, where it did not pass.  However, similar bills could be introduced in the future aiming to prohibit the use or commercialization of somatic cell nuclear transfer technology or of any products resulting from it, including those related to human therapeutic

 

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cloning and regenerative medicine.  If passed, such a bill could have a significant influence on our ability to pursue our research, development and commercialization plans in the United States.

 

The Commonwealth ofMassachusetts House of Representatives and Senate have passed a bill, S.2039, “AnAct Relative to Enhancing Regenerative Medicine in the Commonwealth,” which hasbeen sent to the Governor of the Commonwealth for action.  The bill, among other things, permitsresearch and clinical applications involving the derivation and use of humanembryonic stem cells, including somatic cell nuclear transfer, human adult stemcells from any source, umbilical cord stem cells, parthenotes, and placentalcells; requires that all research involving the derivation human embryonic stemcells through the use human genetic material, including somatic cell nucleartransfer, and parthenogenesis or other asexual means be conducted only upon thewritten approval of a duly authorized Institutional Review Board (IRB); andprohibits the knowing purchase, sale or transfer of human embryos or gametesfor valuable consideration for research purposes.  The bill also directs the biomedical researchadvisory council created pursuant to the bill to investigate the feasibility ofpermitting companies’ such as ours whose stock is publicly traded to use analternative method of approval in lieu of the requirement of having to acquireIRB approval before conducting embryonic stem cell research.  If the bill becomes law, the biomedicalresearch advisory council will be required to report its findings andrecommendations (if any) by October 31, 2005.  If passed, this bill could have a significantinfluence on the Company’s ability to pursue its research, development andcommercialization plans in Massachusetts.

 

Any future oradditional government-imposed restrictions in these or other jurisdictions withrespect to use of embryos or human embryonic stem cells in research anddevelopment could have a material adverse effect on us, by, among other things:

 

**•**  harming ourability to establish critical partnerships and collaborations;

**•**  delaying orpreventing progress in our research and development;

**•**  limiting orpreventing the development, sale or use of our products; and

**•**  causing adecrease in the price of our stock.

 

***Because we or our collaborators must obtain regulatory approval tomarket our products in the United States and other countries, we cannot predictwhether or when we will be permitted to commercialize our products.***Federal, state and localgovernments in the United States and governments in other countries havesignificant regulations in place that 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 these regulations, our ability to earn revenues will be materially and negatively impacted.  The regulatory process, particularly in the biotechnology field, is uncertain, can take many years and requires the expenditure of substantial resources. Biological drugs and non-biological drugs are rigorously regulated. In particular, proposed human pharmaceutical therapeutic product candidates are subject to rigorous preclinical and clinical testing and other requirements by the FDA in the United States and similar health authorities in other countries in order to demonstrate safety and efficacy. We may never obtain regulatory approval to market our proposed products. For additional information about governmental regulations that will affect our planned and intended business operations, see “BUSINESS-*Government Regulation*” of Part II, Item 5 of this Quarterly Report on Form 10-QSB.

 

***Our products may not receive FDA approval, which would prevent us from commercially marketing our products and producing revenues.*****The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy 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 and varies substantially based upon the type, complexity and novelty of the proposed product. We cannot yet accurately predict when we might first submit any Investigational New Drug, or IND, application to the FDA, or whether any such IND application would be granted on a timely basis, if at all, nor can we assure you that we will successfully complete any clinical trials in connection with any such IND application. Further, we cannot yet accurately predict when we might first submit any product

 

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license application for FDA approval or whether any such product license application would be granted on a timely basis, if at all.  As a result, we cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue. For additional information about governmental regulations that will affect our planned and intended business operations, see “BUSINESS-*Government Regulation*” of Part II, Item 5 of this Quarterly Report on Form 10-QSB.

 

***For-profit entities may be prohibited from benefiting from grant funding***.  There has been much publicity about grant resources for stem cell research, including Proposition 71 in California. To date, California has not provided any funding related to research activities pursuant to this Proposition, and there is ongoing litigation in California that may delay, or prevent the sale of State bonds that would fund the activities contemplated by California voters.  In addition, rules and regulations related to any funding that may ultimately be provided, the type of entity that will be eligible for funding, the science to be funded, and funding details have not been finalized.  As a result of these uncertainties regarding Proposition 71, we cannot assure you that funding, if any, will be available to the Company, or any for-profit entity.

 

***The government maintains certain rights in technology that we developusing government grant money and we may lose the revenues from such technologyif we do not commercialize and utilize the technology pursuant to establishedgovernment guidelines***. Certain of our and our licensors’ research has been or isbeing funded in part by government grants. In connection with certain grants,the U.S. Government retains rights in the technology developed with thegrant. These rights could restrict our ability to fully capitalize upon thevalue of this research.

 

**Risks Relating to Competition**

 

***Our competition includes both public and private organizations and collaborations among academic institutions and large pharmaceutical companies, most of which have significantly greater experience and financial resources than we do.*****The biotechnology and pharmaceutical industries are characterized by intense competition. We compete against numerous companies, many of which have substantially greater financial and other resources than we have. Several such enterprises have initiated cell therapy research 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, have substantially greater resources and experience in our fields than we do, and are well situated to compete with us effectively.  Of course, any of the world’s largest pharmaceutical companies represents a significant actual or potential competitor with vastly greater resources than ours.

 

These companies hold licenses to genetic selection technologies and other technologies that are competitive with those of our technologies.  These and other competitive enterprises have devoted, and will continue to devote, substantial resources to the development of technologies and products in competition with us.

 

Private and public academic and research institutions also compete with us in the research and development of human therapeutic or agricultural products.  In the past several years, the pharmaceutical industry has selectively entered into collaborations with both public and private organizations to explore the possibilities that stem cell therapies may present for substantive breakthroughs in the fight against disease.

 

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

 

***The United States is encountering tremendous competition from many foreign countries that are providing an environment more attractive for stem cell research.***The governments of numerous foreign countries are investing in, providing facilities, personnel and legal environments intended to attract biotechnology companies and encourage stem cell research and development of stem cell-related technologies.

 

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These efforts by foreign countries may make it more difficult to effectively compete in our industry and may generate competitors with substantially greater resources than ours.

 

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

 

***We depend on our collaborators to help usdevelop and test our proposed products, and our ability to develop andcommercialize products may be impaired or delayed if collaborations areunsuccessful***.  Our strategy for the development, clinical testingand commercialization of our proposed products requires that we enter intocollaborations with corporate partners, licensors, licensees and others. We aredependent upon the subsequent success of these other parties in performingtheir respective responsibilities and the continued cooperation of ourpartners. Our collaborators may not cooperate with us or perform theirobligations under our agreements with them. We cannot control the amount andtiming of our collaborators’ resources that will be devoted to our research anddevelopment activities related to our collaborative agreements with them. Ourcollaborators may choose to pursue existing or alternative technologies inpreference to those being developed in collaboration with us.

 

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

 

**•**  designand conduct advanced clinical trials in the event that we reach clinicaltrials;

**•**  fundresearch and development activities with us;

**•**  payus fees upon the achievement of milestones; and

**•**  marketwith us any commercial products that result from our collaborations.

 

The development and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely manner or at all. In addition, our collaborators could terminate their agreements with us and we may not receive any development or milestone payments. If we do not achieve milestones set forth in the agreements, or if our collaborators breach or terminate their collaborative agreements with us, our business may be materially harmed.

 

***Our reliance on the activities of ournon-employee consultants, research institutions, and scientific contractors,whose activities are not wholly within our control, may lead to delays indevelopment of our proposed products***. We rely extensively upon and have relationships withscientific consultants at academic and other institutions, some of whom conductresearch at our request, and other consultants with expertise in clinicaldevelopment strategy or other matters. These consultants are not our employeesand may have commitments to, or consulting or advisory contracts with, otherentities that may limit their availability to us. We have limited control overthe activities of these consultants and, except as otherwise required by ourcollaboration and consulting agreements to the extent they exist, can expectonly limited amounts of their time to be dedicated to our activities.

 

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 third parties are unable orrefuse to contribute to projects on which we need their help, our ability togenerate advances in our technologies and develop our products could besignificantly harmed.

 

**Risks Relating to A.C.T. Group, Inc.**

 

***One of our largest shareholders is in financial distress which may harm our ability to conduct operations.*****One of**our largest shareholders, ACT Group, is facing insolvency.  Two of our three Board members also serve in similar positions at ACT Group.  Our Chairman, President and Chief Scientific Officer is the President of ACT Group.  Although our operations and those of ACT Group are distinct and separate, with separate governance structures, and the two companies observe strict corporate formalities distinct to the respective entities, there have been several attempts by the debt holders of ACT Group, via a legal complaint, to pierce the corporate veil and hold ACT responsible for ACT Group’s liabilities.  To date, those claims have not been successful.  However, we cannot assure you that there will not be further attempts by creditors of ACT Group to pierce the corporate veil, or that they will be unsuccessful in doing so.  If there are such future attempts, they could result in significant legal expenses in

 

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defending such claims.  Moreover, if ACT Group creditors are successful in piercing the corporate veil and holding us responsible for ACT Group debts, there will be a material adverse effect on our business and operations.

 

***ACT Group isinvolved in certain litigation proceedings, which, if not resolved on termssatisfactory to us, could adversely affect our business. ***ACT Group is involvedin litigation relating to a claim for breach of contract and failure to paybrought by two of the individuals who hold Promissory Notes issued by ACTGroup, as discussed in more detail in Part II, Item 1 “LEGAL PROCEEDINGS.”  The plaintiffs have obtained a judgment inthe amount of approximately $690,000. Our subsidiary, ACT, is a named defendant in this proceeding.  If ACT Group is unable to resolve thisdispute on terms that are satisfactory to it and ACT, our business may bematerially adversely affected.  TheMassachusetts Superior Court has entered an order requiring all shares of ourstock held by ACT Group be placed in escrow pending sale to satisfy thisjudgment.  Although the order specifiesthat the sale must be conducted in a commercially reasonable manner, we cannotassure you that the plaintiffs in this action will effect the sale in a mannerthat will not have a materially adverse impact upon the trading value of ourstock.  Other creditors of ACT Group havealso filed suit against ACT Group.  Wecannot assure you that these creditors will not also take action against thatcompany that could have a material adverse impact upon the trading value of ourstock due to the significant block of our stock held by ACT Group.

 

**General Risks Relating to Our Business**

 

***We may be subject tolitigation that will be costly to defend or pursue and uncertain in itsoutcome. ***Ourbusiness may bring us into conflict with our licensees, licensors, or otherswith whom we have contractual or other business relationships, or with ourcompetitors or others whose interests differ from ours. If we are unable toresolve those conflicts on terms that are satisfactory to all parties, we maybecome involved in litigation brought by or against us. That litigation is likelyto be expensive and may require a significant amount of management’s time andattention, at the expense of other aspects of our business. The outcome oflitigation is always uncertain, and in some cases could include judgmentsagainst us that require us to pay damages, enjoin us from certain activities,or otherwise affect our legal or contractual rights, which could have asignificant adverse effect on our business. Additional discussion regarding litigation in which the Company and/orACT is involved is contained in Part II, Item 1 “LEGAL PROCEEDINGS.”

 

***Patent litigation presents an ongoing threat to our business with respect to both outcomes and costs.*****We have previously been involved in patent interference litigation with Infigen, Inc., and are currently involved in two patent disputes with Geron Corporation, and it is possible that further litigation over patent matters with one or more competitors could arise. We could incur substantial litigation or interference costs in defending ourselves against suits brought against us or in suits in which we may assert our patents against others. If the outcome of any such litigation, including our current disputes with Geron Corporation, is unfavorable, our business would likely be materially adversely affected. To determine the priority of inventions, we may also have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial cost to us.  Without additional capital, we may not have the resources to adequately defend or pursue this litigation.

 

***We may not be able to obtain third-party patient reimbursement or favorable product pricing, which would reduce our ability to operate profitably.***Our ability to successfully commercialize certain of our proposed products in the human therapeutic field may depend to a significant degree on patient reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations. We cannot assure you that reimbursement in the United States or foreign countries will be available for any products we may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, our products with a consequent harm to our business. We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional regulations are overly onerous or expensive, or if health care related legislation makes our business more expensive or burdensome than originally anticipated, we may be forced to significantly downsize our business 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 to be significantlymore expensive to manufacture than most other drugs currently on the markettoday.  Our present manufacturingprocesses produce modest quantities of product intended for use in our ongoingresearch activities, and we have not developed processes, procedures andcapability to produce commercial volumes of product We hope to substantiallyreduce manufacturing costs through

 

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processimprovements, development of new science, increases in manufacturing scale andoutsourcing to experienced manufacturers. If we are not able to make these, orother improvements, and depending on the pricing of the product, our profitmargins may be significantly less than that of most drugs on the market today.In addition, we may not be able to charge a high enough price for any celltherapy product we develop, even if they are safe and effective, to make aprofit. If we are unable to realize significant profits from our potentialproduct candidates, our business would be materially harmed.

 

***To be successful, our proposed productsmust be accepted by the health care community, which can be very slow to adoptor unreceptive to new technologies and products***.  Our proposed productsand those developed by our collaborative partners, if approved for marketing,may not 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:

 

**•**  ourestablishment and demonstration to the medical community of the clinicalefficacy and safety of our proposed products;

**•**  ourability to create products that are superior to alternatives currently on themarket;

**•**  ourability to establish in the medical community the potential advantage of ourtreatments over alternative treatment methods; and

**•**  reimbursementpolicies of government and third-party payors.

 

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

 

***Our current source of revenues depends on the stability and performance of our sublicensees.***Our ability to collect royalties on product sales from our sublicensees will depend on the financial and operational success of the companies operating under a sublicense.  We have numerous licensees to third parties including Lifeline Cell Technology, Exeter Life Sciences and GTC Biotherapeutics, as well as others that hold licenses to our technology.  Revenues from those licensees will depend upon the financial and operational success of those third parties.  We cannot assure you that these licensees will be successful in obtaining requisite financing or in developing and successfully marketing their products.  These licensees may experience unanticipated obstacles including regulatory hurdles, and scientific or technical challenges, which could have the effect of reducing their ability to generate revenues and pay us royalties.

 

***We depend on key personnel for our continued operations and future success, and a loss of certain key personnel could significantly hinder our ability to move forward with our business plan.*****Because of the specialized nature of our business, we are highly dependent on our ability to identify, hire, train and retain highly qualified scientific and technical personnel 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 retaining qualified scientific personnel to perform research and development work is critical to our success. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities, and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. The failure to attract and retain such personnel or to develop such expertise would adversely affect our business.

 

***Our credibility as abusiness operating in the field of human embryonic stem cells is largelydependent upon the support of our Ethics Advisory Board.*****Because the use of human embryonic stemcells gives rise to ethical, legal and social issues, the Company consults withits Ethics Advisory Board on a regular basis. The Company’s Ethics Advisory Board is made up of highly qualifiedindividuals with expertise in the field of human embryonic stem cells.  We cannot assure you that these members willcontinue to serve on our Ethics Advisory Board, and the loss of any such membermay affect the credibility and effectiveness of the Board.  As a result, our business may be materiallyharmed in the event of any such loss.

 

***Our insurance policies may be inadequate and potentially expose us to unrecoverable risks.***  We have limited director and officer insurance and commercial insurance policies. Any significant insurance claims would have a

 

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material adverse effect on our business, financial condition and results of operations.  Insurance availability, coverage terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify, however, we may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain appropriate insurance coverage, and insurers may not respond as we intend to cover insurable events that may occur. We have observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.

 

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

 

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

 

***We need to improveour financial control procedures. ***Sincethe Merger, we have determined that there are serious deficiencies in theoperating effectiveness of our internal controls over financial reporting thatwe believe would collectively constitute significant deficiencies and materialweaknesses under standards established by the American Institute of CertifiedPublic Accountants, resulting in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements of the Company willnot be prevented or detected.

 

In our opinion, we have not established and did not maintain effectiveinternal control over financial reporting as of March 31, 2005.  We also believe that because of the effect ofthe material weakness we have identified, we have not maintained effectiveinternal control over financial reporting as of March 31, 2005, based oncriteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Companyhas taken initial remedial steps, and will continue its on-going evaluation ofinternal controls and expects to improve its internal controls over financialreporting as necessary to assure their effectiveness, but there can be noassurance that it will succeed or that other deficiencies will not beidentified.

 

***The Companypresently has members of management and other key employees located in variouslocations throughout the country which adds complexities to the operation ofthe business. ***Presently,the Company has members of management and other key employees located in bothCalifornia and Massachusetts, which adds complexities to the operation of ourbusiness.  The Company intends tomaintain its research facilities in Massachusetts and establish corporateoffices and an additional research facility in California.  The Company will likely incur significantcosts associated with maintaining multiple locations.

 

***We face risksrelated to compliance with corporate governance laws and financial reportingstandards***. The Sarbanes-Oxley Act of 2002, as well as related new rules andregulations implemented by the Securities and Exchange Commission and thePublic Company Accounting Oversight Board, required changes in the corporategovernance practices and financial reporting standards for public companies.These new laws, rules and regulations, including compliance with Section 404of the Sarbanes-Oxley Act of 2002 relating to internal control over financialreporting (“Section 404”), have materially increased our legal andfinancial compliance costs and made some activities more time-consuming andmore burdensome. Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat our management assess our internal control over financial reportingannually and include a report on its assessment in our annual report. Ourindependent registered public accounting firm is required to audit both thedesign and operating effectiveness of our internal controls and management’sassessment of the design and the operating effectiveness of its internalcontrols. As described below in Part I, Item 4 of this Quarterly Report onForm 10-QSB, there exist material weaknesses and deficiencies at this timein the Company’s internal controls. These weaknesses and deficiencies could have a material adverse effecton our business and operations.

 

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**Risks Relating to Our Common Stock**

 

***Stock prices for biotechnology companies havehistorically tended to be very volatile***.  Stock prices andtrading volumes for many biotechnology companies fluctuate widely for a numberof reasons, including but not limited to the following factors, some of whichmay be unrelated to their businesses or results of operations:

 

**•**                      clinicaltrial results;

**•**                      the amountof our cash resources and our ability to obtain additional funding;

**•**                      announcementsof research activities, business developments, technological innovations or newproducts by us or our competitors;

**•**                      enteringinto or terminating strategic relationships;

**•**                      changes ingovernment regulation;

**•**                      disputesconcerning patents or proprietary rights;

**•**                      changes inour revenues or expense levels;

**•**                      publicconcern regarding the safety, efficacy or other aspects of the products ormethodologies we are developing;

**•**                      reports bysecurities analysts;

**•**                      activitiesof various interest groups or organizations;

**•**                      mediacoverage; and

**•**                      status ofthe investment markets.

 

Thismarket volatility, as well as general domestic or international economic,market and political conditions, could materially and adversely affect themarket price of our common stock and the return on your investment.

 

***The sale or issuance of a substantialnumber of shares may adversely affect the market price for our commonstock. ***Sale of a substantial number of shares of our common stockin the public market, or the perception that such sales could occur, couldsignificantly and negatively affect the market price for our common stock.  We expect that we will likely issue asubstantial number of shares of our capital stock in financing transactions inorder to fund our operations and the growth of our business.  In addition, we have issued common stock tocertain parties, such as vendors and service providers, as payment for productsand services. Under these arrangements, we may agree to register the shares forresale soon after their issuance. We may also continue to pay for certain goodsand services with equity, which would dilute your interest in the Company.Also, sales of the shares issued in this manner could negatively affect themarket price of our stock.

 

***We do not intend to pay cash dividends onour common stock in the foreseeable future***.  Any payment of cashdividends will depend upon our financial condition, results of operations,capital requirements and other factors and will be at the discretion of theBoard of Directors. We do not anticipate paying cash dividends on our commonstock in the foreseeable future. Furthermore, we may incur additionalindebtedness that may severely restrict or prohibit the payment of dividends.

 

***Our securities arequoted on the OTC Bulletin Board, which may limit the liquidity and price ofour securities more than if our securities were quoted or listed on the NasdaqStock Market or a national exchang***e. Oursecurities are currently quoted on the OTC Bulletin Board, an NASD-sponsoredand operated inter-dealer automated quotation system for equity securities notincluded in the Nasdaq Stock Market. Quotation of our securities on the OTCBulletin Board may limit the liquidity and price of our securities more than ifour securities were quoted or listed on The Nasdaq Stock Market or a nationalexchange. Some investors may perceive our securities to be less attractivebecause they are traded in the over-the-counter market.  In addition, as an OTC Bulletin Board listedcompany, we do not attract the extensive analyst coverage that accompaniescompanies listed on Nasdaq or any other regional or national exchange. Further,institutional and other investors may have investment guidelines that restrictor prohibit investing in securities traded in the over-the-counter market. Thefactors may have an adverse impact on the trading and price of our securities.

 

***Our common stock issubject to “penny stock” regulations and restrictions on initial and secondarybroker-dealer sales***. The Securities and ExchangeCommission has adopted regulations which generally define “penny stock” to beany listed, trading equity security that has a market price less than $5.00 pershare or an exercise price of less than $5.00 per share, subject to certainexemptions.  Penny stocks are subject tocertain additional oversight and regulatory requirements.  Brokers and dealers affecting transactions inour Common Stock in many circumstances must obtain the written consent of acustomer prior to purchasing our Common Stock, must obtain information from thecustomer and must provide disclosures to the customer.  These requirements may restrict the abilityof broker-dealers

 

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to sell our Common Stock and may affect your ability to sell yourshares of our Common Stock in the secondary market.

 

## **ITEM 3. CONTROLS ANDPROCEDURES**

## ** **

(a) *Evaluationof disclosure controls and procedures.*  The Company’s management, with the participation of ourprincipal executive officer, has evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this Quarterly Report on Form 10-QSB.Based on such evaluation, due to the material weaknesses in our internalcontrols over financial reporting further described below, our principalexecutive officer has concluded that such disclosure controls and procedureswere not effective in providing reasonable assurance that information requiredto be disclosed by us in the reports we file or submitted by us under the ExchangeAct is recorded, processed, summarized and reported, within the time periodsspecified in the SEC’s rules and forms. The Company is therefore in the process of designing new disclosurecontrols and procedures to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported with the time periods specified inapplicable SEC rules and forms are effective.

 

(b) *Changes in internal controls*.  The Company’s management is responsiblefor establishing and maintaining adequate internal control over financialreporting.  Our internal control systemis intended to provide reasonable assurance to the Company’s management andboard of directors regarding the preparation and fair presentation of publishedfinancial statements.  The Company’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of March 31, 2005. In making its assessment ofinternal control over financial reporting, management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control — Integrated Framework.

 

Management’s assessment identified materialdeficiencies in the Company’s internal control over financial reporting.  These deficiencies include lack ofsegregation of duties, limited capability to interpret and apply United Statesgenerally accepted accounting principles, lack of adequate documentation of oursystem of internal controls, lack of formal accounting policy and proceduresand related documentation, deficiencies in our information technology systemsand lack of a formal budgeting process. We also have not yet instituted newinternal control processes related to our identified material weaknesses,significant deficiencies and deficiencies, as has been characteristic ofcompanies that have completed their review of internal controls and have had toreport on the effect or such review. Accordingly, our internal control overfinancial reporting may be subject to additional material weaknesses anddeficiencies that we have not identified. Management has determined that these significant deficiencies, in theaggregate, constituted a material weakness in the design and operation of theCompany’s internal controls in effect prior to March 31, 2005. Althoughthe Company hired a chief financial officer on April 1, 2005, the newcontrols this addition allowed were not in operation during the quarter ended March 31,2005.  As a result of the materialweaknesses described in the preceding paragraph, we believe that, as of March 31,2005, the Company’s internal control over financial reporting was not effectivebased on the COSO criteria.

 

# **PART II. OTHER INFORMATION**

# ** **

## **ITEM 1. LEGALPROCEEDINGS**

## ** **

Although this Part II,Item 1 of Form 10-QSB requires that a legal proceeding need only bereported in the Form 10-QSB filed for the quarter in which it first becamea reportable event and in subsequent quarters in which there have been materialdevelopments, in light of the Merger and the complete change of business by thesmall business issuer following the Merger, we have elected to providedisclosure relating to all material pending legal proceedings to which theCompany or ACT is a party.

 

**Geron-Related Proceedings**

 

Campbell et al. v. Stice et al., Patent Interference Nos. 104,746 and105,192.  These two interference proceedings wereinitiated January 30, 2002 at the request of Geron Corporation in aneffort to obtain rights to U.S. Patent Nos. 5,945,577 and 6,235,970, which arelicensed by the University of Massachusetts exclusively to the Company.  In both proceedings, the Board of PatentAppeals and Interferences issued a decision adverse to the Company.  Both of these decisions are being challengedin proceedings described below.  Thisproceeding and the two proceedings discussed immediately below are referred toas the “Geron-Related Proceedings.” Adverse determinations in this proceeding would have a materiallyadverse effect on our business.

 

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University of Massachusetts andAdvanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), GeronCorporation and Exeter Life Sciences, Inc., U.S.District Court for the District of Columbia. The Company filed an action on February 18, 2005 in the U.S.District Court for the District of Columbia. The Company brought this action under 35 U.S.C. 146 to reverse thedecision of the Board of Patent Appeals and Interferences regarding a patent toa method of cloning non-human animals. The patent, U.S. Patent No. 5,945,577, is licensed by theUniversity of Massachusetts exclusively to the Company.  Defendants have received an extension until May 2,2005 to answer or otherwise respond.  Noother activities have taken place in this action.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

University of Massachusetts andAdvanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), GeronCorporation and Exeter Life Sciences, Inc., U.S.District Court for the District of Columbia. The Company filed an action on April 7, 2005 in the U.S. DistrictCourt for the District of Columbia.  TheCompany brought this action under 35 U.S.C. 146 to reverse the decision of theBoard of Patent Appeals and Interferences regarding a patent to a method ofcreating embryonic stem cells.  Thepatent, U.S. Patent No. 6,235,970, is licensed by the University ofMassachusetts exclusively to the Company. Adverse determinations in this proceeding would have a materiallyadverse effect on our business.

 

***Other Legal Proceedings***

 

Gary D. Aronson and John Gorton v. A.C.T. Group, Inc., AdvancedCell Technology, Inc., Michael D. West, and Gunnar L. Engstrom. Commonwealth ofMassachusetts Superior Court. Worcester. C.A. No. 040523B.  This proceeding is a claim for breach ofcontract and failure to pay brought by two of the individuals who holdPromissory Notes issued by ACT Group. ACT is a named defendant in thisproceeding.  In April 2004, the courtentered an order denying a request for a temporary restraining order andpreliminary injunction with respect to our subsidiary ACT.  In its order, the Court stated that, basedupon the record before the Court at that stage of the proceeding, ACT, was “notlegally responsible” for these ACT Group obligations.  In August 2004, the plaintiffs obtaineda judgment against ACT Group for $690,040. The Company and certain of itsofficers and directors have been named as contemnors in a related contemptcomplaint seeking to enforce the judgment against ACT Group.  If ACT Group is unable to resolve thisdispute on terms that are satisfactory to it and the Company, our business maybe materially adversely affected. Although our operations and those of ACT Group are distinct andseparate, with separate governance structures, and the two companies observestrict corporate formalities distinct to the respective entities, theplaintiffs in this action seek to pierce the corporate veil and hold usresponsible for ACT Group’s liabilities. To date, those claims have not been successful.  However, we cannot assure you that there willnot be further attempts to pierce the corporate veil, or that they will beunsuccessful in doing so.  If there aresuch future attempts, they could result in significant legal expenses indefending such claims.  Moreover, if theplaintiffs creditors are successful in piercing the corporate veil and holdingus responsible for these ACT obligations, there will be a material adverseeffect on our business and operations. The Massachusetts Superior Court before which this proceeding is pendinghas entered an Order requiring all 6,811,146 shares of our stock held by ACTGroup be placed in escrow pending sale to satisfy this judgment.  Although the Order specifies that the salemust be conducted in a commercially reasonable manner, we cannot assure youthat the plaintiffs in this action will effect the sale in a manner that willnot have a materially adverse impact upon the trading value of our stock.

 

University of Massachusetts v. James M. Robl and Phillippe Collas, Massachusetts SuperiorCourt (Suffolk County).  The Universityof Massachusetts, referred to as UMass, filed a complaint on February 22,2004 in the Superior Court (Suffolk County) for the Commonwealth ofMassachusetts.  We are not a party tothis litigation; however, a decision adverse to UMass in this litigation couldhave a materially adverse effect on the Company’s business.  The complaint alleges the misappropriation bythe defendants of valuable inventions in the fields of animal cloning and cellreprogramming, made by the defendants at UMass and with UMass support, that areexclusively licensed to ACT by UMass. The complaint includes counts for declaratory judgment, breach ofcontract seeking specific performance, injunctive relief and damages,intentional interference with contract and prospective contractual relations,conversion, breach of duty, and breach of the covenant of good faith and fairdealing.  ACT has been cooperating withUMass in connection with the prosecution and possible settlement of thislitigation.

 

William A. Brandt, Jr. as Assignee for the Benefit of theCreditors of Avian Farms, Inc. v. Advanced Cell Technology, Inc. andA.C.T. Group, Inc.  U.S. DistrictCourt for the District of Massachusetts, C.A. No. 01-40227-NMG.  Plaintiff brought suit on December 3,2001 in U.S. District Court in Worcester, Massachusetts

 

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alleging that ACT Group and ACT defaulted on two promissory notestotaling $2,787,000.  Plaintiff soughtthat amount plus interest and legal fees. ACT Group and ACT filed an answer in which they disputed the amount due.  ACT Group and ACT also brought counterclaimsin which they sought compensation for travel expenses and legal fees owed toACT.  ACT paid its note in full in July of2002.  Following the parties’notification to the court that they had reached tentative settlement, the casewas dismissed on August 16, 2004 without prejudice to the right of anyparty to move to re-open the case within 60 days if settlement could not beformalized.  The parties never reachedsettlement and none of the parties moved to re-open the case.  On or about January 11, 2005, Brandtassigned Avian Farms’ rights to Highview Associates.  Although our operations and those of ACTGroup are distinct and separate, with separate governance structures, and thetwo companies observe strict corporate formalities distinct to the respective entities,there have been several attempts by the debt holders of ACT Group, via a legalcomplaint, to pierce the corporate veil and hold us responsible for ACT Group’sliabilities.  To date, those claims havenot been successful.  However, we cannotassure you that there will not be further attempts by creditors of ACT Group topierce the corporate veil, or that they will be unsuccessful in doing so.  If there are such future attempts, they couldresult in significant legal expenses in defending such claims.  Moreover, if ACT Group creditors are successfulin piercing the corporate veil and holding us responsible for ACT Group debts,there will be a material adverse effect on our business and operations.

 

## **ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

## ** **

Although this Part II, Item 2 of Form 10-QSB requires thatthe small business issuer need only report unregistered sales of equitysecurities during the period covered by the report, in light of the Merger andthe complete change of business by the small business issuer following theMerger, we have elected to disclose all unregistered sales of equity securitiesduring the previous three years.  For theportion of the three year period prior to the consummation of the Merger on January 31,2005, the disclosure set forth below relates to unregistered sales of equitysecurities by ACT.  For the period January 31,2005 through March 31, 2005, the disclosure set forth below relates tounregistered sales of equity securities by the Company.  The issuances of the equity securities describedbelow were made in reliance upon the exemption from registration under Section 4(2) ofthe Securities Act of 1933, as amended (the “Securities Act”), relating tosales by an issuer not involving a public offering, and/or pursuant to therequirements of one or more of the safe harbors provided in Regulation D underthe Securities Act or, in the case of equity compensation to employees,directors and eligible consultants, Rule 701 therewith.

 

On January 31, 2005, the Company’s Board of Directors approved theestablishment of the 2005 Stock Incentive Plan (the “2005 Plan”), subject toapproval of our shareholders.  The Boardapproved stock option grants to employees and consultants totaling 7,808,335under the 2005 Plan.  These grantsincluded 7,273,335 awarded to employees and 535,000 awarded to consultants.

 

On January 31, 2005, the Company closed the Merger.  The Company filed a Form 8-K on February 4,2005 reporting that it had completed the Merger transaction and the followingissuances of unregistered securities in connection therewith.  As a result of the Merger, all of theoutstanding shares of the capital stock of ACT were converted, on a pro ratabasis, into the right to receive an aggregate of approximately 18,000,000shares of the Company’s Common Stock.  Inaddition, all outstanding options and warrants to acquire shares of the capitalstock of ACT were converted into the right to receive shares of the Company’sCommon Stock, and the Company has assumed the ACT 2004 Stock Option Plan andthe ACT 2004 Stock Option Plan II and all options granted thereunder.

 

On or about January 27, 2005, ACT issued 616,124 shares of itscommon stock and granted associated warrants to purchase 308,062 shares ofcommon stock at a per share price of $1.27 to five holders of $500,000aggregate principal amount of short-term promissory notes, plus interest of$23,708 in exchange for and in retirement of the notes.  The issuance of the notes is described below.

 

On or about January 15, 2005, ACT issued 17,647 shares of commonstock to Robert Scherne in consideration of accounting services provided toACT.

 

During the period January 3, 2005 through January 31, 2005,ACT completed a preferred unit offering in which ACT sold 4,705,890 investmentunits to a group of accredited investors (within the meaning of Rule 501of Regulation D) for total consideration of $8,000,000.  The completion of the offering resulted inthe issuance of 9,411,788 shares of its Series A Preferred Stock andassociated warrants to purchase 4,705,890 shares of common

 

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stock at a pershare price of $1.27.  In considerationof services rendered in connection with the preferred unit offering, ACT paidconsultants to the preferred unit offering 469,247 investment units, whichresulted in the issuance by ACT of 469,247 shares of Series A PreferredStock and associated warrants to purchase 234,629 shares of common stock at aper share price of $1.27.

 

On December 30, 2004, the Company issued 1,291,615 warrants toconsultants and employees with an exercise price of $2.00 per share, and1,833,260 cashless warrants with an exercise price of $0.85, as reported in theCompany’s Form 8-K filed February 4, 2005.  All of these warrants are exercisable for aperiod of 10 years, enjoy “piggy-back” registration rights and may not beexercised for a period of twelve months from the date of issuance.

 

On December 13, 2004, ACT’s Board of Directors and stockholdersapproved the establishment of the 2004 Stock Plan II. The total number ofcommon shares available for grant and issuance under the plan may not exceed1,301,161 shares, subject to adjustment in the event of certainrecapitalizations, reorganizations and similar transactions.  Common stock purchase options may be exercisableby the payment of cash or by other means as authorized by the committee or theBoard of Directors or a committee established by the Board of Directors.  As of December 31, 2004, ACT had granted1,301,161 common stock purchase options under the plan to certain employees andconsultants of ACT.

 

On December 13, 2004, ACT granted warrants to certain employeesand consultants to purchase 1,954,000 shares of common stock at a price of$0.25 per share in consideration for consulting services provided to ACT.

 

On November 30, 2004, ACT granted warrants to purchase 100,000shares of common stock at a per share price of $0.25 to a former executive ofthe Company in connection with the termination of his employment contract.  The warrants are exercisable on or after April 1,2005 and lapse if unexercised on April 1, 2010.

 

On November 26, 2004, ACT granted to Andwell, LLC warrants topurchase 250,000 shares of common stock at a per share price of $0.05 inconnection with the early release of $500,000 of escrowed funds from the ACTpreferred unit offering escrow account. The warrants are exercisableimmediately upon issuance and lapse if unexercised on November 26, 2006.

 

During the period August 2004 through October 2004, ACTissued promissory notes aggregating $500,000 face value to certain accreditedinvestors (within the meaning of Rule 501 of Regulation D) for cashproceeds of $450,000 and the assumption of $50,000 of debt owed by ACT Group toone of its creditors.  The notes wereconvertible at the option of the holder into shares of ACT’s capital stock soldin a subsequent financing, at an amount equal to the lowest per share sellingprice of shares of that stock issued in such financing.  As described above, these notes wereconverted into ACT common stock and warrants on January 27, 2005.  As additional consideration for the purchaseof the notes, ACT granted to the note holders warrants entitling them topurchase 700,000 common shares at an exercise price of $0.05. Warrants for300,000 shares were exercisable immediately upon issuance and expire two yearsfrom the date of issue.  Warrants for400,000 shares are exercisable on or after February 1, 2006 and expire February 1,2008.

 

On August 12, 2004, ACT’s Board of Directors approved theestablishment of the 2004 Stock Plan, subject to approval by our stockholderson or before August 12, 2005. Stockholder approval was received on December 13,2004. The total number of common shares available for grant and issuance underthe plan may not exceed 2,800,000 shares, subject to adjustment in the event ofcertain recapitalizations, reorganizations and similar transactions.  Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by thecommittee or the Board of Directors or a committee established by the Board ofDirectors.  At December 31, 2004, wehad granted 2,604,000 common share purchase options under the plan.

 

On September 27, 2003, ACT issued 2,596,967 shares of its commonstock to its majority stockholder pursuant to the cashless exercise of3,051,738 options.

 

On April 1, 2003, ACT issued 73,263 shares of its common stock tothe University of Massachusetts in consideration for a license to certainintellectual property.

 

On or about February 1, 2002, ACT issued 284,000 shares of itscommon stock to the University of Massachusetts in consideration for a licenseto certain intellectual property.

 

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## **ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

## ** **

None.

 

## **ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

## ** **

None.

 

## **ITEM 5. OTHERINFORMATION**

## ** **

Please refer to the information set forth under the heading “RECENTDEVELOPMENTS OF SMALL BUSINESS ISSUER” on page 1 of this Quarterly Reporton Form 10-QSB for an explanation as to the purposes behind the followingdisclosure.  None of the informationcontained herein was required to be reported on a Current Report of Form 8-Kfor the period covered by this Quarterly Report on Form 10-QSB.

 

**BUSINESS**

 

***Overview.*** We are a biotechnology company focused on developing and commercializing human stem cell technology in the emerging field of regenerative medicine.

 

We have developed and maintain a portfolio of patents and patent applications that form the proprietary base for our research and development efforts in the area of embryonic stem cell research.  We believe that our intellectual property represents one of the strongest portfolios in the field.  We employ a team including some of the world’s leading scientists in the field of stem cell research and development.  We believe our technology base, in combination with our know-how, provides a competitive advantage and will facilitate the successful development and commercialization of products for use in treatment of a wide array of chronic degenerative diseases and in regenerative repair of acute disease, such as trauma, infarction and burns.

 

Our belief that our intellectual property represents one of the strongest portfolios in the field is supported by (i) the size, date and pace of filing, and focus of the portfolio, (ii) the relative immaturity of this field of study, and (iii) the limited number of truly competitive portfolios of intellectual property.

** **

Regenerative medicine is a new and emerging field of study involving development of medical therapies based on advances in stem cell and nuclear transfer technology. We have developed and maintain a broad portfolio with ownership or exclusive licensing of over 30 issued patents and over 280 patent applications in the field of regenerative medicine and related technologies.  This significant volume of patents and patent licenses has been developed in the short span of approximately the past seven years.

** **

Although we have strong competitors in this field (See “BUSINESS — Competition” at page 42 of this Form 10-QSB), there are a limited number of companies operating in this field.  We believe our intellectual property portfolio compares favorably with those of our competition based upon its size, focus and filing dates.

 

With respect to the focus of our portfolio, we believe that somatic cell nuclear transfer and chromatin transfer are, and will prove to be, one of the technological keys to successful development of stem cell therapies.  See “BUSINESS — Cellular Reprogramming” on page 38 of this Form 10-QSB.  Our patent rights include one of only two core patent estates supporting somatic cell nuclear transfer technology and chromatin transfer technology.  We believe that only one other known patent estate, held by Roslin Institute, derived from the cloning of Dolly, the first cloned sheep, is comparable to ours.  However, in contrast with Roslin, we own or have license to numerous other technologies for dealing with transplant rejection including: means of activating oocytes during nuclear transfer, parthenogenesis, transdifferentiation, and dedifferentiation.  Our intellectual property also includes patent rights and applications for specific applications of stem cell technology in producing retinal pigment epithelium, hemangioblasts, and dermal cells, and on numerous methods and compositions for the use of these technologies and derived cells in heart disease, immunodeficiency estates and cancer.

 

This is a young and emerging field.  There can be no assurances that our intellectual property portfolio will ultimately produce viable commercialized products and processes; however, at this early stage of development, our intellectual property and science team are well-recognized leaders in the field.  See “RISK FACTORS — Risks Relating to Our Technology” on page 22 of this Form 10-QSB.

 

All of the Company’s research efforts to date are at the level of basic research or in the pre-clinical stage of development. The Company is focused on leveraging its key assets, including its intellectual property, its scientific team, its facilities and its capital, to accelerate the advancement of its stem cell technologies.  In addition, we are pursuing strategic collaborations with members of academia, industry and foundations to further accelerate the pace of our research efforts.  The Company is currently headquartered in Worcester, Massachusetts.  The Company intends to establish a research facility in California, where voters passed Proposition 71 in November 2004.

 

***The Field of Regenerative Medicine.***  The emerging field of treatment called “regenerative medicine” or “cell therapy,”  refers to treatments that are founded on the concept of producing new cells to replace malfunctioning or damaged cells as a vehicle to treat disease and injury.  Our focus is the development of effective methods to generate replacement cells from stem cells.  Many significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in the body.  This is especially true of diseases associated with aging such as Alzheimer’s disease, Parkinson’s disease, type II diabetes, heart failure, osteoarthritis, and aging of the immune system, known as immunosencence.  This is also true for medical conditions resulting from damage to cells due to acute disease, such as trauma, infarction and burns.  We believe that replacing damaged or malfunctioning cells with fully functional ones may be a useful therapeutic strategy in treating many of these diseases and conditions.

 

A stem cell is a cell that has the ability to branch out and change, ordifferentiate, into two or more different cell types. Stem cells areself-renewing primitive cells that have the ability to develop into functional,differentiated cells. In general, there are two broad categories of stem cells:adult stem cells and embryonic stem cells. Adult stem cells are derived from various tissues in the human body.Because they can branch out into many different cell types, they are referredto as “multipotent.”  Multipotent meansthese cells develop into multiple, but not all, types of cells in thebody.  Embryonic stem cells, referred toas ES cells, which are derived from pre-implantation embryos, are uniquebecause they are “pluripotent,” which means that they can develop into allcells and tissues in the body, and they self-renew indefinitely in theirundifferentiated state.  The ability ofES cells to divide indefinitely in the undifferentiated state without losingpluripotency is a unique characteristic that distinguishes them from all otherstem cells discovered to date in humans. Because of the potential of ES cells, one of our primary efforts is thedevelopment and commercialization of ES cell based technologies.

 

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Since the discovery of the human ES cell, medical researchers worldwidehave generally recognized the significance of this new technology and havebegun to focus research on the translation of this discovery into important newtherapies.  Specifically, researchershave focused on several key challenges including:

 

**•**                  isolating and purifying celllines;

**•**                  growing stable cell lines inculture for long periods without mutations;

**•**                  manufacturing cell lines innumbers sufficient for therapy;

**•**                  differentiating ES cellsinto all of the cell types desired for therapies; and

**•**                  solving the potentialrejection of ES cells used in therapies due to immuno-incompatibility with thepatient.

 

We believe that solving the potential rejection of ES cells in patientsis the greatest scientific obstacle to developing successful therapeutics.  Our research and technologies are focused onsolving this obstacle by creating stem cell therapeutics with compatibletissues. Compatible tissues are referred to as being histocompatible.

 

We believe the potential markets for regenerative medicine and stem cell therapy are large.  The table below summarizes the potential United States patient populations which we believe may be amenable to cell or organ transplantation and represent target markets for products generated through our regenerative medicine technology.

 

**Potential U.S. Patient Populations for Cell-Based Therapies**

 

| **Medical Condition**    | ** ** | **Number of Patients*** | ** **        |
|--------------------------|------------|-------------------------|-------------------|
|                     |       |                    |              |
| Cardiovascular disease   |       |                    | 70 million        |   |
| Autoimmune disease       |       |                    | 50 million        |   |
| Diabetes                 |       |                    | 18 million        |   |
| Osteoporosis             |       |                    | 10 million        |   |
| Cancer                   |       |                    | 10 million        |   |
| Alzheimer’s disease |       |                    | 4.5 million       |   |
| Parkinson’s disease |       |                    | 1 million         |   |
| Burns (severe)           |       |                    | 1.1 million       |   |
| Spinal-cord injuries     |       |                    | 0.25 million      |   |
| Birth defects            |       |                    | 0.15 million/year |   |

 

----

* These estimates are based on the most current patient estimates published by the following organizations as of April 2005: the American Heart Association, the American Autoimmune Related Diseases Association, SEER (Surveillance, Epidemiology and End Result), American Burn Association, March of Dimes, the Alzheimer’s Association, the Alzheimer’s Disease Education & Referral Center (National Institute on Aging), the National Institutes of Health’s National Institute on Neurological Disorders and Stroke, the Foundation for Spinal Cord Injury Prevention, Care & Cure, the Centers for Disease Control and Prevention, the American Association of Diabetes Educators, the Northwest Parkinson’s Foundation and the Parkinson’s Action Network.

 

***Our Technology.**** *Theability to produce embryonic stem cells that are immunologically compatiblewith the patient is the hallmark and the strength of our technologyplatform.  We believe our technologyplatform will enable the transformation of a patient’s cells into an embryonicstate where those cells can be differentiated into specific therapeuticallyrelevant cell types that are genetically identical to the patient. We believeour technology may also enable the production of stem cell lines, from sourcesexternal to the patient, that have a sufficiently high level ofhistocompatibility to be useful in making cell therapies readily accessible toa large segment of the patient population, without the need for exact geneticmatching of tissues. As a result, our technology avoids reliance on more limitedapproaches that involve use of cell lines that are not histocompatible with therecipient, or therapies based upon use of adult stem cells.

 

In August 2001, the President of the United States setguidelines for federal funding of research on embryonic stem cells from humanembryos created by in-vitro fertilization (IVF)*.*  IVF-ES cells have the drawback that they arenot genetically matched to the recipient patient.  These ES cells are allogeneic.  The word allogeneic literally means “otherDNA type.”  Therapies using allogeneiccell lines can result in immune system incompatibilities where the host immunesystem attacks and rejects the transplanted cells or the transplanted cellsattack the host.  These incompatibilitiesmay be partially suppressed with powerful immunosuppressive drugs, but the sideeffects can be severe and result in life-threatening complications.  As a result, these incompatibilities willgenerate significant inefficiencies in the application of cell therapies.

 

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Our approach also differs from that of technologies limitedto use of adult stem cells.  Theprincipal drawbacks to therapies based exclusively on use of adult stem cellsare that these cells are neither pluripotent, nor “youthful.”  Adult stem cells are multipotent, which meansthat, unlike our pluripotent stem cells, they cannot be differentiated into allcell types of the human body.  Theirusefulness is inherently limited in this regard.  With respect to their lack of “youthful”characteristics, adult stem cells are intrinsically mortal.  Cellular aging is caused by shorteningtelomeres, which are the ends of chromosomes. ES cells are immortal, telomerase positive cells.  Through nuclear transfer, we have beensuccessful in regenerating cell lifespan through the reactivation oftelomerase, an enzyme concerned with the formation, maintenance and renovationof telomeres.

 

The strategic focus of our technology is toproduce cell lines that are both histocompatible with the patient andpluripotent.  We have numerousproprietary technologies that we believe will generate histocompatible,pluripotent stem cells for patient-specific application.  These cells maximize the potential foreffective use as transplants to replace diseased or destroyed cells in humanpatients.  If successfully developed, ourcellular reprogramming technologies will make it possible to produce cells thathave the proliferative capacity of young cells, have specific therapeuticapplication, and are immunologically compatible with the patient.

 

All of our technologies are at the level ofbasic research or in the pre-clinical stage of development.

 

***Our ResearchPrograms. ***Ourresearch programs are divided into three core categories: cellularreprogramming, our reduced complexity program, and stem celldifferentiation.  Each of these coreareas of focus are discussed below.

 

**Cellular Reprogramming.**  This research program involves development oftherapies based on the use of genetically identical pluripotent stem cellsgenerated by our cellular reprogramming technologies.  These technologies can be used to generatepatient-specific pluripotent cells and tissues for transplantation.  We believe our technology platform willenable the transformation of a patient’s cell into pluripotent ES cells thatare histocompatible with the patient and have the potential to bedifferentiated into any of the over 200 different human cell types that may betherapeutically relevant in treating diseased or destroyed tissues in human patients.  We expect that our cellular reprogrammingtechnologies will offer a new avenue for the introduction of targeted geneticmodifications in cells and for the regeneration of cell lifespan, therebymaking youthful cells available for aging patients.  The combination of these advances, theability to produce young cells of certain kinds that are histocompatible withthe patient, is a core potential application of our technology. We believethese cellular reprogramming technologies will be effective therapies wherethere is time to prepare customized therapy through reprogramming of thepatient’s own cells.

 

Some of the technologies that support ourCellular Reprogramming are somatic cell nuclear transfer and chromatin transferand fusion technologies.

 

Somatic cell nuclear transfer, referred to as SCNT, refers to theprocess wherein a body cell is transferred to an egg cell from which thenuclear DNA has been removed.  Thisresults in the body cell being “reprogrammed” by the egg cell.  This reprogramming transforms the cell fromthe type of cell it was, for instance a skin cell, into an embryonic cell withthe power to become any cell type in the body. A related technology is called chromatin transfer.  Through this technology, the DNA and attachedproteins, or chromatin, of the somatic cell is reprogrammed prior to transferinto an egg cell.  Chromatin transfer hasthe potential to improve the efficiencies and therefore reduce the cost ofnuclear transfer.  We believe that onecritical advantage of our proprietary SCNT and chromatin transfer technologiesis that the cells are “rejuvenated” by returning the cell to a youthful state.This is important because these youthful cells will have the proliferativecapacity of young cells.  These healthyreplacement cells, which would be genetically identical to the patient’s owncells, would then be used for cell transplantation.

 

Our fusion technologies involve the fusion of the cytoplasm of one cellinto another.  In the same manner thatthe cytoplasm of an egg cell is capable of transforming any cell back to anembryonic state, the fusion of the cytoplasm of other cell types, includingdifferentiated cell types (such as blood cells) is capable of reprogramminganother cell type (such as a skin cell). These technologies have the potential of transforming a cell from apatient into another medically-useful cell type also identical to thepatient.  They also have the potential tofuse the cytoplasm of undifferentiated cells, such as embryonic stem cells,with somatic cells to transport the somatic cell DNA back to pluripotency.  We believe that the fusion technology we aredeveloping can be developed into as broad and powerful a technique as SCNT,producing histocompatible, youthful stem cells that are multi and potentiallyeven pluripotent.  If successfullydeveloped, this technology may also provide a pathway that does not utilizehuman egg cells which would reduce the cost of the procedure, increase thenumber of patients that could benefit from its implementation and bypass manyof the ethical issues associated with technologies based upon or using eggs andembryos, because it does not require the creation or destruction of embryos.

 

38

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**Reduced Complexity Program.* ***Webelieve our proprietary technology may be applied to generate readily availablecell therapy products for patients with acute medical needs that do not allowtime for patient-specific reprogramming of cells.  We believe several of our proprietary technologiesmay be used to generate a wide array of readily available stem cell therapiesfor rapid deployment across a broad patient population without the need fortime-consuming patient-specific reprogramming of cells.  Current organ and tissue transplantationtechnology requires that there be a high degree of compatibility between thedonated organ or tissue and the recipient. Genes for histocompatibility antigens, or HLA genes, play a criticalrole in achieving donor/recipient compatibility and resulting transplantsuccess.  We are developing our reducedcomplexity technology with the goal of assembling a bank of stem cell linesthat are homozygous in the HLA genes.

 

We believe the result of this technology will be that abank of at most a few hundred cell lines will provide a close enough matchthat, together with immunosuppressive drugs, stem cell therapies for certaincommon applications will be achievable in most patients.  One example of a potential application is introductionof stem cell therapy on a time-sensitive basis in the case of heart attack torepair damaged heart tissue.  Timely,cost-effective introduction of cell therapies will be critical to commercialapplication.  Without reduced complexitytechnology, producing a readily-available, “off the shelf” supply may requiremany hundreds of thousands of cell lines.

 

We also believe that reduced complexity applicationsresulting from our research will offer an important research tool in the fieldof regenerative medicine by offering readily available cell lines forresearchers produced at a level of quality and quantity appropriate forclinical applications.  We believe ourability to genetically modify cells, while assuring quality control of the celllines, will give us a decided advantage over our competition in providingreadily available, closely matched cell lines at lower cost.

 

We have several different technologies we believe may be used to createa bank of stem cells with reduced complexity in the HLA genes.  One of several such technologies is called “parthenogenesis”.  Parthenogenesis is similar to somatic cellnuclear transfer; however there is no somatic cell being transferred.  We use our proprietary technology to take oneegg cell and stimulate it to begin cell division as though it has beenfertilized.  This results in a parthenoteor a blastocyst with a duplicate set of the egg’s chromosomes from which we canharvest ES cells.  This duplication givesa parthenote a full complement of genes. We believe parthenogenesis and certain of our other technologies couldbe used to generate a master cell bank of clean homozygous stem cell lines thatcould provide matches for a majority of the U.S. patient population.

 

**Stem Cell Differentiation.* ***Regenerative medicinerequires that stem cells, from whatever source derived, be differentiated (orre-differentiated) into specific body cell types and then physicallytransplanted into a patient. Differentiation into tissues such as cardiac muscle, blood, and othertissues occurs spontaneously in ES cells being cultured in a dish.  Successful application of stem celltechnology will require control over the specific kinds of cells into whichstem cells differentiate.  Control ofdifferentiation and the culture and growth of stem and differentiated cells areimportant current areas of research for us. Also, some chemicals, such as retinoic acid, can be used to triggerdifferentiation into specific cell types such as nerve cells.  We intend to pursue differentiationapproaches both in-house and through collaborations with other researchers whohave particular interests in, and skills related to, cellulardifferentiation.  These efforts includeusing both animal and human stem cell lines. Our research in this area includes projects focusing on developing manydifferent cell types that may be used in the future to treat a wide range ofdiseases.  Currently researchers at theCompany are working on projects to generate stable cell lines including retinalpigment epithelium (“RPE”) cells, skin cells, and hemangioblast cells.  In the future, researchers at the Company mayalso focus on various projects to generate other cell types, includingneuronal, lung, heart, liver and pancreatic beta cells.

 

Researchers at the Company were the first to report thesuccessful generation of several stable lines of retinal pigment epithelium (“RPE”)cells from human ES cells.  Ourscientific team has refined our ability to purify and establish banks of thesecell lines.  We are currently conductingpre-clinical research in the restoration of visual loss in small animal modelsto determine if these cells may be used to treat disorders such as maculardegeneration and retinitis pigmentosa.

 

39

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Our researchers are also focusing on development oftechnology and know-how to consistently isolate, purify and develop skin cellswith patterns of gene expression that are analogous to early embryonicskin.  Early embryonic skin is capable ofregenerating after wounding without scar formation.  We believe that these types of cells mayprovide a means of improving wound repair in surgery, burns, and chronic skinulcers.

 

Additionally, our research is also focused on an importantcell type called the hemangioblast. Hemangioblasts are a newly-characterized stem cell capable ofdifferentiating into both hematopoietic (blood cell forming) and angiogenic(blood vessel endothelium forming) cells. We believe it will be possible to utilize hemangioblast cells in engraftmentto repair age-related endothelial dysfunction associated with numeroussignificant age-related diseases, including cardiovascular disease, stroke, andeven perhaps cancer. We have demonstrated in a mouse model that nucleartransfer-derived hemangioblast cells were able to regenerate myocardium in aninfarcted mouse heart.  In addition, wehave recently completed a project using nuclear transfer technology to producehemangioblasts in a bovine model. The nuclear transfer-derived hemangioblastswere transplanted into the original adult animals and persisted and multipliedin the blood and lymph supply of those cows, demonstrating a significantcompetitive advantage over adult stem cells. We believe that demonstrating long-term success of these techniques inanimal models may translate into future applications in humans.  Results from the Company’s on-goingpre-clinical research programs will ultimately determine what clinicalapplications the Company chooses to initially pursue in human clinical trials.

 

***PotentialCommercial Applications of our Technologies. ***Webelieve that, if successfully developed, stem cell-based therapy has thepotential to provide treatment for a broad range of acute and chronicdegenerative diseases.  We believe thepotential applications of cell-based therapeutics include

 

**•**                  hematopoietic cells forblood diseases and cancer,

**•**                  myocardial and endothelialvascular tissue for cardiovascular disease,

**•**                  skin cells fordermatological conditions,

**•**                  retinal pigment epitheliumcells as treatment for macular degeneration and retinal pigmentosis,

**•**                  neural cells for spinal cordinjury, Parkinson’s disease and other neuro-degenerative diseases,

**•**                  pancreatic islet ß cells fordiabetes,

**•**                  liver cells for hepatitisand cirrhosis,

**•**                  cartilage cells forarthritis, and

**•**                  lung cells for a variety ofpulmonary diseases.

 

While we expect that any future products will take the form of medical procedures, tangible therapeutics, or combinations thereof, we currently have no products, and the identity of our future products, if any, is dependent upon the results of our ongoing research efforts, and, therefore cannot be determined at this time.

 

***Our Intellectual Property.***** Our research and development is supported by a broad intellectual property portfolio.  We currently own or have exclusive licenses to over 30 patents and have over 280 patent applications pending worldwide in the field of regenerative medicine and stem cell therapy.  We also have non-exclusive rights to a portfolio of patents and patent applications that support our core intellectual property.  We believe our intellectual property collectively represents one of the strongest portfolios in the field.

 

Our success will likely depend upon our ability to preserve our proprietary technologies and operate without infringing the proprietary rights of other parties. However, we may rely on certain proprietary technologies and know-how that are not patentable. We protect our proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors.

 

We maintain a disciplined patent policy and, when appropriate, seek patent protection for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise believe will provide us with a competitive advantage.  We pursue this strategy by filing patent applications for discoveries we make, either alone or in collaboration with scientific collaborators and strategic partners.  Typically, although not always, we file patent applications both in the United States and in select international markets.  In addition, we plan to obtain licenses or options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives and our strategic business interests.

 

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The following table identifies the issuedpatents we own or license that we believe currently support our technologyplatform.

 

**Ownedby Advanced Cell Technology, Inc.**

 
| **Number  Patent** | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** | **Title**                                                                                                                  |
|--------------------|------------|-------------|------------|------------------|------------|-----------------|------------|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| 6,808,704          |       | US          |       | 09/06/00         |       | 10/26/04        |       | 02/18/2021           |       | Method for  Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer  Techniques                              |
| 518191             |       | New Zealand |       | 10/13/00         |       | 05/10/04        |       | 10/13/2020           |       | Method of  Differentiation of Morula or Inner Cell Mass Cells and Method of Making  Lineage-Defective Embryonic Stem Cells |
| 516236             |       | New Zealand |       | 12/18/01         |       | 04/07/05        |       | 12/18/2021           |       | Cytoplasmic  Transfer to De-Differentiate Recipient Cells                                                                  |
|               |       |        |       |             |       |            |       |                 |       |                                                                                                                       |

 
| **University  of Massachusetts Exclusive License to Advanced Cell Technology, Inc.** |
|-------------------------------------------------------------------------------------------|

 
| **Number  Patent** | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** | **Title**                                                                                                                                                                                                  |
|--------------------|------------|-------------|------------|------------------|------------|-----------------|------------|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 6,235,970          |       | US          |       | 09/22/97         |       | 05/22/01        |       | 09/22/2017           |       | CICM Cells and  Non-Human Mammalian Embryos Prepared by Nuclear Transfer of a Proliferating  Differentiated Cell or its Nucleus                                                                            |
| 6,235,969          |       | US          |       | 07/03/97         |       | 05/22/01        |       | 07/03/2017           |       | Cloning Pigs  Using Donor Nuclei from Non-Quiescent Differentiated Cells                                                                                                                                   |
| 6,215,041          |       | US          |       | 01/08/98         |       | 04/10/01        |       | 01/08/2018           |       | Cloning Using  Donor Nuclei from a Non-Quiescent Somatic Cells                                                                                                                                             |
| 6,156,569          |       | US          |       | 08/04/97         |       | 12/05/00        |       | 08/04/2017           |       | Prolonged  Culturing of Avian Primordial Germ Cells (PGCs) Using Specific Growth  Factors, Use Thereof to Produce Chimeric Avians                                                                          |
| 5,994,619          |       | US          |       | 12/16/96         |       | 11/30/99        |       | 12/16/2016           |       | Production of  Chimeric Bovine or Porcine Animals Using Cultured Inner Cell Mass Cells                                                                                                                     |
| 5,945,577          |       | US          |       | 01/10/97         |       | 08/31/99        |       | 01/10/2017           |       | Cloning Using  Donor Nuclei from Proliferating Somatic Cells                                                                                                                                               |
| 5,905,042          |       | US          |       | 04/01/96         |       | 05/18/99        |       | 04/01/2016           |       | Cultured Inner  Cell Mass Cell Lines Derived from Bovine or Porcine Embryos                                                                                                                                |
| 521426             |       | New Zealand |       | 03/26/01         |       | 11/11/04        |       | 03/26/2021           |       | Prion-Free  Transgenic Ungulates                                                                                                                                                                           |
| 521026             |       | New Zealand |       | 02/26/01         |       | 01/13/05        |       | 02/26/2021           |       | Production of  Mammals which Produce Progeny of a Single Sex                                                                                                                                               |
| 518365             |       | New Zealand |       | 10/27/00         |       | 08/12/04        |       | 10/27/2020           |       | Gynogenetic or  Androgenetic Production of Pluripotent Cells and Cell Lines, and Use Thereof  to Produce Differentiated Cells and Tissues                                                                  |
| 517609             |       | New Zealand |       | 09/14/00         |       | 06/08/04        |       | 09/14/2020           |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation and  Method for Enhancing Embryonic Development by Genetic Alteration of Donor  Cells or by Tissue Culture Conditions |
| 519346             |       | New Zealand |       | 05/10/00         |       | 06/08/04        |       | 05/10/2020           |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 759322             |       | Australia   |       | 03/02/99         |       | 07/24/03        |       | 03/02/2019           |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 506808             |       | New Zealand |       | 03/02/99         |       | 03/29/04        |       | 03/02/2019           |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 502713             |       | New Zealand |       | 08/04/98         |       | 01/05/04        |       | 08/04/2018           |       | Production of  Avian Embryonic Germ (EG) and Embryonic Stem (ES) Cell Lines by Prolonged  Culturing of PGCs Use Thereof of Cloning and Chimerization                                                       |
| 502712             |       | New Zealand |       | 08/04/98         |       | 05/12/03        |       | 08/04/2018           |       | Avian Primordial  Germ Cell (PGC) Cell Line and a Method for Long Term Culturing Thereof                                                                                                                   |
| 742840             |       | Australia   |       | 07/01/98         |       | 08/01/02        |       | 07/01/2018           |       | Cloning Pigs  Using Donor Nuclei from Differentiated Cells                                                                                                                                                 |
| 502124             |       | New Zealand |       | 07/01/98         |       | 05/12/03        |       | 07/01/2018           |       | Cloning Pigs  Using Donor Nuclei from Differentiated Cells                                                                                                                                                 |
| 742363             |       | Australia   |       | 01/05/98         |       | 01/03/02        |       | 01/05/2018           |       | Cloning Using  Donor Nuclei from Differentiated Fetal and Adult Cells                                                                                                                                      |
| 334016             |       | New Zealand |       | 07/28/97         |       | 12/07/00        |       | 07/28/2017           |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 717529             |       | Australia   |       | 03/24/97         |       | 07/13/00        |       | 03/24/2017           |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |
| 126416             |       | Israel      |       | 03/24/97         |       | 09/21/04        |       | 03/24/2017           |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |
| 332159             |       | New Zealand |       | 03/24/97         |       | 06/08/00        |       | 03/24/2017           |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |

 

41

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**GenzymeTransgenics Corp. Exclusive License to Advanced Cell Technology, Inc.**

 
| **Number  Patent** | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** | **Title**                                                                                               |
|--------------------|------------|-------------|------------|------------------|------------|-----------------|------------|----------------------|------------|---------------------------------------------------------------------------------------------------------|
| 6,580,017          | ** ** | US          | ** ** | 04/23/99         | ** ** | 06/17/03        | ** ** | 04/23/2019           | ** ** | Methods of  Reconstructed Goat Embryo Transfer                                                          |
| 6,528,699          | ** ** | US          | ** ** | 03/22/01         | ** ** | 03/04/03        | ** ** | 03/22/2021           | ** ** | Transgenically  Produced Non-Secreted Proteins                                                          |
| 517930             | ** ** | New Zealand | ** ** | 09/27/00         | ** ** | 05/10/04        | ** ** | 09/27/2020           | ** ** | Methods of  Producing Cloned and Transgenic Mammals                                                     |
| 88117              | ** ** | Singapore   | ** ** | 10/16/00         | ** ** | 03/31/04        | ** ** | 10/16/2020           | ** ** | Methods of Producing  a Target Molecule in a Transgenic Animal and Purification of the Target  Molecule |
| 518263             | ** ** | New Zealand | ** ** | 10/16/00         | ** ** | 07/05/04        | ** ** | 10/16/2020           | ** ** | Methods of  Producing a Target Molecule in a Transgenic Animal and Purification of the  Target Molecule |

 
| **Infigen  Non-Exclusive License to Advanced Cell Technology, Inc.** |
|---------------------------------------------------------------------------|

 
| **Number  Patent** | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** | **Title**                                                                |
|--------------------|------------|-------------|------------|------------------|------------|-----------------|------------|----------------------|------------|--------------------------------------------------------------------------|
| 6,700,037          |       | US          |       | 12/28/00         |       | 03/02/04        |       | 12/28/2020           |       | Method of Cloning  Porcine Animals                                       |
| 6,680,199          |       | US          |       | 05/22/00         |       | 01/20/04        |       | 05/22/2020           |       | In Vitro  Activation of Mammalian Oocytes and Use in Cloning Procedures  |
| 6,603,059          |       | US          |       | 10/16/00         |       | 08/05/03        |       | 10/16/2020           |       | Ungulates  Produced By Sequential Nuclear Transfer                       |
| 6,395,958          |       | US          |       | 07/15/99         |       | 05/28/02        |       | 07/15/2019           |       | Method of  Producing a Polypeptide In an Ungulate                        |
| 6,258,998          |       | US          |       | 11/24/98         |       | 07/10/01        |       | 11/24/2018           |       | Method of Cloning  Porcine Animals                                       |
| 6,194,202          |       | US          |       | 03/04/96         |       | 02/27/01        |       | 03/04/2016           |       | Parthenogenic  Oocyte Activation                                         |
| 6,077,710          |       | US          |       | 10/21/98         |       | 06/20/00        |       | 10/21/2018           |       | Parthenogenic  Oocyte Activation                                         |
| 6,011,197          |       | US          |       | 01/28/99         |       | 01/04/00        |       | 01/28/2019           |       | Method of Cloning  Bovines Using Reprogrammed Non-Embryonic Bovine Cells |
| 5,843,754          |       | US          |       | 06/06/95         |       | 12/01/98        |       | 12/01/2015           |       | Parthenogenic  Bovine Oocyte Activation                                  |
| 5,496,720          |       | US          |       | 02/10/93         |       | 03/05/96        |       | 03/05/2013           |       | Parthenogenic  Oocyte Activation                                         |
| 5,453,366          |       | US          |       | 03/15/93         |       | 09/26/95        |       | 09/26/2012           |       | Method of Cloning  Bovine Embryos                                        |
| 5,374,544          |       | US          |       | 01/15/92         |       | 12/20/94        |       | 12/20/2011           |       | Mutated Skeletal  Actin Promoter                                         |
| 4,994,384          |       | US          |       | 10/27/87         |       | 02/19/91        |       | 02/19/2018           |       | Multiplying Bovine  Embryos                                              |

 

Thefundamental consequence of patent expiration is that the invention covered bythat patent will enter the public domain. However, the expiration of patent protection, or anticipated patentprotection, for the bulk of our portfolio is not scheduled to begin forapproximately fifteen years.  Due to therapid pace of technology development in this field, and the volume ofintellectual property we anticipate will be generated over the next decade, itis unlikely that the expiration of any existing patents or patent rights wouldhave an adverse affect on our business. Due to the current stage of our Company, as described in Management’sDiscussion and Analysis or Plan of Operation, Item 2, above, our existingpatent portfolio is not currently supporting a marketed product, so we will notsuffer from any reduction in product revenue from patent expiration. Any actualproducts that we develop are expected to be supported by intellectual propertycovered by current patent applications that, if granted, would not expire for20 years from the date first filed.  Forexample, our patent rights under the University of Massachusetts license listedin the patent table, above, do not begin to expire until 2016.  Due to the early stage of our business, wediffer from, for example, the pharmaceutical industry where the loss of a keysignificant patent can result in contemporaneous loss of products, programs orrevenues.  As our table demonstrates, ourbusiness is at the front end of the patent protection spectrum and is notexpected to be significantly impacted by expiration of existing patents orpatents issued in response to existing applications.

 

***Research andLicense Agreements.***

 

**Licenses of Intellectual Property to theCompany**

 

The following summarizes technology licenses to theCompany.

 

UMass License.  Exclusive LicenseAgreements dated February  1, 2002 and April 16, 1996 between the University of Massachusetts and Advanced CellTechnology,  Inc., as amended by amendments to dated September  1,1997, May  31, 2000 and September  19, 2002.  Pursuant to these agreements, the Universityof Massachusetts, referred to as UMass, exclusivelylicensed to ACT certain biological materials, patent rights and relatedtechnology for commercialization in specified fields. The license agreements require ACT to use diligent efforts to develop licensedproducts and licensed services and requires ACT to pay certainroyalties, minimum annual royalties, milestone payments and sublicense incometo UMass received 73,263 shares of Common Stock of ACT as partial considerationof the license granted.

 

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*2002 License*.  Under the 2002 license, UMass licenses to ACTcertain patent rights relating to the cloning of non-human animals for use inconnection with the development, manufacture and sale of products and servicesin the field of non-human animals for agriculture, companion animals, researchand diagnostic products, non-human and human therapeutics, and neutraceuticals,except production of immunoglobulin in the blood of *Bos taurus* and *Bosindicus*.  We are required topay royalties to UMass ranging from 1.5% to 2.0% based on the covered productor service.  We agreed to pay minimumroyalty payments of $15,000 on the first and second anniversary of theagreement, $20,000 on the third anniversary, $25,000 on the fourth anniversary,and increasing to $45,000 on the fifth anniversary and for each yearthereafter.  We also agreed to makemilestone payments to UMass of up to $1,630,000 upon the achievement of variousdevelopment and commercialization milestones. Finally, we have agreed to pay UMass 18% of all sublicense income.

 

*1996 License*.  The 1996 license covers certain patentrights, biological materials and know-how related to the cloning of non-humananimals and cells for use in cell fields except the production ofimmunoglobulin in the blood of *Bos taurus* and *Bosindicus*.  We are required topay royalties ranging from 2.5% to 4.5% on net sales of products and servicescovered by the license, and minimum royalty payments in the amount of $15,000per year (beginning on the later of the fourth year after the effective date ofthe agreement or the completion of certain clinical trials) for net sales onproducts and services for use in human therapeutics, and $30,000 per year(beginning in the third year after the effective date of the agreement) for netsales on products and services for all uses other than in humantherapeutics.  UMass agreed to waiveminimum royalty payments during any calendar year in which ACT funds researchat UMass in the aggregate amount of $300,000. There are no milestone payments. We agreed to pay UMass 18% of all sublicense income except forequity.  With respect to equity, we arerequired to pay UMass an amount equal to 10% of the total equity we receive forany transfer of rights under the 1996 license.

 

Both the 2002 agreement and the 1996 agreement remain ineffect until all issued patents within the patent rights licensed under theagreement have expired, or for a period ten years after the effective date ofthe agreement if no patents have issued within that ten-year period.  Each party has the right to terminate theagreement upon the occurrence of a material uncured breach.  We also have the right to terminate at anytime for any reason with ninety days’ written notice.

 

GTC License.  Exclusive Development and License Agreementbetween GTC Biotherapeutics (f/k/a as Genzyme Transgenics Corporation) andAdvanced Cell Technology,  Inc. dated June 8, 1999.  ACT entered into a Developmentand Commercialization Agreement with Genzyme Transgenics Corporation (now knownas GTC Biotherapeutics) on September  25, 1997,which was superseded by an Exclusive Development and License Agreement dated June 8, 1999, pursuant to which each party exclusively licensed to the other certainpatent rights and technology for use in defined fields and pursuant to whichACT agreed to provide certain related services. ThisThe agreement also requires each party to disclose to the other on aperiodic basis a written report of developments relevant to the other party’sfield.

 

Under the agreement, GTC licenses certain patent rights toACT that are useful to (i) human somatic cell nuclear transferapplications for therapeutic purposes and (ii) the cloning of animals foragricultural purposes, for the production of recombinant proteins, peptides andpolypeptides for human transplantation, cells for human transplantation andtissues from human transplantation, but excluding the GTC field, and ACTlicenses to GTC certain patent rights and know-how useful to the cloning ofanimals for all purposes for the production of biopharmaceutical agents inmilk, including, but not limited, proteins, peptides and polypeptides forpharmaceutical, neutraceutical or other use. Under the agreement, we agreed by September 1, 2000, to produce atleast 20 cloned hSA cows (cows produced with our technology that aretransfected with a GTC recombinant DNA construct and contain the hSA transgeneand express hSA in their milk for the purpose of transgenic production of milkproducts.)

 

We are required to pay GTC a royalty in the amount of 3% ofnet sales of products covered by the GTC license, which is reduced to 2% in theevent net sales of such products exceed $25 million per calendar quarterfor two consecutive calendar quarters. GTC is required to pay royalties to us in the amount of 2% of net salesof products consisting of hSA produced in the milk of hSA cows, which isreduced to 1% in the event net sales exceed $12,500,000 per calendar quarterfor two consecutive calendar quarters, and 3% of net sales of productsconsisting of proteins other than hSA in the milk of transgenic animals, whichis reduced to 2% in the event sales exceed $25 million per calendar quarter fortwo consecutive quarters.  GTC agreed topay ACT an annual fee of $100,000 to maintain exclusivity rights granted toGTC, which may be increased to $1 million if GTC does not enter intoagreements with third parties to develop two additional products covered by thepatent rights licensed to GTC under the agreement every two years.  Each party also agrees to pay to the other25% of any and all fees obtained in connection with the sublicensing of theother party’s intellectual property. There are no milestone payments under the agreement.  The licenses granted in the agreementcontinue in force until the expiration of all patent rights included in thelicenses.  The agreement may beterminated by either party in the event of an uncured breach.

 

Wake Forest License.  Materials and Research Data License Agreementdated January  26, 2001 between Wake Forest University and Advanced CellTechnology,  Inc., and July  1, 2002 Assignment to Wake ForestUniversity Health Sciences.  In January  2001, ACT entered into a Materials and Research DataLicense Agreement with Wake Forest University, referred to as WFU, pursuant towhich Wake Forest University, referred to as WFU, granted to ACT a worldwide,exclusive, royalty-free, perpetual and irrevocable right and license to usecertain data and stem cells and stem cell cultures created by ACT frombiological materials provided by WFU to ACT for specified purposes only.  The agreement allows ACT to utilize certainprimate skin cells and ovary materials produced by WFU 

 

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and transferred to ACT pursuant to an Agreement Relating tothe Transfer of Biological Materials. There are no milestone payments. There are no royalty requirements unless ACT desires to negotiate acommercial license for use of the biological materials provided to ACT byWFU.  WFU received 60,000 shares of ACTGroup’s common stock.  ACT has agreed toprovide WFU samples of stem cells for WFU’s research, education and teachingpurposes and ACT has a first option to obtain an exclusive license to anyintellectual property rights claimed by WFU in connection with the use of suchstem cells.  The term of the licensegranted is perpetual and irrevocable absent a breach by ACT.

 

Infigen License. Non-Exclusive SublicenseAgreement between Advanced Cell Technology,  Inc.and Infigen,  Inc. dated August  1, 2003.  In August  2003,ACT entered into a Non-Exclusive Sublicense Agreement with Infigen,  Inc.pursuant to which each party non-exclusively licensed to the other certainpatent rights and technology for use in defined fields.  The license was entered into in connectionlitigation that was then pending in Massachusetts Superior Court and inconnection with a Final Settlement Agreement dated August 6, 1999 between the parties pursuant to which, among other things,Infigen licensed to ACT certain patents and patent applications.  In connection with the license, ACT andInfigen entered into a Settlement Agreement and General Release regarding thethen pending litigation.  The licenserequires each party to pay to the other certain sublicense income and royaltypayments on the net sales of products or services sold by each party using theother party’s patent rights.

 

Under thisagreement, ACT licenses certain patent rights to Infigen that are relevant tothe “Infigen Field”, namely:  (a) theresearch and discovery of genes or proteins or other molecules that play a rolein the reprogramming of cells; (b) the development, making, using,selling, offering to sell or importing of products that are composed ofnon-human cells or tissues or a formulation including such cells or tissues,for the purpose of xenotransplantation of such cells, tissues, or organs fortherapy in humans; (c) the development, making, using, selling, orimporting of proteins (excluding all immunoglobulin which is not sheepimmunoglobulin) produced in the blood of cloned animals; and (d) thedevelopment, making, using, selling or offering to sell genetically modified ornon-genetically modified or non-genetically modified ovine, bovine and porcineanimals as models of human disease.

 

Infigen licenses toACT certain patent rights that are relevant to the “ACT Cell Therapy Field”,namely: the development, making, using, selling, offering to sell or importingof therapeutic products that are composed of (a) human cells for humancell therapy, or a formulation including such cells (with or without geneticmodification), and the rendering of services that relate to the production ofsuch products, or (b) non-human animal cells for veterinary cell therapy,or a formulation including such cells (with or without genetic modification)and the rendering of services that relate to the production of suchproducts.  The parties have agreed to payeach other a royalty equal to 1.5% of the net commercial sales of products andservices covered by the license.  Thereare no minimum royalty payments and no milestone payments.  The licenses granted under the agreementcontinue until the expiration of all patent rights covered by thelicenses.  The agreement may beterminated by either party for an uncured breach.

 

**ExclusiveLicenses of Intellectual Property from the Company**

 

The following summarizes licensesfrom the Company to third parties.

 

GTC License.  Exclusive Development and License Agreementbetween GTC Biotherapeutics (f/k/a as Genzyme Transgenics Corporation) andAdvanced Cell Technology,  Inc. dated June 8, 1999.  See description of thisagreement above.

 

Exeter Life Sciences License.  Exclusive License Agreement dated October  22, 2003 between Advanced Cell Technology,  Inc.and Exeter Life Sciences,  Inc.  In October  2003, ACT entered into an Exclusive License Agreementwith Exeter Life Sciences,  Inc., referred to as Exeter, pursuant to whichACT exclusively licensed to Exeter certain technology and patent rights for usein the fields of agriculture, endangered species, companion animals and equineanimals.  The license also grants Exetera right of first negotiation to any improvement patents that are obtained byACT that relate to the licensed intellectual property or which are useful,necessary or required to develop or manufacture certain animals, cells ortissues within the defined fields of use.

 

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Under the agreement, ACT licenses rights to certain patentrights and technology useful for the fields of use of non-human animals foragriculture, endangered animals and companion animals; excluding production ofsuch animals for the primary purpose of producing human and non-human animaltherapeutics and human healthcare products, including without limitation theproduction of biopharmaceutical agents in milk, such as proteins, peptides andpolypeptides for pharmaceutical, neutraceutical or other use, and excluding theproduction of immunoglobulin in the blood of *Bostaurus* and *Bos indicus*.  The field includes (a) the cloning,development, manufacture and sale of cloned non-human animals, includingwithout limitation, bovine, hircine, ovine, porcine, equine animals andungulates (as well as any transgenic variance or enhancements thereto) orproducts that are composed of, made in or derived, extracted or isolated fromcells or tissues of such animals for the production of food or fiber, and therendering of services or uses that relate to the production of such products; (b) thecloning, development, manufacture and sale of endangered species for purposesof researching, aiding, reproducing or assisting in the reproduction of suchendangered species; (c) the cloning, development, and sale of hircine,ovine, feline, canine and equine animals (as well as any transgenic variance orenhancements thereto) for personal, business or commercial purposes,specifically excluding the sale of these animals as scientific researchlaboratory subjects; and (d) the cloning, development, manufacture andsale of cloned equine animals (as well as any transgenic variance orenhancements thereto) or products that are composed of, made in or derived,extracted or isolated from cells or tissues of such animals for non-therapeuticpurposes, including but not limited to, for use in agriculture, for use asfood, for use as companion, service, work or recreational animals, or for useas racing or other equine event animals, and the rendering of services or usesthat relate to the production of such products.

 

In consideration of the rights and licenses granted toExeter, Exeter has agreed to pay to ACT specifiedan initial license fees,fee of $1,000,000, and royalties onequal to 5% of the netsales of all products and services covered by the license; provided that,sublicense income andfor license products that are the progeny of clonedanimals covered by the license or products obtained from such progeny, theroyalty is 3%.  Exeter is required to payan annual maintenance fees. fee Underfor thelicense,  equal to $100,000 in 2005,increasing annually by $50,000 up to $500,000. Exeter’s obligation to pay thethis annual maintenance fee is suspendedunless and until certain intellectual property that is the subject oflitigation,, namely the matter styled University of Massachusetts v. James M.Robl and Phillipe Collas, Massachusetts Superior Court, Suffolk County, Docket No. 04-0445-BLS,is recovered and licensed to ACT and included in the license to Exeter.  The license also provides that ACT willrefund certain amounts to Exeter if certain conditions concerning thereferenced litigation are not met and that ACT will extend to Exeter rightsacquiredto “improvement patents” that are obtained by ACT or the University inconnection with the referenced litigation or any patent interference oropposition proceedings involving ACTthat relate to the licensed intellectualproperty or which are useful, necessary or required to develop or manufacturecloned and/or transgenic non-human animals and cloned and/or transgenic cellsand tissues from non-human animals within the field of use.  The license grants Exeter a right of firstnegotiation to any improvement patents. There are no milestone payments. Exeter agrees to pay ACT a total of 25% of all sublicense income underthe license.  Either party may terminatethe agreement in the event of an uncured breach.  Exeter may terminate without cause on 60 days’prior written notice to us, or may terminate immediately in the event of achange in law that materially affects Exeter’s ability to commercialize thelicensed intellectual property under the license.

 

Lifeline License.Exclusive License Agreements dated May 14, 2004 between Advanced CellTechnology, Inc. and Lifeline Cell Technology (f/k/a PacGen Cellco, LLC)and Agreement to Amend ACT/CELLCO License Agreements dated September 7,2004.  In May 2004, ACT entered intothree Exclusive License Agreements with Lifeline Cell Technology (f/k/a PacGenCellco, LLC) pursuant to which ACT exclusively licensed to Lifeline certainknow-how and patent rights for, among other things, the research, development,manufacture and sale of human cells for cell therapy in the treatment of humandiabetes and liver diseases.  Theagreement requires milestone payments up to $1.75 million in theaggregate.  The agreement requiresLifeline to meet minimum research and development requirements.  The licenses continue until expiration of thelast valid claim within the licensed patent rights.  Either party may terminatethe agreement for an uncured breach, and Lifeline may terminate theagreement at any time with 30 days’ notice.

 

*Exclusive License Agreement Number 1* covers patent rights andtechnology developed by ACT that is relevant to (1) the research,development, manufacture and sale of human and non-human animal cells forcommercial research and (2) the manufacture and selling of human cells fortherapeutic and diagnostic use in the treatment of human diabetes and liver diseases.Lifeline has agreed to pay us royalties ranging from 3% to 10% on net sales ofproducts and services covered by the license, and a minimum royalty fee of$175,000 in the first year, plus, commencing 12 months after the effective dateof the agreement, additional minimum royalty fees in the amount of $10,000 at12 months, $25,000 at 24 months, $40,000 at 36 months, and $50,000 annuallythereafter.  Lifeline also agreed to paya license fee in the amount of $225,000 in the form of a Convertible PromissoryNote due and payable June 1, 2007, which may be repaid in cash or stock atour election.

 

*Exclusive License Agreement Number 2* covers patent rights andtechnology developed by UMass relevant to (1) the research, development,manufacture and sale of human and non-human animal cells and defined animalcell lines for commercial research, (2) the manufacture and selling ofhuman cells for therapeutic and diagnostic use in the treatment of humandiabetes and liver diseases, and (3) the use of defined animal cell linesin the process of manufacturing and selling human cells for therapeutic anddiagnostic use in the treatment of human diabetes and live diseases.  Lifeline is required to pay us royaltiesranging from 3% to 12% on net sales of products and services covered by thelicense, and a minimum royalty fee of $100,000 in the first year, plus,commencing 12 months after the effective date of the agreement, additionalminimum royalty fees in the amount of $10,000 at 12 months, $20,000 at 24months, $30,000 at 36 months, and $40,000 annually thereafter. Lifeline alsoagreed to pay a license fee in the amount of $150,000 in 

 

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the form of a ConvertiblePromissory Note due and payable June 1, 2007, which may be repaid in cashor stock at our election.

 

*Exclusive License AgreementNumber 3*covers patent rights and technology developed by Infigen relevant to theresearch, development, manufacture and sale of human cells for cell therapy inthe treatment of therapeutic and diagnostic use in the treatment of humandiabetes and liver diseases. Lifeline is required to pay us royalties equal to6% of net sales of products and services covered by the license, and a minimumroyalty fee of $25,000 in the first year, plus, commencing 12 months after theeffective date of the agreement, additional minimum royalty fees in the amountof $5,000 for the first three years, and $10,000 annually thereafter. Lifelinealso agreed to pay a license fee in the amount of $225,000 in the form of aConvertible Promissory Note due and payable June 1, 2007, which may berepaid in cash or stock at our election.

In September 2004,the parties amended the licenses to include the field described as all retinaland other cell types related to the diagnosis and treatment of retinal diseaseor the slowing or stopping the progression of retinal degenerativediseases.  Under the amendment, Lifelinehas agreed to pay us additional initial fees in defined fields.  These licenses generally provide for commercializationtheamount of our intellectual property$150,000 and additional annual minimumroyalties in the amount of $12,500 at 12 months, $25,000 at 24 months, $37,500at 36 months, and typically contain minimum royalties, milestones andcontinuing royalties based upon percentages of revenue.$50,000 annuallythereafter.  The parties are currentlynegotiating more formal amendments to the license agreements.

 

**NonexclusiveLicenses of Intellectual Property from the Company**

** **

We haveentered into numerous nonexclusive license agreements pursuant to which we havegranted non-exclusive rights to various parties to use certain patent rights indefined fields. These licenses generally provide for commercialization of ourintellectual property and typically contain minimum royalties, milestones andcontinuing royalties based upon percentages of revenue.

 

***CaliforniaProposition 71.***  In November 2004,California State Proposition 71, referred to as Prop. 71, the California StemCell Research and Cures Initiative, was adopted bystate-wide referendum.  Prop. 71 is astate-sponsored program designed to encourage stem cell research in the Stateof California, and to finance such research with State funds totalingapproximately $295 million annually for 10 years beginning in 2005.This initiative creates the California Institute for Regenerative Medicine,which will provide grants, primarily but not exclusively, to academicinstitutions to advance both ES cell research and adult stem cell research.  ES cell research is one of our primary areasof focus.  It is unclear whether we areeligible to directly receive Prop. 71 generated funds.  However, we intend to apply for any fundingthat becomes available. We also expect to benefit from collaborations withacademic and other institutions eligible for Prop. 71 fundingfor research in the use of ES cells for various diseases and conditions.  ES cell research does not generally qualifyfor federal funding due to restrictions on embryonic stem cell research.  Prop. 71 isspecifically targeting research in the embryonic stem cell field.  The Company considers government support tobe important confirmation of the quality of its technology, but does not relyon government programs as a significant source of financial support.

 

***Competition****.*  The biotechnology industries arecharacterized by rapidly evolving technology and intense competition. Ourcompetitors include major multinational pharmaceutical companies, specialtybiotechnology companies and chemical and medical products companies operatingin the fields of regenerative medicine, cell therapy, tissue engineering andtissue regeneration. Many of these companies are well-established and possesstechnical, research and development, financial and sales and marketingresources significantly greater than ours. In addition, certain smaller biotech companies have formed strategiccollaborations, partnerships and other types of joint ventures with larger,well established industry competitors that afford these companies potentialresearch and development and commercialization advantages. Academicinstitutions, governmental agencies and other public and private researchorganizations are also conducting and financing research activities which mayproduce products directly competitive to those we are developing.  Moreover, many of these competitors may beable to obtain patent protection, obtain FDA and other regulatory approvals andbegin commercial sales of their products before we do.

 

In the general area of cell-based therapies, wecompete with a variety of companies, most of whom are specialty biotechnologycompanies. Some of these, such as Geron Corporation, Genzyme Corporation,StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc.,are well-established and have substantial technical and financial resourcescompared to us. However, as cell-based products are only just emerging asmedical therapies, many of our direct competitors are smaller biotechnology andspecialty medical products companies. These smaller companies may become significant competitors through rapidevolution of new technologies.  Any ofthese companies could substantially strengthen their competitive positionthrough strategic alliances or collaborative arrangements with largepharmaceutical or biotechnology companies.

 

The diseases andmedical conditions we are targeting have no effective long-term therapies.Nevertheless, we expect that our technologies and products will compete with avariety of therapeutic products and procedures offered by major pharmaceutical companies.  Many pharmaceutical and biotechnologycompanies are investigating new drugs and therapeutic approaches for the samepurposes, which may achieve new efficacy profiles, extend the therapeuticwindow for such products, alter the prognosis of these diseases, or preventtheir onset. We believe that our products, when and if successfully developed,will compete with these products principally on the basis of improved andextended efficacy and safety and their overall economic benefit to the health caresystem.

 

Competition for anystem cell products that we may develop may be in the form of existing and newdrugs, other forms of cell transplantation, ablative and simulative procedures,and gene therapy. We believe that some of our competitors are also trying todevelop stem and progenitor cell-based technologies. We expect that all ofthese products will compete with our potential stem cell products based onefficacy, safety, cost and intellectual property positions.  We may also face competition from companiesthat have filed patent applications relating to the use of genetically modifiedcells to treat disease, disorder or injury. In the event our therapies shouldrequire the use of such genetically modified cells, we may be required to seeklicenses from these competitors in order to commercialize certain of ourproposed products, and such licenses may not be granted.

 

If we developproducts that receive regulatory approval, they would then have to compete formarket acceptance and market share. For certain of our potential products, animportant success factor will be the timing of

 

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market introduction of competitiveproducts. This timing will be a function of the relative speed with which weand our competitors can develop products, complete the clinical testing andapproval processes, and supply commercial quantities of a product to market.These competitive products may also impact the timing of clinical testing andapproval processes by limiting the number of clinical investigators andpatients available to test our potential products.

 

***Government Regulation.****** ***Regulation by governmentalauthorities in the United States and other countries is a significant factor inour research and development and will be a significant factor in themanufacture and marketing of our proposed products. The nature and extent towhich such regulation applies to us will vary depending on the nature of anyproducts we may develop. We anticipate that many, if not all, of our productswill require regulatory approval by governmental agencies prior tocommercialization. In particular, human therapeutic products are subject torigorous preclinical and clinical testing and other approval procedures of theU.S. Food and Drug Administration, referred to as the FDA, and similarregulatory authorities in European and other countries. Various governmentalstatutes and regulations also govern or influence testing, manufacturing,safety, labeling, storage and recordkeeping related to such products and theirmarketing. The process of obtaining these approvals and the subsequentcompliance with appropriate statutes and regulations require the expenditure ofsubstantial time and money, and there can be no guarantee that approvals willbe granted.

 

***FDA Approval.****** ***The FDA requirements for ourpotential products to be marketed in the United States include the followingfive steps:

 

Preclinicallaboratory and animal tests must be conducted. Preclinical tests include laboratory evaluation of the cells and theformulation intended for use in humans for quality and consistency. In vivostudies are performed in normal animals and specific disease models to assessthe potential safety and efficacy of the cell therapy product.

 

An investigationalnew drug application, or IND, must be submitted to the FDA, and the IND mustbecome effective before human clinical trials in the United States maycommence.  The IND is submitted to theFDA with the preclinical data, a proposed development plan and a proposedprotocol for a study in humans. The IND becomes effective 30 days followingreceipt by the FDA, provided there are no questions, requests for delay orobjections from the FDA. If the FDA has questions or concerns, it notifies thesponsor, and the IND will then be on clinical hold until a satisfactoryresponse is made by the sponsor.

 

Adequate andwell-controlled human clinical trials must be conducted to establish the safetyand efficacy of the product.  Clinicaltrials involve the evaluation of a potential product under the supervision of aqualified physician, in accordance with a protocol that details the objectivesof the study, the parameters to be used to monitor safety and the efficacycriteria to be evaluated. Each protocol is submitted to the FDA as part of theIND. The protocol for each clinical study must be approved by an independentinstitutional review board, or IRB, of the institution at which the study isconducted, and the informed consent of all participants must be obtained. TheIRB reviews the existing information on the product, considers ethical factors,the safety of human subjects, the potential benefits of the therapy and thepossible liability of the institution. The IRB is responsible for ongoingsafety assessment of the subjects during the clinical investigation.  Clinical development is traditionallyconducted in three sequential phases.

 

**•**      Phase 1 studies for a cell therapy product are designed toevaluate safety in a small number of subjects in a selected patient populationby assessing adverse effects, and may include multiple dose levels. This studymay also gather preliminary evidence of a beneficial effect on the disease.

 

**•**      Phase 2 may involve studies in a limited patient populationto determine biological and clinical effects of the product and to identifypossible adverse effects and safety risks of the product in the selectedpatient population.

 

**•**      Phase 3 trials would be undertaken to conclusivelydemonstrate clinical benefit or effect and to test further for safety within abroader patient population, generally at multiple study sites.  The FDA continually reviews the clinicaltrial plans and results and may suggest changes or may require discontinuanceof the trials at any time if significant safety issues arise.

 

Marketingauthorization applications must be submitted to the FDA.  The results of the preclinical studies andclinical studies are submitted to the FDA in the form of marketing approvalauthorization applications.

 

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The FDA mustapprove the applications prior to any commercial sale or practice of thetechnology or product. Biologic product manufacturing establishments located incertain states also may be subject to separate regulatory and licensingrequirements.  The testing and approvalprocess will require substantial time, effort and expense. The time forapproval is affected by a number of factors, including relative risks andbenefits demonstrated in clinical trials, the availability of alternativetreatments and the severity of the disease. Additional animal studies orclinical trials that may be requested during the FDA review period.

 

Our research anddevelopment is based largely on the use of human stem and progenitor cells. TheFDA has initiated a risk-based approach to regulating human cell, tissue andcellular and tissue-based products and has published current Good TissuePractice, or cGTP, regulations. As part of this approach, the FDA has publishedfinal rules for registration of establishments that engage in therecovery, screening, testing, processing, storage or distribution of humancells, tissues, and cellular and tissue-based products, and for the listing ofsuch products. In addition, the FDA has published rules for makingsuitability and eligibility determinations for donors of cells and tissue andfor current good tissue practice for manufacturers using them, which haverecently taken effect. We cannot now determine the full effects of thisregulatory initiative, including precisely how it may affect the clarity ofregulatory obligations and the extent of regulatory burdens associated with ourstem cell research and the manufacture and marketing of stem cell products.

 

***European and Other RegulatoryApproval.***  Approval of aproduct by regulatory authorities comparable to the FDA in Europe and othercountries will likely be necessary prior to commencement of marketing a productin any of these countries. The regulatory authorities in each country mayimpose their own requirements and may refuse to grant approval, or may requireadditional data before granting approval, even though the relevant product hasbeen approved by the FDA or another authority. The regulatory authorities inthe European Union, or EU, and other developed countries have lengthy approvalprocesses for pharmaceutical products. The process for gaining approval inparticular countries varies, but is generally similar to the FDA approvalprocess. In Europe, the European Committee for Proprietary Medicinal Productsprovides a mechanism for EU-member states to exchange information on allaspects of product licensing. The EU has established a European agency for theevaluation of medical products, with both a centralized community procedure anda decentralized procedure, the latter being based on the principle of licensingwithin one member country followed by mutual recognition by the other membercountries.

 

***Other Regulations.*** In addition to safetyregulations enforced by the FDA, we are also subject to regulations under theOccupational Safety and Health Act, the Environmental Protection Act, the ToxicSubstances Control Act and other present and potential future and Federal,state, local, and foreign regulations.

 

Outside the UnitedStates, we will be subject to regulations that govern the import of drugproducts from the United States or other manufacturing sites and foreignregulatory requirements governing human clinical trials and marketing approvalfor our products. The requirements governing the conduct of clinical trials,product licensing, pricing and reimbursements vary widely from country tocountry.

 

The United States Congress, several states and foreign countries, have considered legislation banning or restricting human application of ES cell-based and nuclear transfer based technologies.  No assurance can be given regarding future restrictions or prohibitions that might affect our technology and business.  In addition, we cannot assure you that future judicial rulings with respect to nuclear transfer technology or human ES cells will not have the effect of delaying, limiting or preventing the use of nuclear transfer technology or ES cell-based technology or delaying, limiting or preventing the sale, manufacture or use of products or services derived from nuclear transfer technology or ES cell-derived material.  Any such legislative or judicial development would harm our ability to generate revenues and operate profitably.

 

For additional information about governmental regulations that will affect our planned and intended business operations, see “RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth in Part I, Item 2.

 

***Employees.***  As of March 31, 2005, we had 23full-time employees, of whom eight hold Ph.D. or M.D. degrees. Fifteenemployees are directly involved in research and development activities andeight are engaged in business development and administration. Along with oursubsidiaries, we also use the services of numerous outside consultants inbusiness and scientific matters.  We believethat we have good relations with our employees and consultants.

 

***Properties.****** ***Our headquarters are locatedat 381 Plantation Street, Worcester, MA 01605. Our facilities consist of anapproximately 14,000 square foot executive office and laboratory facilitieswhich provide us the

 

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capability of producing necessaryquantities of materials sufficient to support our research.  We have the facility under an 8 yearsub-lease which expires on April 30, 2010. We do not own any real estate.

 

As part of the newmanagement of the Company, the Company will be establishing procedures by whichsecurity holders may recommend nominees to our Board of Directors.

 

## **ITEM6.** EXHIBITS AND REPORTS ONFORM 8-K

## ** **

Please see the Exhibit Indexwhich follows the signature pages to this Quarterly Report on Form 10-QSBand which is incorporated by reference herein. Although this Part II, Item 6 of Form 10-QSB requires thatMaterial Agreements need only be reported in the 10-QSB filed for the quarterin which they first become a reportable event, in light of the Merger and thecomplete change of business by the small business issuer following the Merger,we have elected to provide disclosure relating to all Material Agreements towhich the Company or ACT is a party.

 

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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: September 7, 2005 |                                |   |

 

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**Exhibit Index**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger between the Company, A.C.T.  Acquisition Corp., and ACT, dated as of January 3, 2005. Previously  filed as Exhibit 10.1 to our Current Report on Form 8-K dated December 30,  2004 and filed with the Securities and Exchange Commission (the “Commission”)  on January 4, 2005 (SEC File No. 0-50295).                                                                                                                                                                                     |
| 3.1              |       | Articles of Incorporation of the Company. Previously  filed as Exhibit 3.1 to our Registration Statement on Form SB-2  filed with the Commission on May 14, 2001(SEC File No. 333-6096).                                                                                                                                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 3.1.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Certificate of Amendment to Articles of Incorporation  dated April 1, 2004. |
|             |       | 3.1.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Certificate of Amendment to Articles of Incorporation.  Previously filed as Exhibit 3.1 to our Current Report on Form 8-K  dated December 30, 2004 and filed with the Commission on filed on January 4,  2005 (sec File No. 0-50295). |
| 3.2              |       | Bylaws of the Company. Previously filed as Exhibit 3.2  to our Registration Statement on Form SB-2 filed with the Commission on May 14,  2001 (SEC File No. 333-6096).                                                                                                                                                                                                                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 3.2.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Amendment to Bylaws of the Company. Previously filed as Exhibit 3.1  to our Current Report on Form 8-K dated December 15, 2004 and filed  with the Commission on December 29, 2004 (SEC File No. 0-50295). |
| 4.1              |       | Specimen Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2              |       | Form of $0.05 Warrant to Purchase Common Stock of  ACT. ACT issued warrants in this form for the purchase of an aggregate of  900,000 shares, including a warrant to purchase 250,000 shares of ACT common  stock to Andwell, LLC, an entity affiliated with William Caldwell, IV, the Chief  Executive Officer and a director of the Company                                                                                                                                                                                                               |
| 4.3              |       | Form of $0.25 Warrant to Purchase Common Stock of  ACT. ACT issued warrants in this form for the purchase of an aggregate of  1,954,000 shares, including (i) a warrant to purchase 236,000 shares of  ACT common stock to Andwell, LLC, an entity affiliated with William Caldwell,  IV, the Chief Executive Officer and a director of the Company, (ii) a  warrant to purchase 75,000 shares of ACT common stock to Rocket Ventures, an  entity affiliated with Jonathan Atzen, a Senior Vice President and the  General Counsel of the Company |
| 4.4              |       | $0.25 Warrant to Purchase Common Stock of the Company  issued to Gunnar Engstrom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5              |       | Form of $0.85 Warrant to Purchase Common Stock of  ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6              |       | Form of $1.27 Warrant to Purchase Common Stock of  ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.7              |       | Form of $2.00 Warrant to Purchase Common Stock of  ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.8              |       | Form of Subscription Agreement to Purchase Series A Convertible Preferred Units of ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9              |       | Form of Share Purchase Agreement to purchase common  stock of Two Moons Kachinas Corp. (“TMOO”), the predecessor to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10             |       | Form of Lock-Up Agreement entered into by certain  sellers of TMOO common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.11             |       | Form of Lock-Up Agreement entered into by certain  buyers of TMOO common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12             |       | Investor’s Rights Agreement between ACT and Avian Farms, Inc.  dated December 31, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 9.1              |       | Form of Voting Agreement for shares of common stock  of ACT held by certain parties effective as of January 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1             |       | Exclusive Development and License Agreement between GTC  Biotherapeutics (f/k/a as Genzyme Transgenics Corporation) and ACT dated June 8,  1999.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2             |       | Exclusive License  Agreement dated April 16, 1996 between the University of Massachusetts  and ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|             |       | 10.2.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Amendment to  Exclusive License Agreement dated September 1, 1997 |
|             |       | 10.2.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Second Amendment  to Exclusive License Agreement dated May 31, 2000 |
|             |       | 10.2.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Third Amendment  to Exclusive License Agreement dated September 19, 2002 |
| 10.3             |       | Materials and  Research Data License Agreement dated January 26, 2001 between Wake Forest  University and ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 10.3.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | July 1, 2002  Assignment to Wake Forest University Health Sciences. |
|                  |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |

 

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| 10.4   |   | Exclusive License  Agreement dated February 1, 2002 between the University of Massachusetts  and ACT.                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5   |   | Non-Exclusive  Sublicense Agreement between ACT and Infigen, Inc. dated August 1,  2003.                                                                                                 |
| 10.6   |   | Non-Exclusive  License Agreements, dated January 1, 2001 between ACT and PPL  Therapeutics (Scotland) Limited.                                                                                |
| 10.7   |   | Nonexclusive  License Agreement dated May 1, 2001 between ACT and Immerge  BioTherapeutics, Inc.                                                                                         |
| 10.8   |   | Nonexclusive  License and Sponsored Research Agreement dated June 29, 2001 between ACT  and Charles River Laboratories, Inc.                                                             |
| 10.9   |   | Non-Exclusive  Sublicense Agreement between Cyagra, Inc., ACT, ACT Group and Goyaike,  S.A. dated November 20, 2001.                                                                     |
| 10.10  |   | Exclusive  Sublicense Agreement between ACT, ACT Group and Cyagra, Inc. dated June 28,  2002.                                                                                            |
| 10.11  |   | Non-Exclusive  License Agreement dated November 8, 2002 between ACT and Merial Limited.                                                                                                       |
| 10.12  |   | Non-Exclusive  Sublicense Agreement between ACT and Infigen, Inc. dated August 1,  2003.                                                                                                 |
| 10.13  |   | Exclusive License  Agreement dated October 22, 2003 between ACT and Exeter Life Sciences, Inc.                                                                                           |
|   |   | 10.13.1                                                                                                                                                                                            | Letter of Intent  between ELS and ACT dated March 16, 2003. |
|   |   | 10.13.2                                                                                                                                                                                            | Sponsored  Research Agreement. |
| 10.14  |   | Non-Exclusive  License Agreement dated January 4, 2002 between ACT and Genetic Savings &  Clone.                                                                                     |
| 10.15  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and Pureline  Genetics.                                                                                                   |
| 10.16  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and First Degree  Genetics.                                                                                               |
| 10.17  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and One Degree  Genetics.                                                                                                 |
| 10.18  |   | Option to License  Intellectual Property dated December 31, 2003 between ACT and PacGen  Cellco, LLC.                                                                                         |
|   |   | 10.18.1                                                                                                                                                                                            | First Amendment  to Option to License Intellectual Property dated February 13, 2004. |
| 10.19  |   | Exclusive License  Agreement (Infigen IP) dated May 14, 2004 between ACT and PacGen Cellco,  LLC.                                                                                             |
| 10.20  |   | Exclusive License  Agreement (UMass IP) dated May 14, 2004 between ACT and PacGen Cellco,  LLC.                                                                                               |
| 10.21  |   | Exclusive License  Agreement (ACT IP) dated May 14, 2004 between ACT and PacGen Cellco,  LLC.                                                                                                 |
| 10.22  |   | Agreement to  Amend ACT/CELLCO License Agreements dated September 7, 2004 ACT and  PacGen Cellco, LLC.                                                                                        |
| 10.23  |   | Indemnification  Agreement of David Merrell to certain buyers of TMOO common stock dated December 31,  2004.                                                                                  |
| 10.24  |   | Convertible  Promissory Note to ACT Group, Inc. dated July 12, 2002 in the amount  of $1,000,000.                                                                                        |
| 10.25  |   | Promissory Note  issued by ACT to Pierce Atwood LLP dated January 2005 in the amount of  $150,000.                                                                                            |
| 10.26  |   | Promissory Note  issued by ACT to Pierce Atwood dated July 1, 2003 in the amount of  $339,000.                                                                                                |
| 10.27  |   | Promissory Note  issued by ACT to Rothwell, Figg, Ernst & Manbeck, P.C. dated July 8,  2003 in the amount of $272,108.                                                               |
| 10.28  |   | Forbearance and Stock Purchase Agreement Among Avian  Farms, Inc., ACT Group, Inc., ACT and Cima Biotechnology, Inc.,  dated July 16, 1999, as amended December 23, 1999. |
| 10.29  |   | Securityholders’ Agreement among ACT, ACT Group, Cyagra, Inc.  and Goyaike S.A. dated November 20, 2001                                                                             |
| 10.30  |   | Securities Purchase Agreement between ACT, ACT Group and  Goyaike S.A. dated July 1, 2002.                                                                                                    |
|   |   | 10.30.1                                                                                                                                                                                            | Securityholders’ Agreement among ACT, ACT Group, Cyagra, Inc.  and Goyaike S.A. dated July 1, 2002. |
|   |   | 10.30.2                                                                                                                                                                                            | Collaboration Agreement and Technology License. |
|   |   | 10.30.3                                                                                                                                                                                            | Separation Agreement among ACT, ACT Group, Cyagra, Inc.  and Goyaike S.A. |
|        |        |                                                                                                                                                                                                    |  |  |

 

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| 10.31  |   | Membership  Interest Exchange and Asset Sale Agreement dated May 31, 2000, by and  among ACT and Hematech, LLC, et al.                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10.31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Buyout Option  Agreement dated May 31, 2000 between Hematech, LLC and ACT. |
| 10.32  |   | Space Sublease Agreement dated November      ,  2004, between BioReliance and ACT, for 381 Plantation Street, Worcester, MA  01605                                                                                                                                                                                                                                                                                                                                                    |
| 10.33  |   | Advanced Cell Technology, Inc. 2004 Stock Option  Plan. ** Pursuant to this option plan, ACT issued options to purchase an  aggregate 2,604,000 shares, including (i) options to purchase 1,500,000  shares of ACT common stock to Michael West, the Chairman of the Board of  Directors and the Chief Scientific Officer of the Company, and (ii) options  to purchase 750,000 shares of ACT common stock to Robert Lanza, the Vice  President of Medical and Scientific Development of the Company |
| 10.34  |   | Advanced Cell Technology, Inc. 2004 Stock Option  Plan II. **Pursuant to this option plan, ACT issued options to purchase an  aggregate 1,301,161 shares, including (i) options to purchase 651,161  shares of ACT common stock to William Caldwell, IV, the Chief Executive  Officer and a director of the Company**,**and  (ii) options to purchase 240,000 shares of ACT common stock to Robert  Peabody, a director of the Company.                                                              |
| 10.35  |   | A.C.T. Holdings, Inc. 2005 Stock Option Plan. **  Previously filed as Appendix A to our preliminary proxy statement on Form PRE-14A  filed with the Commission on May 10, 2005 (SEC File No. 0-50295).                                                                                                                                                                                                                                                                                          |
| 10.36  |   | Form of Incentive Stock Option Agreement.** .                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Form of  Nonqualified Stock Option Agreement**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.38  |   | Employment  Agreement between ACT and William M. Caldwell, IV dated December 31,  2004. **                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.39  |   | Employment  Agreement between ACT and Michael D. West dated December 31, 2004. **                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.40  |   | Employment  Agreement between ACT and Robert Lanza dated February 1, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | Employment  Agreement between ACT, the Company and James Stewart dated March 13,  2005. **                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.42  |   | Employment  Agreement between ACT and Robert Peabody dated February 9, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.43  |   | Employment  Agreement between ACT and Jonathan Atzen dated April 1, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.44  |   | Employment  Agreement between ACT and Irina Klimanskaya dated October 1, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.45  |   | Employment  Agreement between ACT and Sadhana Agarwal dated April 1, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.46  |   | Employment  Agreement between ACT and James Murai dated February 17, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.47  |   | Employment  Agreement between ACT and David Larocca dated February 9, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.48  |   | Consulting  Agreement between ACT and William M. Caldwell, IV dated October 1, 2004  **                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.49  |   | Consulting  Agreement between ACT and Jonathan Atzen dated January 14, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.50  |   | Consulting  Agreement between ACT and Stephen Price dated December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | 10.50.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Consulting  Agreement between ACT and Stephen Price dated April 28, 2005 |
| 10.51  |   | Consulting  Agreement between ACT and Chad Griffin dated April 1, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.52  |   | Consulting  Agreement between ACT and James Stewart dated January 14, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.53  |   | Settlement  Agreement between ACT and Gunnar Engstrom dated January 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.54  |   | Confidentiality and  Nondisclosure Agreement dated February 3, 1999 between ACT and Robert  Lanza, M.D.                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.55  |   | Consulting  Agreement dated September 29, 1997 between ACT and Dr. James Robl.                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.56  |   | Consulting  Agreement dated January 23, 1998 between ACT and Dr. James Robl.                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.57  |   | Final Settlement  Agreement dated August 6, 1999 between Infigen, Inc., ACT and  Steven Stice.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.58  |   | Letter Agreement  dated April 20, 2000 between ACT and Dr. Steven L. Stice.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.59  |   | Master Laboratory  Services Agreement dated as of January 4, 2001 between White Eagle  Laboratories, Inc. and ACT                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.60  |   | Master Study  Agreement dated as of December 4, 2000 between Biomedical Research  Models, Inc. and ACT                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.61  |   | Agreement  Relating to the Transfer of Biological Materials dated as of February 3,  2000 between Wake Forest University and ACT                                                                                                                                                                                                                                                                                                                                                                               |
| 10.62  |   | Materials  Transfer Agreement dated February 16, 2000 between ACT, B.C. Cancer  Agency and Dr. Peter Lansdorp                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.63  |   | Materials  Transfer Agreement dated January 19, 2000 between ACT, IPK and Anna  Wobus                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.64  |   | Materials  Transfer Agreement dated February 23, 2000 between ACT, Philip Damiani  and Carlos T. Moraes                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.65  |   | Material Transfer  Agreement dated January 6, 1997 between ACT, University of  Massachusetts, University of Colorado and Curtis R. Freed                                                                                                                                                                                                                                                                                                                                                                       |
| 10.66  |   | Material Transfer  Agreement dated March 20, 2000 between ACT, Charlotte Farin and Peter  Farin.                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.67  |   | Sponsored  Research Agreement dated as of May 15, 2000 between Carl H. Lindner, Jr.  Family Center for Research of Endangered Wildlife (CREW) and ACT                                                                                                                                                                                                                                                                                                                                                     |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |

 

53

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| 10.68  |   | Sponsored  Research Agreement dated as of August 9, 2000 between Cornell University  and ACT                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.69  |   | Sponsored  Research Agreement dated as of December 1, 1999 between ACT and the  University of Massachusetts Amherst                                                                                       |
|   |   | 10.69.1                                                                                                                                                                                                        | Amendment No. 1  to Agreement dated December 1, 1999. |
| 10.70  |   | Sponsored  Research Agreement dated August 1, 1999 between ACT and UMass (D. Good)                                                                                                                        |
| 10.71  |   | Term Sheet for  Non-Exclusive License Agreement dated as of December 23, 2000 between Immerge  BioTherapeutics, Inc. and ACT, as amended by First Amendment to Term  Sheet dated March 14, 2001 |
| 10.72  |   | Withdrawal,  Termination, Assignment and Assumption Agreement dated March 14, 2001 by  and among ACT, BioTransplant, Inc., Immerge BioTherapeutics, Inc.  and Infigen, Inc.                |
| 10.73  |   | Consulting  Agreement between ACT and Karen Chapman dated January 15, 2005                                                                                                                                |
| 21.1   |   | List of  Subsidiaries                                                                                                                                                                                          |
| 31.1   |   | Section 302  Certification of Chief Executive Officer                                                                                                                                                     |
| 31.2   |   | Section 302  Certification of Chief Financial Officer                                                                                                                                                     |
| 32.1   |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                                                                              |
| 32.2   |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                              |

 

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** Indicates amanagement contract or compensation plan.

 

54

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