**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTOND.C. 20549**

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**FORM 10-QSB**

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

**FORTHE PERIOD ENDED MARCH 31, 2007**

**OR**

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

**FORTHE TRANSITION PERIOD FROM           TO          .**

**COMMISSIONFILE NUMBER: 0-50295**

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**ADVANCED CELL TECHNOLOGY, INC.**

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

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

 

**1201 HARBOR BAY PARKWAY,ALAMEDA, CALIFORNIA 94502**

(ADDRESS, INCLUDING ZIPCODE, OF PRINCIPAL EXECUTIVE OFFICES)

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OFTHE ACT:

**CommonStock, $0.001 par value per****share**

Indicate by check mark whether the small businessissuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the small business issuer was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x   No o

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

| Class:                                    | ** ** | **Outstanding at May 3, 2007:** |
|-------------------------------------------|------------|--------------------------------------|
| Common Stock,  $0.001 par value per share |       | 49,474,592 shares                    |

 

Transitional Small Business Disclosure format (checkone)

Yes o   No x

 

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**ADVANCED CELLTECHNOLOGY, INC.**

**INDEX**

| PART I. FINANCIAL  INFORMATION                                     |   |   |   |
|-------------------------------------------------------------------------|--------|--------|--------|
| ITEM 1. FINANCIAL STATEMENTS                                            |   | 1      |   |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN  OF OPERATION |   | 20     |   |
| ITEM 3. CONTROLS AND PROCEDURES                                         |   | 41     |   |
| PART II.  OTHER INFORMATION                                        |   | 41     |   |
| ITEM  1. LEGAL PROCEEDINGS                                              |   | 41     |   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS    |   | 41     |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                 |   | 41     |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS            |   | 41     |   |
| ITEM  5. OTHER INFORMATION                                              |   | 41     |   |
| ITEM 6. EXHIBITS                                                        |   | 42     |   |
| SIGNATURE                                                               |   | 43     |   |

 

**CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

This Quarterly Report on Form 10-QSB andthe materials incorporated herein by reference contain forward-lookingstatements that involve risks and uncertainties. We use words such as “may,” “assumes,”“forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,”“anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,”“continue” and variations thereof, and other statements contained in quarterlyreport, and the exhibits hereto, regarding matters that are not historicalfacts and are forward-looking statements. Because these statements involverisks and uncertainties, as well as certain assumptions, actual results maydiffer materially from those expressed or implied by such forward-lookingstatements. Factors that could cause actual results to differ materiallyinclude, but are not limited to risks inherent in:  our early stage of development, including alack of operating history, lack of profitable operations and the need foradditional capital; the development and commercialization of largely novel andunproven technologies and products; our ability to protect, maintain and defendour intellectual property rights; uncertainties regarding our ability to obtainthe capital resources needed to continue research and development operationsand to conduct research, preclinical development and clinical trials necessaryfor regulatory approvals; uncertainty regarding the outcome of clinical trialsand our overall ability to compete effectively in a highly complex, rapidlydeveloping, capital intensive and competitive industry. See “RISK FACTORS THAT MAY AFFECTOUR BUSINESS” set forth on page 26 herein for a more complete discussion ofthese factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date that they are made.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

Forward-looking statementsinclude our plans and objectives for future operations, including plans andobjectives relating to our products and our future economic performance.Assumptions relating to the foregoing involve judgments with respect to, amongother things, future economic, competitive and market conditions, futurebusiness decisions, and the time and money required to successfully completedevelopment and commercialization of our technologies, all of which aredifficult or impossible to predict accurately and many of which are beyond ourcontrol. Although we believe that the assumptions underlying theforward-looking statements contained herein are reasonable, any of thoseassumptions could prove inaccurate and, therefore, we cannot assure you thatthe results contemplated in any of the forward-looking statements containedherein will be realized. Based on the significant uncertainties inherent in theforward-looking statements included herein, the inclusion of any such statementshould not be regarded as a representation by us or any other person that ourobjectives or plans will be achieved.

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**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARYBALANCE SHEET**
|                                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|-------------|
| ** **                                                                                                                            | ** ** | **2007**           | ** ** | **2006**              | ** **  |
| ** **                                                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** **  |
| **ASSETS**                                                                                                                            |       |               |       |                  |        |   |   |
| Current assets:                                                                                                                       |       |               |       |                  |        |   |   |
| Cash and cash equivalents                                                                                                             |       | $                  | 3,746,830  |                  |        | $ | 8,689,336 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $236,399 and $236,399                                                 |       | 55,456             |       |                  | 66,319      |   |   |
| Prepaid expenses                                                                                                                      |       | 157,712            |       |                  | 111,229     |   |   |
| Deferred royalty fees, current portion                                                                                                |       | 286,275            |       |                  | 225,475     |   |   |
| Total current  assets                                                                                                                 |       | 4,246,273          |       |                  | 9,092,359   |   |   |
| Property and equipment, net                                                                                                           |       | 1,026,822          |       |                  | 1,081,680   |   |   |
| Deferred royalty fees, less current portion                                                                                           |       | 1,458,385          |       |                  | 1,062,620   |   |   |
| Deposits                                                                                                                              |       | 138,841            |       |                  | 133,841     |   |   |
| Deferred issuance  costs, net of amortization of $329,036 and $1,035,120                                                              |       | 4,583,206          |       |                  | 5,619,218   |   |   |
| Total assets                                                                                                                          |       | $                  | 11,453,527 |                  |        | $ | 16,989,718 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                       |       |               |       |                  |        |   |   |
| Current liabilities:                                                                                                                  |       |               |       |                  |        |   |   |
| Accounts payable                                                                                                                      |       | $                  | 2,440,041  |                  |        | $ | 3,067,825 |   |   |
| Accrued expenses                                                                                                                      |       | 1,149,096          |       |                  | 1,023,583   |   |   |
| Deferred revenue, current portion                                                                                                     |       | 497,374            |       |                  | 432,509     |   |   |
| Interest payable                                                                                                                      |       | 75,833             |       |                  | 75,833      |   |   |
| Advances payable—other                                                                                                           |       | 130,000            |       |                  | 130,000     |   |   |
| 2005 Convertible debenture and embedded derivatives,  net of discounts of $1,800,515 and $3,713,554               |       | 4,485,754          |       |                  | 7,354,706   |   |   |
| 2006 Convertible debenture and embedded derivatives  (fair value $5,131,950  and $5,472,177)                                          |       | 4,160,035          |       |                  | 3,971,543   |   |   |
| Warrant and option derivatives—current portion                                                                                   |       | 3,707,606          |       |                  | 2,264,175   |   |   |
| Capital leases—current portion                                                                                                   |       | 77,594             |       |                  | 77,594      |   |   |
| Notes payable—other                                                                                                              |       | 638,674            |       |                  | 638,674     |   |   |
| Total current liabilities                                                                                                             |       | 17,362,006         |       |                  | 19,036,442  |   |   |
| 2005 Convertible debenture and embedded derivatives,  less current portion and net of discounts of $382,507 and $1,571,332            |       | 952,967            |       |                  | 3,112,029   |   |   |
| 2006 Convertible debenture and embedded derivatives,  less current portion (fair value $16,862,124 and $12,768,413)                   |       | 13,668,685         |       |                  | 9,266,933   |   |   |
| Warrant and option derivatives, less current portion                                                                                  |       | 16,988,265         |       |                  | 12,987,967  |   |   |
| Capital leases, less current portion                                                                                                  |       | 12,481             |       |                  | 31,971      |   |   |
| Deferred revenue, less current portion                                                                                                |       | 1,907,492          |       |                  | 2,096,700   |   |   |
| Total liabilities                                                                                                                     |       | 50,891,897         |       |                  | 46,532,042  |   |   |
| Commitments and  contingencies                                                                                                        |       | —             |       |                  | —      |   |   |
| Stockholders’  deficit:                                                                                                          |       |               |       |                  |        |   |   |
| Preferred stock, $0.001 par value; 50,000,000 shares  authorized, 0 issued and outstanding                                            |       | —             |       |                  | —      |   |   |
| Common stock, $0.001 par value; 500,000,000 shares  authorized, 48,969,882 issued and outstanding       |       | 48,970             |       |                  | 39,318      |   |   |
| Additional paid-in capital                                                                                                            |       | 22,317,378         |       |                  | 12,291,873  |   |   |
| Accumulated deficit                                                                                                                   |       | (61,804,719        | )          |                  | (41,873,515 | ) |   |
| Total  stockholders’ deficit                                                                                                     |       | (39,438,371        | )          |                  | (29,542,324 | ) |   |
| Total liabilities and  stockholders’ deficit                                                                                     |       | $                  | 11,453,527 |                  |        | $ | 16,989,718 |   |   |

** **

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

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF OPERATIONS(UNAUDITED)**
|                                                                                      | ** ** | **Three months ended March 31,** | ** **  |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                           | ** ** | **2007**                                             | ** **  | **2006** | ** ** |
| Revenue:                                                                             |       |                                                 |        |   |   |
| License fees and royalties                                                           |       | $                                                    | 124,343     |   | $ | 83,127 |   |
| Cost of revenue                                                                      |       | 61,436                                               |        | 61,189 |   |
| Gross profit                                                                         |       | 62,908                                               |        | 21,938 |   |
| Operating  expenses:                                                                 |       |                                                 |        |   |   |
| Research and development                                                             |       | 3,649,088                                            |        | 1,808,566 |   |
| Grant reimbursements                                                                 |       | (57,582                                              | )           | (200,905 | ) |
| General and administrative                                                           |       | 1,741,104                                            |        | 2,630,037 |   |
| Total operating  expenses                                                            |       | 5,332,610                                            |        | 4,237,698 |   |
| Loss from  operations                                                                |       | (5,269,703                                           | )           | (4,215,760 | ) |
| Other income  (expense):                                                             |       |                                                 |        |   |   |
| Interest income                                                                      |       | 78,047                                               |        | 118,466 |   |
| Interest expense and late fees                                                       |       | (4,977,140                                           | )           | (3,081,014 | ) |
| Charges related to repricing of 2005 Convertible  Debentures and Warrants  |       | (843,277                                             | )           | — |   |
| Adjustments to fair value of derivatives                                             |       | (8,919,131                                           | )           | 11,991,677 |   |
| Total other  income (expense)                                                        |       | (14,661,502                                          | )           | 9,029,129 |   |
| Net Loss                                                                             |       | $                                                    | (19,931,204 | ) | $ | 4,813,369 |   |
| Basic earnings  per share                                                            |       | $                                                    | (0.49       | ) | $ | 0.20 |   |
| Diluted earnings  per share                                                          |       | $                                                    | (0.49       | ) | $ | 0.09 |   |
| Weighted average shares  used in computation of earnings per share                   |       |                                                 |        |   |   |
| Basic                                                                                |       | 40,623,810                                           |        | 23,767,391 |   |
| Diluted                                                                              |       | 40,623,810                                           |        | 57,332,947 |   |

 

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

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENTS OF CASH FLOWS(UNAUDITED)**
|                                                                              | ** ** | **Quarter Ended March 31,** | ** **  |
|------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                                   | ** **  | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                   |       |                                       |        |   |   |
| Net loss                                                                     |       | $                                          | (19,931,204 | ) | $ | 4,813,369 |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                       |        |   |   |
| Depreciation and amortization                                                |       | 93,997                                     |        | 37,661 |   |
| Amortization of deferred charges                                             |       | 61,436                                     |        | 41,190 |   |
| Amortization of deferred revenue                                             |       | (124,343                                   | )           | (83,126 | ) |
| Amortization of deferred issuance costs                                      |       | 1,036,012                                  |        | 207,029 |   |
| Shares issued for services                                                   |       | —                                     |        | 331,828 |   |
| Amortization of discounts                                                    |       | 3,938,622                                  |        | 2,860,227 |   |
| Adjustments to Fair Value of Derivatives                                     |       | 8,919,131                                  |        | (11,991,677 | ) |
| Repricing of 2005 Convertible Debentures and Warrants                        |       | 843,277                                    |        | — |   |
| Non-cash compensation charge                                                 |       | 1,479,208                                  |        | 114,262 |   |
| Changes  in operating assets and liabilities:                                |       |                                       |        |   |   |
| (Increase)  decrease in:                                                     |       |                                       |        |   |   |
| Accounts receivable                                                          |       | 10,863                                     |        | 10,626 |   |
| Prepaid expenses                                                             |       | (46,483                                    | )           | 16,719 |   |
| Deferred charges                                                             |       | (518,001                                   | )           | (185,000 | ) |
| Deposits                                                                     |       | —                                     |        | (17,151 | ) |
| Increase  (decrease) in:                                                     |       |                                       |        |   |   |
| Accounts payable and accrued expenses                                        |       | (502,271                                   | )           | (382,110 | ) |
| Interest payable                                                             |       | —                                     |        | 11,250 |   |
| Net cash used in  operating activities                                       |       | (4,739,754                                 | )           | (4,214,905 | ) |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |       |                                       |        |   |   |
| Purchases of  property and equipment                                         |       | (39,139                                    | )           | (213,247 | ) |
| Payment of  deposits                                                         |       | (5,000                                     | )           | — |   |
| Net cash used in  investing activities                                       |       | (44,139                                    | )           | (213,247 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |       |                                       |        |   |   |
| Proceeds from  exercise of warrants                                          |       | —                                     |        | 6,100 |   |
| Payments on convertible  debentures                                          |       | (139,123                                   | )           | — |   |
| Payments on notes  and leases                                                |       | (19,490                                    | )           | (31,375 | ) |
| Settlement payment                                                           |       | —                                     |        | (19,484 | ) |
| Net cash (paid)/provided  by financing activities                            |       | (158,613                                   | )           | (44,759 | ) |
| Net increase/(decrease) in cash                                              |       | (4,942,507                                 | )           | (4,472,911 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 8,689,336                                  |        | 13,857,901 |   |
| Cash and cash  equivalents, end of period                                    |       | 3,746,830                                  |        | 9,384,990 |   |
| Cash paid for:                                                               |       |                                       |        |   |   |
| Interest                                                                     |       | $                                          | 2,504       |   | $ | 2,509 |   |
| Income taxes                                                                 |       | $                                          | —      |   | $ | — |   |

 

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

**During the quarterended March 31, 2007:**

The Company issued approximately 2,670,033 shares ofcommon stock in redemption of convertible debentures with a face value ofapproximately $1,722,000.

The Company issued approximately 5,630,870 shares ofcommon stock in conversion of convertible debentures with a face value ofapproximately $5,067,790.

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

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

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

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

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**ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARYSTATEMENT OF STOCKHOLDERS’ DEFICITFOR THE THREE MONTH PERIOD ENDED MARCH 31, 2007 (UNAUDITED)**
|                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**   | ** **  |
|----------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------|-------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Deficit** | ** **  |
| Balance at  December 31, 2006                       |       | 39,318,070            |       | $           | 39,318     |            | $          | 12,291,873             |       | $           | (41,873,515 | ) | $ | (29,542,324 | ) |
| Convertible  Debenture Redemption                        |       | 2,670,033             |       | 2,670       |       | 1,719,427       |       | —                 |       | 1,722,097   |        |
| Convertible  Debenture Conversion                        |       | 5,630,870             |       | 5,631       |       | 7,077,316       |       | —                 |       | 7,082,947   |        |
| Issuance of stock  in payment of board fees              |       | 35,909                |       | 36          |       | 20,716          |       | —                 |       | 20,752      |        |
| Option  compensation charges                             |       | —                |       | —      |       | 194,511         |       | —                 |       | 194,511     |        |
| Issuance of stock  in payment of license fees            |       | 800,000               |       | 800         |       | 607,200         |       | —                 |       | 608,000     |        |
| Issuance of stock  in payment of employee bonuses        |       | 515,000               |       | 515         |       | 406,335         |       | —                 |       | 406,850     |        |
| Net loss for the  three months ended March 31, 2007 |       | —                |       | —      |       |            |       | (19,931,204            | )          | (19,931,204 | )           |
| Balance at  March 31, 2007                          |       | 48,969,882            |       | $           | 48,970     |            | $          | 22,317,378             |       | $           | (61,804,719 | ) | $ | (39,438,371 | ) |

 

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

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**ADVANCEDCELL TECHNOLOGY, INC. AND SUBSIDIARY**

**NOTESTO FINANCIAL STATEMENTS**

**March 31, 2007**

**(UNAUDITED)**

**1.**                 ORGANIZATIONALMATTERS

**Organization**

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

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

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

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

**Nature of Business**

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

**Going Concern**

As reflected in theaccompanying financial statements, the Company has losses from operations,negative cash flows from operations, a substantial stockholders’ deficit andcurrent liabilities exceed current assets. The Company will thus not be able tocontinue as a going concern and fund cash requirements for operations through March 15,2008 with current cash reserves. As more fully described in Note 3—ConvertibleDebentures—2006 and Note 5—Warrant and Option Derivatives, the Company wasable to raise cash in the quarter ended September 30, 2006. Notwithstandingsuccess in raising capital, there continues to be substantial doubt about theCompany’s ability to continue as a going concern.

In view of the mattersdescribed in the preceding paragraph, recoverability of a major portion of therecorded asset amounts shown in the accompanying consolidated balance sheet isdependent upon continued operations of the Company, which, in turn, isdependent upon the Company’s ability to continue to raise capital and ultimatelygenerate positive cash flows from operations. The financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or 

5

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amountsand classifications of liabilities that might be necessary should the Companybe unable to continue its existence.

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

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

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

**2.**                 SIGNIFICANTACCOUNTING POLICIES

***Basis of Presentation—***Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand the rules and regulations of the Securities and Exchange Commissionfor Form 10-QSB.

***Use of Estimates—******These***consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States and, accordingly, requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period. Specifically,our management has estimated variables used to calculate the Black Scholes andbinomial lattice model calculations used to value derivative instrumentsdiscussed below under “Valuation of Derivative Instruments”. In addition,management has estimated the expected economic life and value of our licensedtechnology, our net operating loss for tax purposes, share-based payments tocompensation to employees, directors, consultants and investment banks, theuseful lives of our fixed assets and our allowance for bad debts. Actualresults could differ from those estimates.

***Reclassifications—***Certainprior year financial statement balances have been reclassified to conform tothe current year presentation. These reclassifications have no effect on the recordednet loss.

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

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

***Equipment—******We***recordour equipment at historical cost. We expense maintenance and repairs asincurred. Depreciation is provided for on the straight-line method over threeto six years. Upon disposition of equipment, the gross cost and accumulateddepreciation are written off and the difference between the proceeds and thenet book value is recorded as a gain or loss on sale of assets. In the case ofcertain assets acquired under Capital Leases, the assets are recorded net ofimputed interest, based upon the net present value of future payments. Assetsunder capital lease are pledged as collateral for the related lease.

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***Deferred Issuance Costs—***Payments,either in cash or share-based payments, made in connection with the sale ofdebentures are recorded as deferred debt issuance costs and amortized using theeffective interest method over the lives of the related debentures. Theweighted average amortization period for deferred debt issuance costs is 36months, and as redemptions occur the Company writes off the proportional amountof the original deferred issuance cost to interest expense.

***Intangible and Long-Lived Assets—******We*********follow Statement of FinancialAccounting Standards  (“FAS”) No. 144,“Accounting for Impairment of Disposal of Long-Lived Assets,” which establisheda “primary asset” approach to determine the cash flow estimation period for agroup of assets and liabilities that represents the unit of accounting for along-lived asset to be held and used. Long-lived assets to be held and used arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. The carryingamount of a long-lived asset is not recoverable if it exceeds the sum of theundiscounted cash flows expected to result from the use and eventualdisposition of the asset. Long-lived assets to be disposed of are reported atthe lower of carrying amount or fair value less cost to sell. During the yearsended December 31, 2006 and 2005, no impairment loss was recognized.

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

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

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

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

***Stock Based Compensation—******At***March 31,2007, we had two stock-based employee compensation plans, which are describedmore fully in Note 9—Stock-Based Compensation.

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

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

***Net Loss Per Share—******We***use FAS No. 128,“Earnings Per Share” for calculating the basic and diluted loss per share. Wecompute basic loss per share by dividing net loss and net loss attributable tocommon shareholders by the weighted average number of common sharesoutstanding. 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 endedMarch 31, 2007, approximately 76,000,000 potentially dilutive shares wereexcluded from the shares used to calculate diluted earnings per share as theirinclusion would reduce net loss per share. There were 23,000,000 potentiallydilutive shares at March 31, 2006.

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

When tax returns arefiled, it is highly certain that some positions taken would be sustained uponexamination by the taxing authorities, while others are subject to uncertaintyabout the merits of the position taken or the amount of the position that wouldbe ultimately sustained. The benefit of a tax position is recognized in thefinancial statements in the period during which, based on all availableevidence, management believes it is more likely than not that the position willbe sustained upon examination, including the resolution of appeals orlitigation processes, if any. Tax positions taken are not offset or aggregatedwith other positions. Tax positions that meet the more-likely-than-notrecognition threshold are measured as the largest amount of tax benefit that ismore than 50 percent likely of being realized upon settlement with theapplicable taxing authority. The portion of the benefits associated with taxpositions taken that exceeds the amount measured as described above isreflected as a liability for unrecognized tax benefits in the accompanying balancesheet along with any associated interest and penalties that would be payable tothe taxing authorities upon examination.

Interest and penaltiesassociated with unrecognized tax benefits are classified as additional incometaxes in the statement of income.

***Concentrations and Other Risks—***Currently,the Company’s revenues and accounts receivable are concentrated on onecustomer. There is also a geographic concentration of the Company’s primaryactivities in Northern California and Massachusetts. Other risks include theuncertainty of the regulatory 

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environment and theeffect of future regulations on the Company’s business activities. As we are abiotechnology research and development company, there is also the attendantrisk that someone could commence legal proceedings over our discoveries. Actsof God could also adversely affect our business.

***FIN 48***

Effective January 1,2007, we adopted Financial Accounting Standard Board (“FASB”) InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB Statement No. 109* (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with FAS No. 109, *Accounting for Income Taxes*. We utilize a recognitionthreshold and measurement attributes for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. See Note 11 to the accompanying financial statements for informationregarding the effects of adopting FIN 48.

***Recent Accounting Pronouncements***

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

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

**3.**                 CONVERTIBLEDEBENTURES—2006

On September 6, 2006,we entered into a Securities Purchase Agreement with accredited investors forthe issuance of an aggregate of $10,981,250 principal amount of convertibledebentures with an original issue discount of $2,231,250 representingapproximately 20.3%. In connection with the closing of the sale of thedebentures, we received gross proceeds of $8,750,000. These convertibledebentures were issued in connection with certain additional investment rightsgranted in connection with the convertible debentures issued in 2005, anddescribed more fully in Note 4—Convertible Debentures—2005. The convertibledebentures are convertible at the option of the holders into 38,129,340 sharesof Common Stock at a fixed conversion price of $0.288  per share, subject to anti-dilution and othercustomary adjustments. In 

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connectionwith the Securities Purchase Agreement, we also issued warrants to purchase anaggregate of 19,064,670 shares of our Common Stock. The term of the warrants isfive years and the exercise price is $0.3168 per share, subject to anti-dilutionand other customary adjustments. The investors have contractually agreed torestrict their ability to convert the convertible debentures, exercise thewarrants and exercise the additional investment right and receive shares of ourCommon Stock such that the number of shares of our Common Stock held by themand their affiliates after such conversion or exercise does not exceed 4.99% ofour then issued and outstanding shares of our Common Stock.

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

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

The agreement included anumber of other embedded derivative instruments, and the Company has compliedwith the provisions of FAS 155, “Accounting for Certain Hybrid FinancialInstruments”, and recorded the fair value of the convertible debentures, andrelated embedded derivatives, as of September 6, 2006.  The fair value of the debentures and relatedderivative instruments was valued using a combination of Binomial and BlackScholes models, resulting in a fair value of $22,200,000. The excess of thisvalue over the face value of the Convertible Debentures was recorded throughthe results of operations as a debit to Charges Related to Issuance ofConvertible Debentures.

The 2006 Convertible Debenturesand related embedded derivatives outstanding at March 31, 2007 were againvalued at fair value using a combination of Binomial and Black Scholes models,resulting in an increase  in the fairvalue of the liability of approximately $4,602,000 which was recorded throughthe results of operations as a debit  toAdjustments to Fair Value of Derivatives.

In connection with this financing, we paid cash feesto a broker-dealer of $525,000 and issued a warrant to purchase4,575,521  shares of Common Stock at anexercise price of $0.3168 per share. The initial fair value of the warrant wasestimated at approximately $3,600,000 using the Black Scholes pricing model.The assumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 176%, (3) risk-free interestrate of 4.81%, and (4) expected life of 5 years. Cash fees paid, andthe initial fair value of the warrant, have been capitalized as debt issuancecosts and are being amortized over 36 months, and as redemptions occur theCompany writes off the proportional amount of the original deferred issuancecost to interest expense.

Thefollowing table summarizes the 2006 Convertible Debentures and discountsoutstanding at March 31, 2007 (unaudited):

| 2006 Convertible  debentures at fair value                      |   | $          | 21,994,075 |   |
|-----------------------------------------------------------------|--------|------------|------------|--------|
| Warrant derivative  discount                                    |   | (2,654,552 | )          |
| Original issue discount                                         |   | (1,510,803 | )          |
| Net convertible  debentures                                     |   | 17,828,720 |       |
| Less current portion                                            |   | (4,160,035 | )          |
| 2006 Convertible debentures and embedded  derivatives-long term |   | $          | 13,668,685 |   |

 

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**4.**                 CONVERTIBLEDEBENTURES—2005

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

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

| **Embedded Derivative Liability (Asset)** | ** ** | ** ** | ** ** | **Fair value  December 31, 2006** | ** ** | **Fair value  March 31, 2007  (unaudited)** | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| Conversion feature                                       |       |       | $          | 1,104,414                                        |       |                                                       |       | $ | 1,723,458 |   |   |
| Anti-dilution  protection                                |       |       | 2,107,767  |                                             |       |                                                       | 544,162    |   |   |
| Default provisions                                       |       |       | 46,692     |                                             |       |                                                       | 10,000     |   |   |
| Right to provide  future financing                       |       |       | 0          |                                             |       |                                                       | 0          |   |   |
| Company right to  force conversion                       |       |       | (185,091   | )                                                |       |                                                       | (407,773   | ) |   |
|                                                     |       |       | $          | 3,070,782                                        |       |                                                       |       | $ | 1,869,907 |   |   |

 

The fair value of the derivative for the conversionfeature was valued as an American call option using the Binomial Option PricingModel with the following inputs: (1) closing stock price of $0.78 atMarch 31, 2007 (2) exercise price equal to the $0.90 conversion price(3) volatility based upon the Company’s stock trading of  157% (4) Treasury note rates with termscommensurate with the remaining term of the Notes of 4.71%, and(5) duration of the note as an amortizing debenture of approximately0.80 years, based upon present values.

The fair value of the derivative for anti-dilutionprotection was valued using a standard put option binomial model, adjusted forthe probability of subsequent financing at prices below the principal’sconversion option with the following inputs: (1) closing stock price as ofthe valuation date of $0.78 (2) exercise price equal to the $0.90conversion price (3) volatility based upon the Company’s stock trading of 177%(4) Treasury note rates with terms commensurate with the remaining term ofthe Notes of 4.58% and (5) duration of the note as an amortizing debentureof approximately 0.66 years based upon present values.

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

The fair value of the derivative asset related to theCompany’s right to force conversion was based upon a binomial option pricingmodel with the following inputs: (1) closing stock price at the valuationdate of $0.78 (2) exercise price of $1.80 per share which is required forthe forced conversion (3) volatility based upon the Company’s stocktrading of 173% (4) Treasury note rate with terms commensurate with theremaining term of the Notes of 4.71% and (5) duration of the note as anamortizing debenture of approximately 0.66 years based upon presentvalues.

During the three months ended March 31, 2007, anincrease in the fair value of the embedded derivative amounts of approximately$1,200,000  was recorded through resultsof operations as Adjustment to Fair Value of Derivatives.

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During the three months ended March 31, 2007, theCompany recorded approximately $3,102,000 as Interest Expense for amortizationof discounts for original issue discount, discount for warrant derivative, andother embedded derivatives identified above.

In connection with this financing, we paid cash feesto a broker-dealer of $1,065,000 and issued a warrant to purchase 1,162,239shares of Common Stock at an exercise price of $2.53 per share. The initialfair value of the warrant was estimated at approximately $1,379,000 using the BlackScholes pricing model. The assumptions used in the Black Scholes model are asfollows: (1) dividend yield of 0%; (2) expected volatility of 64%, (3) risk-freeinterest rate of 3.99%, and (4) expected life of 5 years. Cash feespaid, and the initial fair value of the warrant, have been capitalized as debtissuance costs and are being amortized over 36 months under the effectiveinterest rate method. Interest expense for the three months ended March 31,2007 was approximately $914,000.

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

The Company has considered the impact of EmergingIssue Task Force statements, or EITFs 96-19—*Debtor’sAccounting for a Modification or Exchange of Debt Instruments, 02-4—DeterminingWhether a Debtor’s Modification or Exchange of Debt Instruments is Within theScope of FASB No. 15, and 05-7—Accounting for Modifications toconversion Options Embedded in Debt Instruments and Related Issues*onthe accounting treatment of the change in conversion price of the 2005Convertible Debentures described in the paragraph above. EITF 96-19states that a transaction resulting in a significant change in the nature of adebt instrument should be accounted for as an extinguishment of debt. TheCompany has concluded that the change in conversion price does not constitute asignificant change in the nature of the debt and that the transaction shouldnot be treated as an extinguishment of that debt.

Thefollowing table summarizes the 2005 Convertible Debentures and embeddedderivatives outstanding at March 31, 2007:

| 2005 Convertible  debentures at $0.90 at face                        |   | $          | 5,751,836 |   |
|----------------------------------------------------------------------|--------|------------|-----------|--------|
| Discounts on  debentures:                                            |   |       |      |
| Original issue discount                                              |   | (540,184   | )         |
| Conversion feature derivative                                        |   | (900,966   | )         |
| Warrant derivative                                                   |   | (707,470   | )         |
| Other derivatives                                                    |   | (34,402)   |      |
| Net convertible  debentures                                          |   | 3,568,814  |      |
| Embedded  derivatives                                                |   | 1,869,907  |      |
| 2005 Convertible  debentures and embedded derivatives                |   | 5,438,721  |      |
| Less current portion                                                 |   | (4,485,754 | )         |
| 2005 Convertible  debentures and embedded derivatives—long term |   | $          | 952,967   |   |

 

**5.**                 WARRANTAND OPTION DERIVATIVES

As described more fully in Note 4—Convertible Debentures—2005,the provisions of our convertible debenture financing completed in September 2005permit the Company to make its monthly redemption in shares rather than cashupon satisfaction of certain conditions. Under the terms of the debentureagreement, the price per share is variable dependent upon the actual closingprice of the Company’s common stock. Accordingly, the total number of shares toretire outstanding principal is variable and the Company can not be assuredthat there are adequate authorized shares to settle all contractual obligationsunder the debenture agreement, and other option and warrant agreementsoutstanding.

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Accordingly, in accordance with the provisions of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to andPotentially Settled in a Company’s Own Stock” the Company has reviewed allinstruments previously recorded as permanent equity under EITF 00-19which are described in detail in Note 8—Stockholders’ Equity Transactions.As of September 15, 2005, the closing date of the convertible debenturefinancing, a $25,600,000 increase in the fair value of instruments previouslyrecorded as permanent equity with a value of zero was recorded based upon fairvalues computed under a Black Scholes model with the following assumptions: (1) dividendyield of 0% (2) expected volatility of 64% (3) risk-free interestrate of approximately 3.9% and (4) expected life and exercise pricesconsistent with each individual instrument.

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

At March 31, 2007 the fair value of eachinstrument was computed under a Black Scholes model with the followingassumptions: (1) dividend yield of 0% (2) expected volatility of 173%(3) risk-free interest rate of approximately 4.8% and (4) expectedlife and exercise prices consistent with each individual instrument. Thesecalculations resulted in an aggregate value of derivative instruments ofapproximately $20,696,000. As a result, for the three months ended March 31,2007  the Company recorded approximately$5,200,000 as a debit to Adjustment to Fair Value of Derivatives.

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

The Company has considered the impact of EmergingIssue Task Force statements, or EITFs 96-19—*Debtor’sAccounting for a Modification or Exchange of Debt Instruments, 02-4—DeterminingWhether a Debtor’s Modification or Exchange of Debt Instruments is Within theScope of FASB No. 15, and 05-7—Accounting for Modifications toconversion Options Embedded in Debt Instruments and Related Issues*onthe accounting treatment of the change in conversion price of the 2005 ConvertibleDebentures described in the paragraph above. EITF 96-19 states that atransaction resulting in a significant change in the nature of a debtinstrument should be accounted for as an extinguishment of debt. The Companyhas concluded that the change in conversion price does not constitute asignificant change in the nature of the debt and that the transaction shouldnot be treated as an extinguishment of that debt.

The carrying value of the remaining 2005 debenturewarrant derivatives at March 31, 2007 has been adjusted to reflect “fairvalue” of approximately $1,500,000  basedupon a Black Scholes calculation as follows: (1) dividend yield of 0%; (2) expectedvolatility of 157%, (3) risk-free interest rate of 4.54%, and (4) expectedremaining life of 3.25 years. This resulted in an additional decrease in thefair value of the warrant derivative liability of approximately $390,000which  was recorded through results ofoperations as a credit to Adjustment to Fair Value of Derivatives.

The carrying value of the replacement warrantderivatives at March 31, 2007 has been adjusted to reflect “fair value” ofapproximately $3,200,000  based upon aBlack Scholes calculation as follows: (1) dividend yield of 0%; (2) expectedvolatility of 157%, (3) risk-free interest rate of 4.54%, and (4) expectedremaining life of 4.5 years. This resulted in an increase  in the fair value of the warrantderivative  liability of approximately$876,000 which  was recorded as a debitto Adjustment to Fair Value of Derivatives in the results of operations for thethree months ended March 31, 2007.

The carrying value of the January 2005 financingwarrant derivatives at March 31, 2007 has been adjusted to reflect fairvalue of approximately $2,796,000 based upon a Black Scholes calculation asfollows: (1) dividend yield of 0%, (2) expected volatility of 157%, (3) risk-freeinterest rate of 4.58%, and (4) expected remaining life of 2.00 years.This resulted in an additional increase in the fair value of the 

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warrant derivativeliability of approximately $680,000 which was recorded through results ofoperations as a credit to Adjustment to Fair Value of Derivatives.

The carrying value of thebroker dealer warrant derivatives at March 31, 2007 has been adjusted toreflect fair value of approximately $3,379,000 based upon a Black Scholescalculation as follows: (1) dividend yield of 0%, (2) expectedvolatility of 157%, (3) risk-free interest rate of 4.54%, and (4) expectedremaining life of 4.50 years. This resulted in a decrease in the fair value ofthe warrant derivative liability of approximately $859,000 which was recordedthrough results of operations as a credit to Adjustment to Fair Value ofDerivatives.

**6.**                 ADJUSTMENTTO FAIR VALUE OF DERIVATIVES

Thefollowing table summarizes the components of the Adjustment to Fair Value ofDerivatives, explained in more detail above in Notes 3, 4, and 5,which were recorded as charges to results of operations in the quarter ended March 31,2007. The table summarizes by category of derivative liability the impact frommarket changes during the quarter and the impact of repricing certain warrantsand debentures. 

| ** **                                                      | ** ** | **Impact of** | ** ** | ** **             | ** ** | ** **          | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                      | ** ** | **Repricing**      | ** ** | **“Market”** | ** ** | **Total F.V.** | ** ** |
| ** **                                                      | ** ** | **01.11.07**       | ** ** | **F.V. Adj**      | ** ** | **Adjustment**      | ** ** |
| PIPE Hybrid  instrument 9.06                                    |       | 0                  |       | 3,753,485              |       |                | 3,753,485  |   |   |
| Embedded PIPE  derivatives 9.05                                 |       | 1,216,734          |       | (402,445               | )          |                | 814,289    |   |   |
| Original Warrants PIPE 9.05, not including Replacement Warrants |       | (373,457           | )          | 763,644                |       |                | 390,187    |   |   |
| Other Warrant  derivatives                                      |       |               |       | 4,804,447              |       |                | 4,804,447  |   |   |
|                                                            |       | 843,277            |       | 8,919,131              |       |                | 9,762,408  |   |   |

 

**7.**                 RECLASSIFICATIONOF EQUITY TRANSACTIONS

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

Accordingly, in accordance with the provisions of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to andPotentially Settled in a Company’s Own Stock” the Company has reviewed allinstruments previously recorded as permanent equity under EITF 00-19which are described in detail in Note 8—Stockholders’ Equity Transactions.As of September 15, 2005, the closing date of the convertible debenturefinancing, a $25,600,000 increase in the fair value of instruments previouslyrecorded as permanent equity with a value of zero was recorded based upon fairvalues computed under a Black Scholes model with the following assumptions: (1) dividendyield of 0% (2) expected volatility of 64% (3) risk-free interestrate of approximately 3.9% and (4) expected life and exercise pricesconsistent with each individual instrument.

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

**8.**                 STOCKHOLDERS’EQUITY TRANSACTIONS

We are authorized to issue two classes of capitalstock, to be designated, respectively, Preferred Stock and Common Stock. Thetotal number of shares of Preferred Stock we are authorized to issue is50,000,000 

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par value $0.001 pershare. The total number of shares of Common Stock we are authorized to issue is500,000,000, par value $0.001 per share. We had no Preferred Stock outstandingas of March 31, 2007. We had 48,969,882 shares of Common Stock outstandingas of March 31, 2007.

In February, 2007 the Company issued 300,000 warrantsto purchase common stock at $0.96 per share in connection with consultingservices provided during the quarter. The warrants were valued at approximately$225,000 using the Black Scholes pricing model with the following assumptions: (1) dividendyield of 0%; (2) expected volatility of 165%, (3) risk-free interestrate of 4.90%, and (4) expected life of 4.0 years. This warrant isclassified as a warrant derivative.

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

In January 2007, the Company issued 515,000 shares ofCommon Stock, valued at $407,000, to employees. These shares are fully vestedat issuance and are valued at fair market price on date of grant.

In February 2007, theCompany issued 800,000 shares of Common Stock, valued at $608,000 based uponthe closing price per share on the date of issuance, to Infigen, Inc. in connectionwith the execution of a Patent Assignment Agreement. The Company recorded the$608,000 as deferred royalty fees and will amortize this amount over anestimated life of 10 years.

**9.**                 STOCK-BASEDCOMPENSATION

**Stock Plans**

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

On December 13, 2004, ACT’s Board of Directorsand stockholders approved the establishment of the 2004 Stock Option Plan II(the “*2004 Stock Plan II*”). Thetotal number of common shares available for grant and issuance under the planmay not exceed 1,301,161 shares, subject to adjustment in the event of certainrecapitalizations, reorganizations and similar transactions. Common stockpurchase options may be exercisable by the payment of cash or by other means asauthorized by the Board of Directors or a committee established by the Board ofDirectors.

On January 31, 2005, the Company’s Board ofDirectors approved the establishment of the 2005 Stock Incentive Plan (the “2005Plan”), subject to approval of our shareholders. The total number of commonshares available for grant and issuance under the plan may not exceed9 million shares, plus an annual increase on the first day of each of theCompany’s fiscal years beginning in 2006 equal to 5% of the number of shares ofour common stock outstanding on the last day of the immediately precedingfiscal year, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by the Boardof Directors or a committee established by the Board of Directors.

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

Theassumptions used in the Black Scholes models referred to above are based uponthe following data: (1) Expected dividends on the underlying shares overthe remaining term of the option are based upon historical dividend data(2) The expected volatility of the price of the underlying shares over theexpected term of the option is based upon historical share price data(3) The expected term of the option is estimated by considering thecontractual term of the option and the vesting period of the option.
|                                    | ** ** | ** **         | ** ** | ** **             | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**  | ** ** | ** **    | ** ** |
|------------------------------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|--------------|------------|---------------|------------|---------------|------------|
| ** **                         | ** ** | **Shares**         | ** ** | **Exercise**           | ** ** | **Average**        | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** | **Aggregate** | ** ** |
| ** **                         | ** ** | **Available**      | ** ** | **Stock Options** | ** ** | **Price Per** | ** ** | **Exercise** | ** ** | **Average**   | ** ** | **Intrinsic** | ** ** |
| ** **                         | ** ** | **For Grant** | ** ** | **Outstanding**        | ** ** | **Share**          | ** ** | **Price**    | ** ** | **Life**      | ** ** | **Value**     | ** ** |
| Balance at  December 31, 2006 |       | 478,137            |       |                   | 13,656,976 |               |       | $            | 0.05-$2.48 |          |       | $             | 0.71       |   |   | 8.2 years |   |   |   |
| Annual increase pursuant  to plan  |       | 1,965,963          |       |                   | —     |               |       | —       |       |          | —     |          |       | — |   |   |   |
| Options granted                    |       | (1,300,000         | )          |                   | 1,300,000  |               |       | $            | 0.76       |          |       | $             | 0.76       |   |   | 9.8 years |   |   |   |
| Stock awards                       |       | (515,000           | )          |                   |       |               |       | $            | —     |          |       | $             | —     |   |   |   |   |   |   |
| Balance at March 31, 2007     |       | 629,100            |       |                   | 14,956,976 |               |       | $            | 0.05-$2.48 |          |       | $             | 0.74       |   |   | 8.2 years |   | 2,600,000 |   |

 

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

As of March 31, 2007 and December 31, 2006,there were 8,152,896 and 7,503,665 exercisable options outstanding at aweighted average exercise price per share of $0.74 and $0.61, respectively, andwith a weighted average life of 8.40 years and 8.40 years respectively.

During the period, no options were forfeited orexercised. The aggregate intrinsic value of all options vested is approximately$2.0 million. All fully vested options in the Company are exercisable.

The fair value of all options vested during the yearended December 2006 and the three months ended March 31, 2007 was $522,516 and $187,606 respectively.

For the three months ended March 31, 2007, acharge of approximately $53,000 and $142,000 respectively was recorded throughresults of operations as General and Administrative and Research andDevelopment expense related to share based compensation. These amounts werecalculated using a pre-vesting forfeiture rate of 13%, based onhistorical employee turnover and forfeiture data.

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Asummary of the status of unvested employee stock options as of March 31,2007 and changes during the period then ended, is presented below:

| ** **                          | ** ** | **Options** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|-------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at  December 31, 2006 |       | 3,416,398   |       |                                                                    | $          | 0.22 |   |   |
| Granted                             |       | 1,300,000   |       |                                                                    | $          | 0.69 |   |   |
| Vested                              |       | (649,231    | )          |                                                                    | $          | 0.30 |   |   |
| Unvested at  March 31, 2007    |       | 4,067,167   |       |                                                                    | $          | 0.37 |   |   |

 

As of March 31, 2007,the total remaining unrecognized compensation cost related to unvested stockoptions amounted to $1.0 million, which will be amortized over theweighted-average remaining requisite service period of 4.0 years.

**10.**          COMMITMENTSAND CONTINGENCIES

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

In May 2006 we entered into exclusive andnon-exclusive sublicense agreements with a company whereby we are the licenseeof certain of its technology and intellectual property for a cash payment of$300,000. The agreement requires we pay minimum annual royalties of $25,000 perannum for 2006, $37,500 for 2007 and $50,000 each year thereafter through theterm of the agreement. The initial license fees paid have been capitalized andwill be amortized over the life of the underlying intellectual property,estimated to be approximately ten years.

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

During 2004, we entered into license agreements withtwo parties, the terms of which provide for the initial payment of the licensefee through an aggregate of six promissory notes totaling $1,400,000. The notesmature as follows: $333,333 on December 1, 2005; $666,667 on December 1,2006; and $400,000 on June 1, 2007. There is no stated interest rate for$1,000,000 of notes, the remaining $400,000 bear interest at 10% per year, butonly if the notes are not paid at maturity. Because of the uncertainty of theultimate collection of the principal amount of the notes, they have not beenrecorded in the financial statements and will not be recorded until theircollectibility is reasonably assured.

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

| 1 year  |   | $574,450 |   |
|---------|--------|----------|--------|
| 2 years |   | 299,779  |   |
| 3 years |   | 247,158  |   |
| 4 years |   | 20,850   |   |

 

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

| 2007                                      |   | 65,940  |   |
|-------------------------------------------|--------|---------|--------|
| 2008                                      |   | 36,655  |   |
|                                      |   | 102,595 |   |
| Imputed interest                          |   | (12,520 | )      |
| Net asset value                           |   | 90,075  |   |
| Less current  portion                     |   | (77,594 | )      |
| Long-term commitment  under capital lease |   | $       | 12,481 |   |
|                                           |        |         |        |  |

 

Rent expense recorded in the financial statements forthe three month period ended March 31, 2007 and 2006 was approximately$328,000  and $326,000, respectively.

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

**11.**          INCOMETAXES

The Company adopted the provisions of FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*(“FIN 48”), on January 1, 2007.FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. Due to the fact that the Company hassubstantial net operating loss carryforwards, adoption of FIN 48 had noimpact on the Company’s beginning retained earnings, balance sheets, orstatements of operations.

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

The Company recognizes accrued interest and penalties onunrecognized tax benefits in income tax expense. The Company did not have anyunrecognized tax benefits as of March 31, 2007 and 2006. As a result, theCompany did not recognize interest expense, and additionally, did not recordany penalties during the three months ended March 31, 2007 and 2006. TheCompany does not expect that the amounts of unrecognized tax benefits willchange significantly within the next 12 months.

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**12.**          SUBSEQUENTEVENTS

In April 2007, the Company made its monthlyredemptions of convertible debentures described in Note 6. The terms of theagreement provide for payment in cash, or company stock under certaincircumstances. In connection with the April redemptions, the Companyissued approximately 779,682 shares of common stock and redeemed approximately$514,590 in Notes Payable.

In May 2007, the Company made its monthlyredemptions of convertible debentures described in Note 6. In connection withthe May redemptions, the Company issued approximately 832,085 shares of commonstock and redeemed approximately $502,572 in Notes Payable.

At March 31, 2007, approximately 109,970 of theshares related to the April redemption had been preliminarily issued bythe transfer agent in accordance with the terms of the debenture agreement.Such shares are not reflected as issued and outstanding by the company prior tofinalizing share and cash payments in connection with the redemption in April 2007.

In April 2007, the Company executed a settlementagreement with certain of its creditors to settle outstanding accounts payableof $170,249, accrued interest of $10,833 and late fees of $65,000. Thesettlement resulted in a gain of approximately $128,000 and will be accountedfor as a gain on settlement of debt in April 2007.

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

**OVERVIEW**

This Quarterly Report on Form 10-QSBcontains forward-looking statements that involve risks and uncertainties. Weuse words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,”“will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,”“plans,” “budgets,” “potential,” “continue” and variations thereof, and otherstatements contained in quarterly report, and the exhibits hereto, regarding mattersthat are not historical facts and are forward-looking statements. Because thesestatements involve risks and uncertainties, as well as certain assumptions,actual results may differ materially from those expressed or implied by suchforward-looking statements. Factors that could cause actual results to differmaterially include, but are not limited to risks inherent in: our early stageof development, including a lack of operating history, lack of profitableoperations and the need for additional capital; the development andcommercialization of largely novel and unproven technologies and products; ourability to protect, maintain, and defend our intellectual property rights:uncertainties regarding our ability to obtain the capital resources needed tocontinue research and development operations and to conduct research,preclinical development and clinical trials necessary for regulatory approvals;uncertainty regarding the outcome of clinical trials and our overall ability tocompete effectively in a highly complex, rapidly developing, capital intensiveand competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS”**set forth below on page 26 for amore complete discussion of these factors. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of thedate that they are made. We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

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

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

**SIGNIFICANTACCOUNTING POLICIES**

***Basis ofPresentation******—***The accompanying consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and the rules andregulations of the Securities and Exchange Commission for Form 10-KSB.

***Principles of Consolidation*****—**The accounts of the Company and ACT are  included in the accompanying consolidatedfinancial statements for the period from January 1, 2005 to November 18,2005, when the shareholders approved the roll-up merger to combine the twocompanies. During the period from January 1, 2005 to November 18,2005, all intercompany balances and transactions were  eliminated in consolidation.

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

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***Reclassifications******—***Certain prior yearfinancial statement balances have been reclassified to conform to the currentyear presentation. These reclassifications have no effect on the recorded netloss.

***Cash and Cash Equivalents—******Cash*****equivalents are comprised of certain highly liquidinvestments with maturities of three months or less when purchased. We maintainour cash in bank deposit accounts, which at times, may exceed federally insuredlimits. We have not experienced any losses related to this concentration ofrisk.

***Accounts Receivable—******We*******periodically assess our accounts receivable forcollectibility on a specific identification basis. If collectibility of anaccount becomes unlikely, we record an allowance for that doubtful account.Once we have exhausted efforts to collect, we write off the account receivableagainst the allowance we have already created. We do not require collateral forour trade accounts receivable.

***Equipment—******We*****record our equipment at historical cost. We expensemaintenance and repairs as incurred. Depreciation is provided for on thestraight-line method over three to six years. Upon disposition of equipment,the gross cost and accumulated depreciation are written off and the differencebetween the proceeds and the net book value is recorded as a gain or loss onsale of assets. In the case of certain assets acquired under Capital Leases,the assets are recorded net of imputed interest, based upon the net presentvalue of future payments. Assets under capital lease are pledged as collateralfor the related lease.

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

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

***Fair Value of Financial Instruments—******For*****certain of our financial instruments, including accountsreceivable, account payable, accrued expenses, interest payable, bankoverdraft, advances payable and notes payable, the carrying amounts approximatefair value due to their relatively short maturities.

***Valuation ofDerivative Instruments—******FAS*** 133, “Accountingfor Derivative Instruments and Hedging Activities” requires bifurcation ofembedded derivative instruments and measurement of fair value for accountingpurposes. In addition, FAS 155, “Accounting for Certain Hybrid FinancialInstruments” requires measurement of fair values of hybrid financialinstruments for accounting purposes. We applied the accounting proscribed in FAS155 to account for the 2006 Convertible Debentures described below in Note 3—ConvertibleDebentures 2006. In determining the appropriate fair value, the Company uses avariety of valuation techniques including Black Scholes models, Binomial OptionPricing models, Standard Put Option Binomial models and net present value ofcertain penalty amounts. Derivative liabilities are adjusted to reflect fairvalue at each period end, with any increase or decrease in the fair value beingrecorded in results of operations as Adjustments to Fair Value of Derivatives.The effects of interactions between embedded derivatives are calculated andaccounted for in arriving at the overall fair value of the financialinstruments. In addition, the fair values of freestanding derivativeinstruments such as warrant derivatives are valued using Black Scholes models.

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***Revenue Recognition—******Our*****revenues are generated from license and research agreementswith collaborators. Licensing revenue is recognized on a straight-line basisover the shorter of the life of the license or the estimated economic life ofthe patents related to the license. Deferred revenue represents the portion ofthe license and other payments received that has not been earned. Costsassociated with the license revenue are deferred and recognized over same termas the revenue. Reimbursements of research expense pursuant to grants arerecorded in the period during which collection of the reimbursement becomesassured, because the reimbursements are subject to approval.

***Research andDevelopment Costs—******Research*****and development costs consist of expenditures for theresearch and development of patents and technology, which are notcapitalizable. Our research and development costs consist mainly of payroll andpayroll related expenses, research supplies and research grants. Reimbursementsof research expense pursuant to grants are recorded in the period during whichcollection of the reimbursement becomes assured, because the reimbursements aresubject to approval. Research and development costs are expensed as incurred.

***Stock BasedCompensation—******At*** March 31,2007, we had two stock-based employee compensation plans, which are describedmore fully in Note 9—Stock-Based Compensation.

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

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

Prior to the adoption of SFAS 123R, the Companypresented all tax benefits resulting from the exercise of stock options asoperating cash inflows in the consolidated statements of cash flows, inaccordance with the provisions of the Emerging Issues Task Force (“EITF”) IssueNo. 00-15, “Classification in the Statement of Cash Flows of theIncome Tax Benefit Received by a Company upon Exercise of a NonqualifiedEmployee Stock Option.”  SFAS 123Rrequires the benefits of tax deductions in excess of the compensation costrecognized for those options to be classified as financing cash inflows ratherthan operating cash inflows, on a prospective basis. The impact of this changewas not material to the Company.

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

For the twelve months ended December 31, 2006,76,941,797 potentially dilutive shares were excluded from the shares used tocalculate diluted earnings per share as their inclusion would reduce net lossper share. There were 40,104,105 potentially dilutive shares at December 31,2005.

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***Concentrations andOther Risk—***Currently, the Company’s revenues andaccounts receivable are concentrated on one customer. There is also ageographic concentration of the Company’s primary activities in NorthernCalifornia and Massachusetts. Other risks include the uncertainty of theregulatory environment and the effect of future regulations on the Company’sbusiness activities. As we are a biotechnology research and developmentcompany, there is also the attendant risk that someone could commence legalproceedings over our discoveries. Acts of God could also adversely affect ourbusiness.

***Income Taxes******—***Deferred income taxes are providedusing the liability method whereby deferred tax assets are recognized fordeductible temporary differences and operating loss and tax creditcarryforwards and deferred tax liabilities are recognized for taxable temporarydifferences. Temporary differences are the differences between the reportedamounts of assets and liabilities and their tax bases. Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Deferred tax assets and liabilities are adjusted for the effects ofthe changes in tax laws and rates of the date of enactment.

When tax returns are filed, it is highly certain thatsome positions taken would be sustained upon examination by the taxingauthorities, while others are subject to uncertainty about the merits of theposition taken or the amount of the position that would be ultimately sustained.The benefit of a tax position is recognized in the financial statements in theperiod during which, based on all available evidence, management believes it ismore likely than not that the position will be sustained upon examination,including the resolution of appeals or litigation processes, if any. Taxpositions taken are not offset or aggregated with other positions. Taxpositions that meet the more-likely-than-not recognition threshold are measuredas the largest amount of tax benefit that is more than 50 percent likely ofbeing realized upon settlement with the applicable taxing authority. Theportion of the benefits associated with tax positions taken that exceeds theamount measured as described above is reflected as a liability for unrecognizedtax benefits in the accompanying balance sheet or a reduction in deferred taxamounts along with any associated interest and penalties that would be payableto the taxing authorities upon examination.

Interest and penaltiesassociated with unrecognized tax benefits are classified as additional incometaxes in the statement of income.

***Recent Accounting Pronouncements***

On February 15, 2007, the Financial AccountingStandards Board, or FASB, issued FAS No. 159, “The Fair Value Option forFinancial Assets and Liabilities—Including an Amendment of FAS 115.” Thisstandard permits an entity to choose to measure many financial instruments andcertain other items at fair value. This option is available to all entities.Most of the provisions in FAS 159 are elective; however, an amendment to FAS115 “Accounting for Certain Investments in Debt and Equity Securities” appliesto all entities with available for sale or trading securities. Somerequirements apply differently to entity’s that do not report net income. FAS159 is effective as of the beginning of an entities first fiscal year thatbegins after November 15, 2007. Early adoption is permitted as of thebeginning of the previous fiscal year provided that the entity makes thatchoice in the first 120 days of that fiscal year and also elects to apply theprovisions of FAS 157, “Fair Value Measurements.” We will adopt FAS 159 beginningJanuary 1, 2008 and we are currently evaluating the potential impact theadoption of this pronouncement will have on our financial statements.

Effective January 1,2007, the Company adopted FSP No. FIN 48-1, “Definition ofSettlement in FASB Interpretation No. 48,” (FSP FIN 48-1), which wasissued on May 2, 2007. FSP FIN 48-1 amends FIN 48 to provideguidance on how an entity should determine whether a tax position iseffectively settled for the purpose of recognizing previously unrecognized taxbenefits. The term “effectively settled” replaces the term “ultimately settled”when used to describe recognition, and the terms “settlement” or “settled” 

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replacethe terms “ultimate settlement” or “ultimately settled” when used to describemeasurement of a tax position under FIN 48. FSP FIN 48-1 clarifies that atax position can be effectively settled upon the completion of an examinationby a taxing authority without being legally extinguished. For tax positionsconsidered effectively settled, an entity would recognize the full amount oftax benefit, even if the tax position is not considered more likely than not tobe sustained based solely on the basis of its technical merits and the statuteof limitations remains open. The adoption of FSP FIN 48-1 did not have animpact on the accompanying Financial Statements.

**RESULTS OFOPERATIONS**

***Revenues***

Revenues for the threemonths ended March, 2007 and 2006 were approximately  $124,000 and $83,000 respectively. Theseamounts relate primarily to license fees and royalties collected that are beingamortized over the period of the license granted. The increase in revenue incurrent periods was due to new licenses being granted.

***Research and Development Expenses and GrantReimbursements***

Research and development expenses for the three monthsended March 31, 2007 and 2006  wereapproximately  $3,649,000 and$1,809,000  respectively. The increase inexpenses in the current periods, which consist mainly of facility costs,payroll and payroll related expenses, research supplies and costs incurred inconnection with specific research grants, relate principally to increased staffingand spending for scientific research.

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

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

We expect that research and development expenses willcontinue to increase in the foreseeable future as we add personnel, expand ourpre-clinical research, begin clinical trial activities, and increase 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 thenumber, size and duration of planned and unplanned trials. As our researchefforts mature, we will continue to review the direction of our research basedon an assessment of the value of possible commercial applications emerging fromthese efforts. Based on this continuing review, we expect to establish discreteresearch programs and evaluate the cost and potential for cash inflows fromcommercializing products, partnering with others in the biotechnology orpharmaceutical industry, or licensing the technologies associated with theseprograms to third parties.

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

Grant reimbursements forthe three months ended March 31, 2007 and 2006 were approximately  $58,000 and $201,000, respectively. The 2006amounts represent approved reimbursements pursuant to the grant from NationalInstitutes of Science and Technology. This grant expired in May 2006. The2007 to grant amount is from the Small Business Technology Transfer Program.

***General and Administrative Expenses***

General and administrativeexpenses for the three months ended March 31, 2007 and 2006 wereapproximately  $1,741,000  and $2,630,000 respectively. The principalincrease in expense in the three  monthperiod versus the same period last year is a result of additional salary costsrelated to the addition of key personnel and approximately $600,000 of costsincurred by the Company for investor relations related expenses during thecurrent period. Expenses for the three month period versus the same period lastyear have decreased primarily as a result of decreased general and administrativeinfrastructure costs and legal fees.

***Other Income (Expense)***

Other income (expense) forthe three months ended March 31, 2007 and 2006 were approximately  $(14,662,000) and $9,029,000 , respectively.The increase in other expense in the three months ended March 31, 2007,compared to other income in the prior periods, relates primarily to adjustmentsto fair value of derivatives related to the Convertible Debenture financing andthe Charges related to issuance of Convertible Debentures. The increase ininterest expense in the three months ended March 31, 2007, compared tointerest expense in the prior periods relates primarily to interest recorded inconnection with the convertible debentures.

***Net Income (Loss)***

Net income (loss) for thethree months ended March 31, 2007 and 2006 was approximately  ($19,931,000) and $4,813,000, respectively.The increase in loss in the current period is the result of changes to the fairvalue of derivatives, interest charges related to convertible debentures andcharges related to issuance of Convertible Debentures along with increasedgeneral and administrative and research and development expenses, as well asdecreased grant reimbursements.

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***LIQUIDITY AND CAPITAL RESOURCES***

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

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

Cash and cash equivalentsat March 31, 2007 and December 31, 2006 were approximately $3,747,000and $8,689,000, respectively. The decrease in the current period is primarilythe result of operational cash expenditures.

Ourcash and cash equivalents are limited. We expect to require substantialadditional funding. Our future cash requirements will depend on many factors,including the pace and scope of our research and development programs, thecosts involved in filing, prosecuting, maintaining and enforcing patents andother costs associated with commercializing our potential products. We intendto seek additional funding primarily through public or private financingtransactions, and, to a lesser degree, new licensing or scientificcollaborations, grants from governmental or other institutions, and otherrelated transactions. If we are unable to raise additional funds, we will beforced to either scale back our business efforts or curtail our businessactivities entirely. We anticipate that our available cash and expected incomewill be sufficient to finance most of our current activities for at leasttwelve months from the date of the financial statements, although certain ofthese activities and related personnel may need to be reduced. We cannot assureyou that public or private financing or grants will be available on acceptableterms, if at all. Several factors will affect our ability to raise additionalfunding, including, but not limited to, the volatility of our Common Stock.

**RISKFACTORS THAT MAY AFFECT OUR BUSINESS**

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

**Risks Relating to OurEarly Stage of Development**

**We have a limitedoperating history on which potential investors may evaluate our operations andprospects for profitable operations.**   We have alimited operating history on which a potential investor may base an evaluationof us and our prospects. If we are unable to begin and sustain profitableoperations, investors may lose their entire investment in us. We are in thepre-clinical stage, and our prospects must be considered speculative in lightof the risks, expenses and difficulties frequently encountered by companies intheir early stages of development, particularly in light of the uncertaintiesrelating to the new, competitive and rapidly evolving markets in which weanticipate we will operate. To attempt to address these risks, we must, amongother things, further develop our technologies, products and services,successfully implement our research, development, marketing and commercializationstrategies, respond to competitive developments and attract, retain andmotivate qualified personnel. A substantial risk is involved in investing in usbecause, as an early stage company,

·                     we have fewerresources than an established company,

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

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

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

**Wehave a history of operating losses, and we cannot assure you that we will achievefuture revenues or operating profits.**   We havegenerated modest revenue to date from our operations. Historically, we have hadnet operating losses each year since our inception. We have limited currentpotential sources of revenue from license fees and product developmentrevenues, and we cannot assure you that we will be able to develop such revenuesources or that our operations will become profitable, even if we are able tocommercialize our technologies or any products or services developed from thosetechnologies. If we continue to suffer losses as we have in the past, investorsmay not receive any return on their investment and may lose their entireinvestment.

Although we have revenues from license fees androyalties, we have no commercially marketable products and no immediate abilityto generate revenue from commercial products, nor any assurance of being ableto develop our technologies for commercial applications. As a result, we maynever be able to operate profitably. We are just beginning to identify productsavailable for pre-clinical trials and may not receive significant revenues fromcommercial sales of our products for the next several years, if at all,although we do generate revenues from licensing activities. We have marketedonly a limited amount of services based on our technologies and have littleexperience in doing so. Our technologies and any potential products or servicesthat we may develop will require significant additional effort and investmentprior to material commercialization and, in the case of any biomedicalproducts, pre-clinical and clinical testing and regulatory approvals. We cannotassure you that we will be able to develop any such technologies or anyproducts or services, or that such technologies, products or services willprove to be safe and efficacious in clinical trials, meet applicable regulatorystandards, be capable of being produced in commercial quantities at acceptablecosts or be successfully 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 businessin order to finance operations. The agricultural applications of our technologygenerally have a more rapid realization of revenues due to more limitedregulatory requirements and testing. Our ability to generate revenue from anyagricultural applications of our technology is limited to existing licenseroyalties, if any.

**Wewill require substantial additional funds to continue operating which may notbe available on acceptable terms, if at all.**   Wehave losses from operations, negative cash flows from operations and asubstantial stockholders’ deficit that raise substantial doubt about theCompany’s ability to continue as a going concern. We do not believe that ourcash from all sources, including cash, cash equivalents and anticipated revenuestream from licensing fees and sponsored research contracts is sufficient forus to continue operations beyond March 15, 2008 without raising additionalfinancing.

Management continues to evaluate alternatives andsources for additional funding, which may include public or private investors,strategic partners, and grant programs available through specific states orfoundations, although there is no assurance that such sources will result in raisingadditional capital. Lack of necessary funds may require us to delay, scale backor eliminate some or all of our research and product development programs and/orour capital expenditures, to license our potential products or technologies 

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to third parties, toconsider business combinations related to ongoing business operations, or shutdown some, or all, of our operations.

In addition, our cash requirements may vary materiallyfrom those now planned because of results of research and development, potentialrelationships with strategic partners, changes in the focus and direction ofour research and development programs, competition, litigation required toprotect our technology, technological advances, the cost of pre-clinical andclinical testing, the regulatory process of the United States Food and DrugAdministration, or FDA, and foreign regulators, whether any of our productsbecome approved or the market acceptance of any such products and otherfactors. Our current cash reserves are not sufficient to fund our operationsthrough the commercialization of our first products or services.

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

**Risks Relating toCompetition**

**Ourcompetition includes both public and private organizations and collaborationsamong academic institutions and large pharmaceutical companies, most of whichhave significantly greater experience and financial resources than we do.**   Thebiotechnology and pharmaceutical industries are characterized by intense competition.We compete against numerous companies, both domestic and foreign, many of whichhave substantially greater experience and financial and other resources than wehave. Several such enterprises have initiated cell therapy research programsand/or efforts to treat the same diseases targeted by us. Companies such asGeron Corporation, Genzyme Corporation, StemCells, Inc., AastromBiosciences, Inc. and Viacell, Inc., as well as others, many of whichhave substantially greater resources and experience in our fields than we do,are well situated to effectively compete with us. Any of the world’s largestpharmaceutical companies represents a significant actual or potentialcompetitor with vastly greater resources than ours.

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

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

In addition, many of our competitors havesignificantly greater experience than we have in the development, pre-clinicaltesting and human clinical trials of biotechnology and pharmaceutical products,in obtaining FDA and other regulatory approvals of such products and inmanufacturing and marketing such products. Accordingly our competitors maysucceed in obtaining FDA approval for products more rapidly or effectively thanwe can. Our competitors may also be the first to discover and obtain a validpatent to a particular stem cell which may effectively block all others from doingso. It will be important for us or our collaborators to be the first todiscover any stem cell that we are seeking to discover. Failure to be the firstcould prevent us from commercializing all of our research and developmentaffected by that discovery. Additionally, if we commence commercial sales ofany products, we will also be competing with 

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respect to manufacturingefficiency and sales and marketing capabilities, areas in which we have noexperience.

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

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

**Risks Relating toOur Technology**

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

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

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

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**We may not be able tocommercially develop our technologies and proposed product lines, which, inturn, would significantly harm our ability to earn revenues and result in aloss of investment.**   Our ability to commerciallydevelop our technologies will be dictated in large part by forces outside ourcontrol which cannot be predicted, including, but not limited to, generaleconomic conditions, the success of our research and pre-clinical and fieldtesting, the availability of collaborative partners to finance our work inpursuing applications of nuclear transfer technology and technological or otherdevelopments in the biomedical field which, due to efficiencies, technologicalbreakthroughs or greater acceptance in the biomedical industry, may render oneor more areas of commercialization more attractive, obsolete or competitivelyunattractive. It is possible that one or more areas of commercialization willnot be pursued at all if a collaborative partner or entity willing to fundresearch and development cannot be located. Our decisions regarding theultimate products and/or services we pursue could have a significant adverseaffect on our ability to earn revenue if we misinterpret trends, underestimatedevelopment costs and/or pursue wrong products or services. Any of thesefactors either alone or in concert could materially harm our ability to earnrevenues and could result in a loss of any investment in us.

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

**We may not be able toprotect our proprietary technology, which could harm our ability to operateprofitably.**   The biotechnology and pharmaceuticalindustries place considerable importance on obtaining patent and trade secretprotection for new technologies, products and processes. Our success willdepend, to a substantial degree, on our ability to obtain and enforce patentprotection for our products, preserve any trade secrets and operate withoutinfringing the proprietary rights of others. We cannot assure you that:

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

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

·                    patent applications relating toour potential products or technologies will result in the issuance ofany patents or that, if issued, such patents will afford adequate protection tous or not be challenged invalidated or infringed, and

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

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

**Ourbusiness is highly dependent upon maintaining licenses with respect to keytechnology.**   Several of the key patents weutilize are licensed to us by third parties. These licenses are subject totermination under certain circumstances (including, for example, our failure tomake minimum royalty payments or to timely achieve development and commercializationbenchmarks). The loss of any of such licenses, or the 

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conversion of suchlicenses to non-exclusive licenses, could harm our operations and/or enhancethe prospects of our competitors.

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

**Wemay not be able to adequately protect against piracy of intellectual propertyin foreign jurisdictions.**   Considerable researchin the areas of stem cells, cell therapeutics and regenerative medicine isbeing performed in countries outside of the United States, and a number of ourcompetitors are located in those countries. The laws protecting intellectual propertyin some of those countries may not provide protection for our trade secrets andintellectual property adequate to prevent our competitors from misappropriatingour trade secrets or intellectual property. If our trade secrets orintellectual property are misappropriated in those countries, we may be withoutadequate remedies to address the issue.

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

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

**Risks Relating tothe September 2005 and September 2006 Financings**

**If weare required for any reason to repay our outstanding debentures we would berequired to deplete our working capital, if available, or raise additionalfunds. Our failure to repay the convertible debentures, if required, couldresult in legal action against us, which could require the sale of substantialassets.****  **We have outstanding, as of December 31,2006, $23,505,214 aggregate original principal amount of convertible debentureswith an original issue discount of 20.3187% with $10,824,375 in 2006 Debenturesand $12,680,839 in 2005 Debentures. We are required to redeem on a monthlybasis, by payment with cash or with shares of our common stock, 1/30th of theaggregate original principal amount of the debentures. Unless waived by theholders of the debentures, in order to redeem with shares of our common stockwe must satisfy certain conditions which have yet to be satisfied, includingsuch conditions as the listing of our shares of common stock on either theNASDAQ National Market, the NASDAQ Small Cap Market, or the American StockExchange. These monthly payments will impact the amount of working capitalavailable to us.

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The 2005 Debentures are due and payable on September 14,2008, unless sooner converted into shares of our common stock, and the 2006Debentures are due and payable on February 28, 2010, unless soonerconverted into shares of our common stock. Any event of default could requirethe early repayment of the convertible debentures, including the accruing ofinterest on the outstanding principal balance of the debentures if the defaultis not cured with the specified grace period. We anticipate that the fullamount of the convertible debentures will be converted into shares of ourcommon stock, in accordance with the terms of the convertible debentures. If,prior to the maturity date, we are required to repay the convertible debenturesin full, we would be required to use our limited working capital and raiseadditional funds. If we were unable to repay the notes when required, thedebenture holders could commence legal action against us to recover the amountsdue. Any such action could require us to curtail or cease operations.

**There are a large numberof shares underlying our convertible debentures in full, and warrants that areregistered and available for sale and the sale of these shares may depress themarket price of our common stock.**   As of March 1,2007, we had:

·                    certain outstanding 2005Debentures that may be converted into an estimated 6,412,894 shares ofcommon stock based on a conversion price of $0.90, and

·                    outstanding2005 Warrants to purchase 1,463,223 shares of common stock with an exerciseprice of $0.95 that were issued in connection with the sale of the 2005Debentures, and

·                    outstanding2006 Debentures that may be converted into an estimated 37,584,635 shares ofcommon stock based on a conversion price of $0.288, and

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

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

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

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

**Theissuance of shares upon conversion of the convertible debentures and exerciseof outstanding warrants will cause immediate and substantial dilution to ourexisting stockholders.**   The issuance of sharesupon conversion of the convertible debentures and exercise of warrants,including the replacement warrants, will result in substantial dilution to theinterests of other stockholders since the selling security holders mayultimately convert and sell the full amount issuable on conversion. Although nosingle selling security holder may convert its convertible debentures and/orexercise its warrants if such conversion or exercise would cause it to own morethan 4.99% of our outstanding common stock, this restriction does not preventeach selling security holder from converting and/or exercising some of itsholdings and then converting the rest of its holdings. In this way, eachselling security holder could sell more than this limit while never holdingmore than this limit. There is no upper limit on the number of shares that maybe issued which will have the effect of further diluting the proportionateequity interest and voting power of holders of our common stock, includinginvestors in this offering. In addition, the issuance of the 2006 Debenturesand the 2006 Warrants triggered certain anti-dilution rights for certain thirdparties currently holding securities of the Company resulting in substantialdilution to the interests of other stockholders.

**Paymentof mandatory monthly redemptions in shares of common stock will result insubstantial dilution.**   We expect to satisfy allor a significant portion of our obligation to redeem 1/30th of the 

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aggregate originalprincipal amount of debentures per month through issuance of additional sharesof our common stock. This approach will result in substantial dilution to theinterests of other stockholders.

**If we fail to effect andmaintain registration of the common stock issued or issuable pursuant toconversion of our debentures, or upon exercise of our warrants, we may beobligated to pay the investors of those securities liquidated damages.**   Wehave various obligations to file and obtain the effectiveness of certainregistration statements which include certain outstanding common stock andcommon stock underlying outstanding debentures and common stock underlying the warrants. If we fail to meetany obligations we have to have effective and current registration statementsavailable (including the current registration statement related to the commonstock underlying our debentures and warrants), we may become obligated to payliquidated damages to investors to the extent they may be entitled to suchdamages. In addition, pursuant to the amendments to the 2005 and 2006 financingdocuments described above, we are contractually obligated to file additionalregistration statements at various times in the future. Because of the SEC’srecent interpretation of Rule 415, we cannot offer any assurances that wewill be able to obtain the effectiveness of any registration statement orpost-effective amendments that we may file.

**Risks Relating toGovernment Regulation**

**Companiessuch as ours engaged in research using nuclear transfer and embryonic stemcells are currently subject to strict government regulations, and ouroperations could be harmed by any legislative or administrative effortsimpacting the use of nuclear transfer technology or human embryonic material.**   Ourbusiness is focused on human cell therapy, which includes the production ofhuman differentiated cells from stem cells and involves the use of nucleartransfer technology, human oocytes, and embryonic material. Nuclear transfertechnology, commonly known as therapeutic cloning, and research utilizingembryonic stem cells are controversial subjects, and are currently subject tointense scrutiny, both in the United States, the United Nations and throughoutthe world, particularly in the area of nuclear transfer of human cells and theuse of human embryonic material.

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

**Restrictionson the use of human embryonic stem cells, and the ethical, legal and socialimplications of that research, could prevent us from developing or gainingacceptance for commercially viable products in these areas.**   Someof our most important programs involve the use of stem cells that are derivedfrom human embryos. The use of human embryonic stem cells gives rise toethical, legal and social issues regarding the appropriate use of these cells.In the event that our research related to human embryonic stem cells becomesthe subject of adverse commentary or publicity, the market price for our commonstock could be significantly harmed. 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.

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

Any future oradditional government-imposed restrictions in these or otherjurisdictions with respect to use of embryos or human embryonic stem cells inresearch and development could have a material adverse effect on us, by, amongother things:

·                    harmingour ability to establish critical partnerships and collaborations,

·                    delayingor preventing progress in our research and development,

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

·                    causinga decrease in the price of our stock.

**Becausewe or our collaborators must obtain regulatory approval to market our productsin the United States and other countries, we cannot predict whether or when wewill be permitted to commercialize our products.**   Federal,state and local governments in the United States and governments in othercountries have significant regulations in place that govern many of ouractivities. We are or may become subject to various federal, state and locallaws, regulations and recommendations relating to safe working conditions,laboratory and manufacturing practices, the experimental use of animals and theuse and disposal of hazardous or potentially hazardous substances used inconnection with our research and development work. The preclinical testing andclinical trials of the products that we or our collaborators develop aresubject to extensive government regulation that may prevent us from creatingcommercially viable products from our discoveries. In addition, the sale by usor our collaborators of any commercially viable product will be subject togovernment regulation from several standpoints, including manufacturing,advertising and promoting, selling and marketing, labeling, and distributing.

If, and to the extent that, we are unable to complywith these regulations, our ability to earn revenues will be materially andnegatively impacted. The regulatory process, particularly in the biotechnologyfield, is uncertain, can take many years and requires the expenditure of substantialresources. Biological drugs and non-biological drugs are rigorously regulated.In particular, proposed human pharmaceutical therapeutic product candidates aresubject to rigorous preclinical and clinical testing and other requirements bythe FDA in the United States and similar health authorities in other countriesin order to demonstrate safety and efficacy. We may never obtain regulatoryapproval to market our proposed products. For additional information aboutgovernmental regulations that will affect our planned and intended businessoperations, see “DESCRIPTION OF BUSINESS—*GovernmentRegulation*” in our Annual Report on Form 10KSB for fiscal year2006.

Our products may not receive FDA approval, which wouldprevent us from commercially marketing our products and producing revenues. TheFDA and comparable government agencies in foreign countries impose substantialregulations on the manufacture and marketing of pharmaceutical products throughlengthy and detailed laboratory, pre-clinical and clinical testing procedures,sampling activities and other costly and time-consuming procedures.Satisfaction of these regulations typically takes several years or more andvaries substantially based upon the type, complexity and novelty of theproposed product. We cannot yet accurately predict when we might first submitany Investigational New Drug, or IND, application to the FDA, or whether anysuch IND application would be granted on a timely basis, if at all, nor can weassure you that we will successfully complete any clinical trials in connectionwith any such IND application. Further, we cannot yet accurately predict whenwe might first submit any product license 

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application for FDAapproval or whether any such product license application would be granted on atimely basis, if at all. As a result, we cannot assure you that FDA approvalsfor 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 amaterial adverse effect on the marketing of our products and our ability togenerate product revenue. For additional information about governmentalregulations that will affect our planned and intended business operations, see “DESCRIPTIONOF BUSINESS—*Government Regulation*”in our Annual Report on Form 10KSB for fiscal year 2006.

**For-profitentities may be prohibited from benefiting from grant funding.****  **There has been much publicity aboutgrant resources for stem cell research, including Proposition 71 in California,which is described more fully under the heading “DESCRIPTION OF BUSINESS—*California Proposition 71*” in our AnnualReport on Form 10KSB for fiscal year 2006. There is ongoing litigation inCalifornia that may delay, or prevent the sale of State bonds that would fundthe activities contemplated by California voters. In addition, rules andregulations related to any funding that may ultimately be provided, the type ofentity that will be eligible for funding, the science to be funded, and fundingdetails have not been finalized. As a result of these uncertainties regardingProposition 71, we cannot assure you that funding, if any, will be available tous, or any for-profit entity.

**The government maintainscertain rights in technology that we develop using government grant money andwe may lose the revenues from such technology if we do not commercialize andutilize the technology pursuant to established government guidelines.**   Certainof our and our licensors’ research has been or is being funded in part bygovernment grants. In connection with certain grants, the U.S. governmentretains rights in the technology developed with the grant. These rights couldrestrict our ability to fully capitalize upon the value of this research.

**Risks Relating toOur Reliance on Third Parties**

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

Under agreementswith collaborators, we may rely significantly on such collaborators to, amongother things:

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

·                    fundresearch and development activities with us,

·                    payus fees upon the achievement of milestones, and

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

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

**Ourreliance on the activities of our non-employee consultants, researchinstitutions, and scientific contractors, whose activities are not whollywithin our control, may lead to delays in development of our proposed products.**   Werely extensively upon and have relationships with scientific consultants atacademic and other institutions, some of whom conduct research at our request,and other consultants with expertise in clinical development strategy or othermatters. These consultants are not our employees and may have commitments to,or consulting or advisory contracts with, other entities that may limit theiravailability to us. We have limited control over the activities of theseconsultants and, except as otherwise required by our collaboration andconsulting agreements to the extent they exist, can expect only limited amountsof their time to be dedicated to our activities.

In addition, we have formed research collaborationswith academic and other research institutions throughout the world. Theseresearch facilities may have commitments to other commercial and non-commercialentities. We have limited control over the operations of these laboratories andcan expect only limited amounts of time to be dedicated to our research goals.

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

**General RisksRelating to Our Business**

**Wemay be subject to litigation that will be costly to defend or pursue anduncertain in its outcome.****  **Our business may bring us into conflict with ourlicensees, licensors, or others with whom we have contractual or other businessrelationships, or with our competitors or others whose interests differ fromours. If we are unable to resolve those conflicts on terms that aresatisfactory to all parties, we may become involved in litigation brought by oragainst us. That litigation is likely to be expensive and may require asignificant amount of management’s time and attention, at the expense of otheraspects of our business. The outcome of litigation is always uncertain, and insome cases could include judgments against us that require us to pay damages,enjoin us from certain activities, or otherwise affect our legal or contractualrights, which could have a significant adverse effect on our business.

**Wemay not be able to obtain third-party patient reimbursement or favorableproduct pricing, which would reduce our ability to operate profitably.**   Ourability to successfully commercialize certain of our proposed products in thehuman therapeutic field may depend to a significant degree on patientreimbursement of the costs of such products and related treatments atacceptable levels from government authorities, private health insurers andother organizations, such as health maintenance organizations. We cannot assureyou that reimbursement in the United States or foreign countries will beavailable for any products we may develop or, if available, will not be decreasedin the future, or that reimbursement amounts will not reduce the demand for, orthe price of, our products with a consequent harm to our business. We cannotpredict what additional regulation or legislation relating to the health careindustry or third-party coverage and reimbursement may be enacted in thefuture or what effect such regulation or legislation may have on our business.If additional regulations are overly onerous or expensive, or if health carerelated legislation makes our business more expensive or burdensome thanoriginally anticipated, we may be forced to significantly downsize our businessplans or completely abandon our business model.

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**Ourproducts are likely to be expensive to manufacture, and they may not beprofitable if we are unable to control the costs to manufacture them.**   Ourproducts are likely to be significantly more expensive to manufacture than mostother drugs currently on the market today. Our present manufacturing processesproduce modest quantities of product intended for use in our ongoing researchactivities, and we have not developed processes, procedures and capability toproduce commercial volumes of product. We hope to substantially reducemanufacturing costs through process improvements, development of new science,increases in manufacturing scale and outsourcing to experienced manufacturers.If we are not able to make these or other improvements, and depending on thepricing of the product, our profit margins may be significantly less than thatof most drugs on the market today. In addition, we may not be able to charge ahigh enough price for any cell therapy product we develop, even if they aresafe and effective, to make a profit. If we are unable to realize significantprofits from our potential product candidates, our business would be materiallyharmed.

**To be successful, ourproposed products must be accepted by the health care community, which can bevery slow to adopt or unreceptive to new technologies and products.**   Ourproposed products and those developed by our collaborative partners, ifapproved for marketing, may not achieve market acceptance since hospitals,physicians, patients or the medical community in general may decide not toaccept and utilize these products. The products that we are attempting todevelop represent substantial departures from established treatment methods andwill compete with a number of more conventional drugs and therapiesmanufactured and marketed by major pharmaceutical companies. The degree ofmarket acceptance of any of our developed products will depend on a number offactors, including:

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

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

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

·                    reimbursementpolicies of government and third-party payors.

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

**Ourcurrent source of revenues depends on the stability and performance of oursublicensees.****  **Ourability to collect royalties on product sales from our sublicensees will dependon the financial and operational success of the companies operating under asublicense. Revenues from those licensees will depend upon the financial andoperational success of those third parties. We cannot assure you that theselicensees will be successful in obtaining requisite financing or in developingand successfully marketing their products. These licensees may experienceunanticipated obstacles including regulatory hurdles, and scientific ortechnical challenges, which could have the effect of reducing their ability togenerate revenues and pay us royalties.

**Wedepend on key personnel for our continued operations and future success, and aloss of certain key personnel could significantly hinder our ability to moveforward with our business plan.**   Because of thespecialized nature of our business, we are highly dependent on our ability toidentify, hire, train and retain highly qualified scientific and technical personnelfor the research and development activities we conduct or sponsor. The loss ofone or more certain key executive officers, or scientific officers, would besignificantly detrimental to us. In addition, recruiting and retainingqualified scientific personnel to perform research and development work iscritical to our success. Our anticipated growth and expansion into areas andactivities requiring additional expertise, such as clinical testing, regulatorycompliance, manufacturing and marketing, will require the addition of newmanagement personnel and the development of additional expertise by existingmanagement personnel. There is intense competition for 

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qualified personnel in theareas of our present and planned activities, and there can be no assurance thatwe will be able to continue to attract and retain the qualified personnelnecessary for the development of our business. The failure to attract andretain such personnel or to develop such expertise would adversely affect ourbusiness.

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

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

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

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

**Wepresently have members of management and other key employees located in variouslocations throughout the country which adds complexities to the operation ofthe business.**   Presently, we have members ofmanagement and other key employees located in both California andMassachusetts, which adds complexities to the operation of our business. Weintend to maintain our research facilities in Massachusetts and we haveestablished corporate offices and an additional research facility inCalifornia. We will likely continue to incur significant costs associated withmaintaining multiple locations.

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**We face risks related tocompliance with corporate governance laws and financial reporting standards.****  **The Sarbanes-Oxley Act of2002, as well as related new rules and regulations implemented by theSecurities and Exchange Commission and the Public Company Accounting OversightBoard, require changes in the corporate governance practices and financialreporting standards for public companies. These new laws, rules andregulations, including compliance with Section 404 of the Sarbanes-OxleyAct of 2002 relating to internal control over financial reporting, referred toas Section 404, have materially increased our legal and financialcompliance costs and made some activities more time-consuming and moreburdensome. Section 404 requires that by 2007 our management assess ourinternal control over financial reporting annually and include a report on itsassessment in our annual report. In 2008 our independent registered publicaccounting firm may be required to audit both the design and operatingeffectiveness of our internal controls and management’s assessment of thedesign and the operating effectiveness of our internal control over financialreporting.

**Risks Relating toOur Common Stock**

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

·                    clinicaltrial results

·                    theamount of cash resources and ability to obtain additional funding

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

·                    enteringinto or terminating strategic relationships

·                    changesin government regulation

·                    disputesconcerning patents or proprietary rights

·                    changesin revenues or expense levels

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

·                    reportsby securities analysts

·                    activitiesof various interest groups or organizations

·                    mediacoverage

·                    statusof the investment markets

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

**Asignificant number of shares of our common stock have or will become availablefor sale and their sale could depress the price of our common stock.**   OnJanuary 31, 2006, a significant number of our outstanding securities thatwere previously restricted became eligible for sale under Rule 144 of theSecurities Act. In addition, on January 31, 2007, a significant number ofour outstanding securities that were previously restricted became eligible forsale under Rule 144(k) of the Securities Act, and their sale will notbe subject to any volume limitations.

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

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

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

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

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

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

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**ITEM 3.**                CONTROLS ANDPROCEDURES

(a)   Evaluationof disclosure controls and procedures. Our management, with the participationof our principal executive officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as of the end of the period covered by this quarterly  report on Form 10-QSB. Based onsuch evaluation, our principal executive officer has concluded that suchdisclosure controls and procedures were effective in providing reasonableassurance that information required to be disclosed by us in the reports wefile or submitted by us under the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the SEC’s rules andforms.

(b)   Changes in internal controls. There were no changes in theCompany’s internal controls over financial reporting, known to the chiefexecutive officer or the principal accounting officer, that occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

At the end of 2007,Section 404 of the Sarbanes-Oxley Act will require our management toprovide an assessment of the effectiveness of our internal control overfinancial reporting, and at the end of 2008, our independent registered publicaccountants will be required to audit management’s assessment. We are in theprocess of performing the system and process documentation, evaluation andtesting required for management to make this assessment and for its independentregistered public accountants to provide their attestation report. We have notcompleted this process or its assessment, and this process will requiresignificant amounts of management time and resources. In the course ofevaluation and testing, management may identify deficiencies that will need tobe addressed and remediated.

**PART II.OTHER INFORMATION**

**ITEM1.**                LEGALPROCEEDINGS

None.

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

The issuances of theequity securities described below were made in reliance upon the exemption fromregistration under Section 4(2) of the Securities Act of 1933, asamended, relating to sales by an issuer not involving a public offering, and/orpursuant to the requirements of one or more of the safe harbors provided inRegulation D under the Securities Act or, in the case of equitycompensation to employees, directors and eligible consultants, Rule 701therewith.

On February 5, 2007,we issued a warrant to purchase 300,000 shares of common stock at an exerciseprice of $0.96 per share to Steven Price in connection with consulting servicesprovided to us by Mr. Price.

On February 5, 2007,the Company issued  800,000 shares of ‘restricted’common stock to Infigen, Inc. at a per share price equal to $0.76 (theclosing price on February 5, 2007) in connection with the execution ofthat certain Patent Assignment Agreement with Infigen, Inc.

**ITEM3.**                DEFAULTSUPON SENIOR SECURITIES

None.

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

None.

**ITEM5.**                OTHERINFORMATION

None.

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**ITEM6.**                EXHIBITS

| Exhibit No. | ** ** | **Exhibit Description** | ** ** |
|------------------|------------|------------------------------|------------|
|             | 10.1       |                         |       | Amendment No. 1, dated as of January 11, 2007, to the  Securities Purchase Agreement, dated August 30, 2006, the Amortizing  Convertible Debenture, dated September 6, 2006, and the Registration  Rights Agreement, dated August 30, 2006 (previously filed as Exhibit 10.97 to the Registrant’s  Registration Statement on Form SB-2 filed on January 26, 2007  (File No. 333-140265) and incorporated by reference herein). |   |
|             | 10.2       |                         |       | Amendment No. 1, dated as of January 11, 2007, to the  Securities Purchase Agreement, the Amortizing Convertible Debenture, and the  Registration Rights Agreement, each dated August 30, 2006 (previously  filed as Exhibit 10.97 to the Registrant’s Registration Statement on  Form SB-2 filed on January 26, 2007 (File No. 333-140265)  and incorporated by reference herein). |   |
|             | 10.3       |                         |       | Patent Assignment  Agreement between Advanced Cell Technology, Inc. and Infigen, Inc.,  dated February 5, 2007 (previously filed as Exhibit 10.98 to the  Registrant’s Post-Effective Amendment No. 3 to its Registration  Statement on Form SB-2 filed on March 28, 2007 and  incorporated by reference herein). |   |
|             | 10.4       |                         |       | Employment  Agreement between Advanced Cell Technology, Inc. and Pedro Huertas,  M.D., Ph.D., dated February 5, 2007 (previously filed as  Exhibit 10.99 to the Registrant’s Post-Effective Amendment No. 3 to  its Registration Statement on Form SB-2 filed on March 28,  2007 and incorporated by reference herein). |   |
|             | 10.5       |                         |       | Research Services  Agreement between Advanced Cell Technology, Inc. and Oregon  Health & Science University, dated February 5, 2007 (previously  filed as Exhibit 10.100 to the Registrant’s Post-Effective Amendment  No. 3 to its Registration Statement on Form SB-2 filed on  March 28, 2007 and incorporated by reference herein). |   |
|             | 31.1       |                         |       | Section 302 Certification of Chief Executive  Officer.* |   |
|             | 31.2       |                         |       | Section 302 Certification of Principal Financial  Officer.* |   |
|             | 32.1       |                         |       | Certification of Chief Executive Officer pursuant to 18  U.S.C. Section 1350.* |   |
|             | 32.2       |                         |       | Certification of Principal Financial Officer pursuant to  18 U.S.C. Section 1350.* |   |

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*                    Filedherewith

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.

|                          | ** ** | **ADVANCED CELL TECHNOLOGY, INC.** |
|--------------------------|------------|------------------------------------|
|                     |       | By:                                | /s/ WILLIAM M. CALDWELL, IV |   |
|                     |       |                               | William M. Caldwell, IV |
|                     |       |                               | Chief Executive Officer |
| Dated: May 15, 2007 |       |                               |

 

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**Exhibit Index**

| Exhibit No. | ** ** | **Exhibit Description** | ** ** |
|------------------|------------|------------------------------|------------|
|             | 10.1       |                         |       | Amendment No. 1, dated as of January 11, 2007, to the  Securities Purchase Agreement, dated August 30, 2006, the Amortizing  Convertible Debenture, dated September 6, 2006, and the Registration  Rights Agreement, dated August 30, 2006 (previously filed as Exhibit 10.97 to the Registrant’s  Registration Statement on Form SB-2 filed on January 26, 2007  (File No. 333-140265) and incorporated by reference herein). |   |
|             | 10.2       |                         |       | Amendment No. 1, dated as of January 11, 2007, to the  Securities Purchase Agreement, the Amortizing Convertible Debenture, and the  Registration Rights Agreement, each dated August 30, 2006 (previously  filed as Exhibit 10.97 to the Registrant’s Registration Statement on  Form SB-2 filed on January 26, 2007 (File No. 333-140265)  and incorporated by reference herein). |   |
|             | 10.3       |                         |       | Patent Assignment  Agreement between Advanced Cell Technology, Inc. and Infigen, Inc.,  dated February 5, 2007 (previously filed as Exhibit 10.98 to the  Registrant’s Post-Effective Amendment No. 3 to its Registration  Statement on Form SB-2 filed on March 28, 2007 and  incorporated by reference herein). |   |
|             | 10.4       |                         |       | Employment  Agreement between Advanced Cell Technology, Inc. and Pedro Huertas,  M.D., Ph.D., dated February 5, 2007 (previously filed as  Exhibit 10.99 to the Registrant’s Post-Effective Amendment No. 3 to  its Registration Statement on Form SB-2 filed on March 28,  2007 and incorporated by reference herein). |   |
|             | 10.5       |                         |       | Research Services  Agreement between Advanced Cell Technology, Inc. and Oregon  Health & Science University, dated February 5, 2007 (previously  filed as Exhibit 10.100 to the Registrant’s Post-Effective Amendment  No. 3 to its Registration Statement on Form SB-2 filed on  March 28, 2007 and incorporated by reference herein). |   |
|             | 31.1       |                         |       | Section 302 Certification of Chief Executive  Officer.* |   |
|             | 31.2       |                         |       | Section 302 Certification of Principal Financial  Officer.* |   |
|             | 32.1       |                         |       | Certification of Chief Executive Officer pursuant to 18  U.S.C. Section 1350.* |   |
|             | 32.2       |                         |       | Certification of Principal Financial Officer pursuant to  18 U.S.C. Section 1350.* |   |

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*                    Filedherewith

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