**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTOND.C. 20549**

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**FORM 10-QSB**

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**ý**        QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE PERIOD ENDED MARCH 31,2006

OR

**o**        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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  IDENTIFICATION NO.) |
| INCORPORATION OR  ORGANIZATION)  |   |                                  |

 

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

(ADDRESS, INCLUDING ZIPCODE, OF PRINCIPAL EXECUTIVE OFFICES)

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

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

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

Indicate by check 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       Noo

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

| **Class:**                                |   | **Outstanding  at May 3, 2006:** |
|-------------------------------------------|--------|---------------------------------------|
| Common Stock,  $0.001 par value per share |   | 26,322,210 shares                |

 

Transitional Small Business Disclosure format (checkone)

Yeso       Nox

 

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# **ADVANCED CELL TECHNOLOGY, INC.**

# **INDEX**

| PART I. FINANCIAL  INFORMATION                                     |   |   |
|-------------------------------------------------------------------------|--------|--------|
| ITEM  1. FINANCIAL STATEMENTS                                           |   |   |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN  OF OPERATION |   |   |
| ITEM  3. CONTROLS AND PROCEDURES                                        |   |   |
| PART II.  OTHER INFORMATION                                        |   |   |
| ITEM  1. LEGAL PROCEEDINGS                                              |   |   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS    |   |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                 |   |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS            |   |   |
| ITEM  5. OTHER INFORMATION                                              |   |   |
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                           |   |   |
| SIGNATURE                                                               |   |   |

 

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**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 27 herein for a more complete discussionof these factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date that they are made.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

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

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**PART I.FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**ADVANCED CELL TECHNOLOGY, INC.**

**BALANCE SHEETS(UNAUDITED)**
| ** **                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                               | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                               | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                   |       |               |       |                  |       |
| Current assets:                                                                                          |       |               |       |                  |       |
| Cash and cash equivalents                                                                                |       | $                  | 9,384,990  |                  | $          | 13,857,901 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $636,399                                 |       | 124,250            |       | 134,876               |       |
| Prepaid expenses                                                                                         |       | 156,320            |       | 173,040               |       |
| Deferred royalty fees, current portion                                                                   |       | 293,513            |       | 119,763               |       |
| Total current assets                                                                                     |       | 9,959,073          |       | 14,285,580            |       |
| Property and equipment, net of amortization of  $859,852                                                 |       | 982,997            |       | 807,411               |       |
| Deferred royalty fees, less current portion                                                              |       | 807,435            |       | 598,811               |       |
| Deposits                                                                                                 |       | 122,341            |       | 105,192               |       |
| Deferred  issuance costs, net of amortization of $414,058                                                |       | 2,070,293          |       | 2,277,322             |       |
| Total assets                                                                                             |       | $                  | 13,942,140 |                  | $          | 18,074,316 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                              |       |               |       |                  |       |
| Current  liabilities:                                                                                    |       |               |       |                  |       |
| Accounts payable                                                                                         |       | $                  | 2,172,266  |                  | $          | 2,113,983 |   |
| Accrued Expenses                                                                                         |       | 811,552            |       | 1,251,946             |       |
| Deferred revenue, current portion                                                                        |       | 332,508            |       | 332,508               |       |
| Interest payable                                                                                         |       | 98,333             |       | 87,083                |       |
| Advances payable - other                                                                                 |       | 130,000            |       | 130,000               |       |
| Convertible Debenture and embedded derivatives, net  of discounts of $5,123,074                          |       | 5,600,428          |       | 5,144,896             |       |
| Notes payable - other and capital leases, net of  discounts of $288,599                                  |       | 784,924            |       | 858,103               |       |
| Total current liabilities                                                                                |       | 9,930,011          |       | 9,918,519             |       |
| Convertible Debenture and embedded derivatives, less  current portion and net of discounts of $6,652,555 |       | 7,272,422          |       | 9,003,569             |       |
| Warrant derivatives                                                                                      |       | 22,000,103         |       | 30,994,491            |       |
| Capital Leases                                                                                           |       | 90,441             |       | 109,924               |       |
| Deferred Revenue, net of current portion                                                                 |       | 1,579,415          |       | 1,662,542             |       |
| Total liabilities                                                                                        |       | 40,872,392         |       | 51,689,045            |       |
| Stockholders’  deficit:                                                                             |       |               |       |                  |       |
| Common stock, $0.001 par value; 100,000,000 shares  authorized, 24,459,771 issued and outstanding        |       | 24,459             |       | 23,441                |       |
| Additional paid-in capital                                                                               |       | (8,592,919         | )          | (10,463,008           | )          |
| Deferred compensation                                                                                    |       | (21,585            | )          | (21,585               | )          |
| Accumulated deficit                                                                                      |       | (18,340,208        | )          | (23,153,577           | )          |
| Total stockholders’ deficit                                                                         |       | (26,930,253        | )          | (33,614,729           | )          |
| Total liabilities and stockholders’ deficit                                                         |       | $                  | 13,942,140 |                  | $          | 18,074,316 |   |

 

The accompanying notes are an integral part of theseconsolidated finacial statements

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**ADVANCED CELLTECHNOLOGY, INC.**

**STATEMENTS OFOPERATIONS(UNAUDITED)**
| ** **                                                          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Revenue:                                                            |       |                                                 |       |   |   |
| License fees and royalties                                          |       | $                                                    | 83,127     |   | $ | 108,127 |   |
| Cost of revenue                                                     |       | 61,189                                               |       | 45,691 |   |
| Gross profit                                                        |       | 21,938                                               |       | 62,436 |   |
| Operating  expenses:                                                |       |                                                 |       |   |   |
| Research and development                                            |       | 1,808,566                                            |       | 276,595 |   |
| Grant reimbursements                                                |       | (200,905                                             | )          | (235,810 | ) |
| General and administrative                                          |       | 2,630,037                                            |       | 1,204,480 |   |
| Total operating expenses                                            |       | 4,237,698                                            |       | 1,245,265 |   |
| Loss from operations                                                |       | (4,215,760                                           | )          | (1,182,829 | ) |
| Other income  (expense):                                            |       |                                                 |       |   |   |
| Interest income                                                     |       | 118,466                                              |       | 12,107 |   |
| Gain on settlement of debt                                          |       | —                                               |       | 86,513 |   |
| Interest expense and late fees                                      |       | (3,081,014                                           | )          | (50,124 | ) |
| Interest expense - stockholder                                      |       | —                                               |       | (30,000 | ) |
| Adjustments to fair value of derivatives                            |       | 11,991,677                                           |       | — |   |
| Total other income                                                  |       | 9,029,129                                            |       | 18,496 |   |
| Net Profit / (loss)                                                 |       | $                                                    | 4,813,369  |   | $ | (1,164,333 | ) |
| Basic earnings per share                                            |       | $                                                    | 0.20       |   | $ | (0.06 | ) |
| Diluted earnings per share                                          |       | $                                                    | 0.09       |   | $ | — |   |
| Weighted average  shares used in computation of earnings per share: |       |                                                 |       |   |   |
| Basic                                                               |       | 23,767,391                                           |       | 18,250,769 |   |
| Diluted                                                             |       | 57,332,947                                           |       | — |   |

 

# The accompanyingnotes are an integral part of these consolidated financial statements

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**ADVANCED CELLTECHNOLOGY, INC.**

**STATEMENTS OF CASHFLOWSCHANGE IN CASH AND CASH EQUIVALENTS(UNAUDITED)**
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                |       |                                                 |       |   |   |
| Net loss                                                                                              |       | $                                                    | 4,813,369  |   | $ | (1,164,333 | ) |
| Adjustments to reconcile  net profit / (loss) to net cash (used in) provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                                         |       | 37,661                                               |       | 21,794 |   |
| Bad debt                                                                                              |       | —                                               |       | 32,715 |   |
| Amortization of deferred charges                                                                      |       | 41,190                                               |       | 29,940 |   |
| Amortization of deferred revenue                                                                      |       | (83,126                                              | )          | (83,127 | ) |
| Stock based compensation                                                                              |       | —                                               |       | 50,768 |   |
| Amortization of deferred offering costs                                                               |       | 207,029                                              |       | — |   |
| Gain on settlement of accounts payable                                                                |       | —                                               |       | (86,513 | ) |
| Shares issued for services                                                                            |       | —                                               |       | 15,000 |   |
| Warrants issued for services                                                                          |       | 331,828                                              |       | — |   |
| Amortization of deferred compensation                                                                 |       | 24,145                                               |       | — |   |
| Amortization of discounts                                                                             |       | 2,860,227                                            |       | — |   |
| Changes in fair value of derivatives                                                                  |       | (11,991,677                                          | )          | — |   |
| Non-cash compensation charge                                                                          |       | 90,117                                               |       | — |   |
| Changes in  operating assets and liabilities:                                                         |       |                                                 |       |   |   |
| (Increase)  decrease in:                                                                              |       |                                                 |       |   |   |
| Accounts receivable                                                                                   |       | 10,626                                               |       | (189,375 | ) |
| Prepaid expenses                                                                                      |       | 16,719                                               |       | (43,319 | ) |
| Deferred charges                                                                                      |       | (185,000                                             | )          | (33,750 | ) |
| Deposits                                                                                              |       | (17,151                                              | )          | — |   |
| Increase (decrease) in:                                                                               |       |                                                 |       |   |   |
| Accounts payable and accrued expenses                                                                 |       | (382,110                                             | )          | (72,935 | ) |
| Interest payable                                                                                      |       | 11,250                                               |       | 56,986 |   |
| Advances to Stockholder                                                                               |       | —                                               |       | (192,954 | ) |
| Net cash used in operating activities                                                                 |       | (4,214,905                                           | )          | (1,659,103 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                |       |                                                 |       |   |   |
| Cash acquired in  acquisition                                                                         |       | —                                               |       | 10,000 |   |
| Purchases of  property and equipment                                                                  |       | (213,247                                             | )          | (166,137 | ) |
| Net cash used in  investing activities                                                                |       | (213,247                                             | )          | (156,137 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                |       |                                                 |       |   |   |
| Proceeds from  preferred unit subscriptions, net of cost                                              |       | —                                               |       | 3,658,930 |   |
| Proceeds from  exercise of warrants                                                                   |       | 6,100                                                |       |   |   |
| Payments of  convertible Debentures                                                                   |       | (31,375                                              | )          | — |   |
| Payments on  notes and leases                                                                         |       | (19,484                                              | )          | (150,000 | ) |
| Cash overdraft                                                                                        |       | —                                               |       | (1,409 | ) |
| Net cash provided by (used in) financing activities                                                   |       | (44,759                                              | )          | 3,507,521 |   |
| Net increase / (decrease) in cash                                                                     |       | (4,472,911                                           | )          | 1,692,281 |   |
| Cash and cash equivalents, beginning of period                                                        |       | $                                                    | 13,857,901 |   | $ | 3,676,000 |   |
| Cash and cash equivalents, end of period                                                              |       | $                                                    | 9,384,990  |   | $ | 5,368,281 |   |
| Cash paid for:                                                                                        |       |                                                 |       |   |   |
| Interest                                                                                              |       | $                                                    | 2,509      |   | $ | — |   |
| Income taxes                                                                                          |       | $                                                    | —     |   | $ | — |   |

 

Supplemental schedule of non-cash financing activities:

 

The Company issued approximately 476,000 shares ofcommon stock in redemption of convertible debentures with a face value ofapproximately $690,000The Company issued approximately 290,000 shares of common stock in conversionof convertible debentures with a face value of approximately $846,000The Company issued approximately 163,000 shares of common stock in payment oflicense fees valued at approximately $239,000The accompanying notes are an integral part of these consolidated financialstatements.

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**ADVANCED CELLTECHNOLOGY, INC.**

**STATEMENT OFSTOCKHOLDERS’ DEFICITFOR THE THREE MONTH PERIOD ENDED MARCH 31, 2006(UNAUDITED)**
| ** **                                           | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**  | ** ** | ** **             | ** **  | ** **  | ** ** | **Total**   | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-----------------|------------|------------------------|-------------|-------------|------------|-------------|------------|
| ** **                                           | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** **  |
| ** **                                           | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Compensation**       | ** **  | **Deficit** | ** ** | **Deficit** | ** ** |
| Balance at December 31, 2005                    |       | —                   |       | $                     | —     |        | 23,440,695 |         | $          | 23,441          |       | $                      | (10,463,008 | )           | $          | (21,585     | )          | $ | (23,153,577 | ) | $ | (33,614,728 | ) |
| Cashless Exercise of warrant                         |       |                     |       |                  |       | 63,208      |       | 63           |       | (63             | )          |                   |        |        |       |        |       |
| Stock option Exercises                               |       |                     |       |                  |       | 26,000      |       | 26           |       | 6,074           |       |                   |        |        |       | 6,100       |       |
| Convertible Debenture Redemption                     |       |                     |       |                  |       | 476,034     |       | 476          |       | 689,774         |       |                   |        |        |       | 690,250     |       |
| Convertible Debenture Conversion                     |       |                     |       |                  |       | 290,435     |       | 290          |       | 845,787         |       |                   |        |        |       | 846,077     |       |
| Option compensation charges                          |       |                     |       |                  |       |        |       |         |       | 90,117          |       |                   |        |        |       | 90,117      |       |
| Issuance of stock in payment of license fees         |       |                     |       |                  |       | 163,399     |       | 163          |       | 238,400         |       |                   |        |        |       | 238,563     |       |
| Net profit for the quarter ended March 31, 2006 |       |                     |       |                  |       |        |       |         |       |            |       |                   |        | 4,813,369   |       | 4,813,369   |       |
| Balance at Mach  31, 2006                            |       | —                   |       | $                     | —     |        | 24,459,771 |         | $          | 24,459          |       | $                      | (8,592,919  | )           | $          | (21,585     | )          | $ | (18,340,208 | ) | $ | (26,930,253 | ) |
|                                                      |            |                          |            |                       |            |             |            |              |            |                 |            |                        |             |             |            |             |            |  |  |  |  |  |  |  |

 

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

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**ADVANCED CELLTECHNOLOGY, INC.**

**NOTES TO FINANCIALSTATEMENTSMARCH 31, 2006(UNAUDITED)**

**1.**                 ORGANIZATIONAL MATTERS

**Organization**

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

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

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

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

**Nature of Business**

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

**Going Concern**

As reflected in the accompanying financial statements,the Company has losses from operations, negative cash flows from operations anda substantial stockholders’ deficit. These matters raise substantial doubtabout the Company’s ability to continue as a going concern. Subsequent tofiling the Form 10-KSB for the year ended December 31, 2005, the Companyobtained new information which impacts cash flows forecasted through March 31,2007.  The Company’s Board of Directorsmet and approved an operating plan at current spending levels, assumingadditional capital is raised during the year. In addition, as more fully disclosed in Note 10 – Subsequent Events, theCompany saw increases in cash redemptions of convertible debentures.

In view of the matters described in the precedingparagraph, recoverability of a major portion of the recorded asset amountsshown in the accompanying balance sheet is dependent upon continued operationsof the Company, which, in turn, is dependent upon the Company’s ability tocontinue to raise capital and ultimately generate positive cash flows fromoperations. The financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or amounts andclassifications of liabilities that might be necessary should the Company beunable to continue its existence.

In the first three months of 2006, management hastaken the following steps that it believes will be sufficient to provide theCompany with the ability to continue in existence:

·                     As describedmore fully in Note 3 — Convertible Debentures, the financing completed inSeptember 2005 contains provisions regarding a potential “second closing” offinancing of $8,875,000 net of discounts. The Company has ongoing discussionswith its convertible debenture holders regarding these provisions of thedebenture agreement, although there is no assurance that this financing willultimately be completed.

·                     Managementanticipates raising additional equity funds from its current convertibledebenture holders, or other financing sources, that will be used to fund anycapital shortfalls.

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

***Basis ofPresentation —***The accompanying unaudited financialstatements as of March 31, 2006 and for the three month period ended March 31,2006 and 2005 have been prepared pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”), including Form 10-QSBand Regulation S-B. The information furnished herein reflects all adjustments(consisting of normal recurring accruals and adjustments), which are, in theopinion of management, necessary to fairly present the operating results forthe respective periods. Certain information and footnote disclosures normallypresent in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omittedpursuant to such rules and regulations. The Company believes that thedisclosures provided are adequate to make the information presented notmisleading. These financial statements should be read in conjunction with theaudited financial statements and explanatory notes for the year ended December 31,2005 as disclosed in the Company’s annual report on Form 10-KSB forthat year as filed with the SEC and in conjunction with ACT’s audited financialstatements. Interim results of operations are not necessarily indicative of theresults to be expected for the year ending December 31, 2006.

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**2.**                 SIGNIFICANTACCOUNTING POLICIES

***Stock BasedCompensation—***At March 31, 2006, the Company has twostock-based employee compensation plans, which are described more fully in Note6. Prior to January 1, 2006, the Company accounted for those plans underthe recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, aspermitted by FASB Statement No. 123, Accounting for Stock-BasedCompensation. No stock-based employee compensation cost was recognized in theStatement of Operations for the years ended December 31, 2005 or 2004, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

As more fully discussed in Note 6, effective January 1,2006, the Company adopted the fair value recognition provisions of FASBStatement No. 123(R) Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2006includes: (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of Statement 123,and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of Statement 123(R). Results for prior periodshave not been restated.

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***Earnings per Share***

The Company uses SFAS No. 128, “Earnings PerShare” for calculating the basic and diluted loss per share. Basic loss pershare is computed by dividing net income by the weighted average number of commonshares outstanding. Diluted income per share is computed similar to basic lossper share except that the denominator is increased to include the averagenumber of additional common shares that would have been outstanding if thepotential common shares had been issued and if the additional common shareswere dilutive. Using the treasury stock method, the effect of stock awards onthe weighted average shares used in the computation of diluted earnings pershare was approximately 19,000,000 shares for the three months endedMarch 31, 2006. Additional dilutive shares are primarily related toconvertible debentures more fully described in Note 3 — ConvertibleDebentures.

For the three months ended March 31, 2005approximately 23 million potential shares were excluded from the sharesused to calculate diluted earnings per share as their inclusion would reducenet loss per share.

The following table provides a reconciliation of thenumerators and denominators of the basic and diluted EPS.
| ** **                                                     | ** ** | **For the Three Months Ended March 31, 2006** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **Income  (Numerator)**                                                          | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
| Income                                                         |       | $                                                                                | 4,813,369  |   |  |   |  |   |
|                                                           |       |                                                                             |       |   |   |   |   |
| **Basic  EPS**                                                 |       |                                                                                  |       |  |   |  |   |
| ** **                                                     |       |                                                                             |       |   |   |   |   |
| Income available  to common stockholders                       |       | 4,813,369                                                                        |       | 23,767,391 |   | $ | 0.20 |   |
|                                                           |       |                                                                             |       |   |   |   |   |
| **Effect  of Dilutive Securities**                             |       |                                                                                  |       |  |   |  |   |
| ** **                                                     |       |                                                                             |       |   |   |   |   |
| Warrants                                                       |       |                                                                                  |       | 11,702,082 |   |  |   |
|                                                           |       |                                                                             |       |   |   |   |   |
| Convertible  Debentures                                        |       | 610,502                                                                          |       | 14,337,981 |   |  |   |
|                                                           |       |                                                                             |       |   |   |   |   |
| Stock Options                                                  |       |                                                                             |       | 7,525,493 |   |  |   |
|                                                           |       |                                                                             |       |   |   |   |   |
| **Diluted  EPS**                                               |       |                                                                                  |       |  |   |  |   |
| ** **                                                     |       |                                                                             |       |   |   |   |   |
| Income available  to common stockholders + assumed conversions |       | $                                                                                | 5,423,871  |   | 57,332,947 |   | $ | 0.09 |   |

 

Options to purchase approximately 1,100,000 shares of common stock wereoutstanding during the period but were not included in the computation ofdiluted EPS because the options’ exercise price was greater than the averagemarket price of the common shares. The options were still outstanding at March31, 2006.

 

Warrants to purchase approximately 2,900,000 shares of common stockwere outstanding during the period but were not included in the computation ofdiluted EPS because the warrants’ exercise price was greater than the averagemarket price of the common shares. The warrants were still outstanding at March31, 2006.

 

 

11

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**3.**                 CONVERTIBLE DEBENTURES

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.

12

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The agreement included a number of embedded derivativeinstruments that required separate valuation in accordance with therequirements of FAS 133, EITF 05-04 and related accountingliterature. The following summarizes the fair values of embedded derivatives atDecember 31, 2005 and March 31, 2006, followed by a description ofthe valuation methodology utilized to determine fair values:

|                                                          | ** ** | **Fair value**             | ** ** | **Fair value**          | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| **Embedded Derivative Liability (Asset)** | ** ** | **December 31, 2005** | ** ** | **March 31, 2006** | ** ** |
| Conversion feature                                       |       | $                               | 6,057,088  |                         | $          | 2,218,892 |   |
| Anti-dilution  protection                                |       | 1,755,878                       |       | 1,989,139                    |       |
| Default  provisions                                      |       | 94,886                          |       | 77,395                       |       |
| Right to provide  future financing                       |       | 185,968                         |       | 191,881                      |       |
| Company right to  force conversion                       |       | (1,226,746                      | )          | (310,037                     | )          |
|                                                     |       | $                               | 6,867,074  |                         | $          | 4,167,270 |   |

 

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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 $1.49 at March 31,2006 (2) exercise price equal to the $2.30 conversion price (3) volatilitybased upon the Company’s stock trading of 74% (4) Treasury note rates with terms commensurate with theremaining term of the Notes ranging from 4.56% to 4.82%, and (5) durationof the note as an amortizing debenture of approximately 1.09 years, basedupon 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 $1.49 (2) exercise price equal to the $2.30conversion price (3) volatility based upon the Company’s stock trading of74% (4) Treasury note rates with terms commensurate with the remainingterm of the Notes of 4.8% and (5) duration of the note as an amortizingdebenture of approximately 1.09 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 for the investors’option to provide future financing was determined using a Black-Scholes OptionPricing Model with the following inputs: (1) The stock and exercise pricewas based on the maximum amount of additional investment of $8,875,000 (2) Volatilityof 2% was based on the historical volatility of government and high yield bondindices (3) Risk free rate of 4.8% was based on Treasury notes and (4) timeto maturity was based upon the six month option period.

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 $1.49 (2) exercise price of $4.60 per share which is required forthe forced conversion (3) volatility based upon the Company’s stocktrading of 74% (4) Treasury note rate with terms commensurate with theremaining term of the Notes of 3.9% and (5) duration of the note as anamortizing debenture of approximately 1.72 years based upon presentvalues.

During the three months ended March 31, 2006, adecrease in the fair value of the embedded derivative amounts of approximately$2,500,000 was recorded through results of operations as Adjustment to FairValue of Derivatives.

During the three months ended March 31, 2006, theCompany recorded approximately $3,081,000 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 theBlack Scholes pricing model. The assumptions used in the Black Scholes modelare as follows: (1) dividend yield of 0%; (2) expected volatility of64%, (3) risk-free interest rate of 3.99%, and (4) expected life of5 years. Cash fees paid, and the initial fair value of the warrant, havebeen capitalized as debt issuance costs and are being amortized over36 months under the effective interest rate method. Interest expense forthe three months ended March 31, 2006 was approximately $207,000.

During the period, debentures with a face value of$668,000 were converted into 290,435 shares at $2.30 per share. Theseconversions along with the pro rata portion of the conversion feature embeddedderivative of approximately $178,000, resulted in an increase to stockholders’equity of approximately $846,000. As a result of these conversions,approximately $427,000 of unamortized discounts related to amounts convertedwas charged to interest expense.

The following table summarizes Convertible Debenturesand embedded derivatives outstanding at March 31, 2006:

| Convertible debentures at  face                             |   | $          | 20,481,208 |   |
|-------------------------------------------------------------|--------|------------|------------|--------|
| Discounts on  debentures:                                   |   |       |       |
| Original issue discount                                     |   | (2,974,735 | )          |
| Conversion feature derivative                               |   | (4,826,788 | )          |
| Warrant derivative                                          |   | (3,789,772 | )          |
| Other derivatives                                           |   | (184,334   | )          |
| Net convertible debentures                                  |   | 8,705,579  |       |
| Embedded  derivatives                                       |   | 4,167,270  |       |
| Convertible debentures and embedded derivatives             |   | 12,872,849 |       |
| Less current portion                                        |   | (5,600,428 | )          |
| Convertible  debentures and embedded derivatives- long term |   | $          | 7,272,422  |   |

 

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**4.**                 WARRANT DERIVATIVES

As described more fully in Note 3—ConvertibleDebentures, 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.

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 5—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, 2006 the fair value of eachinstrument was again computed under a Black Scholes model with the followingassumptions: (1) dividend yield of 0% (2) expected volatility of 74% (3) risk-freeinterest rate of approximately 4.4% and (4) expected life and exerciseprices consistent with each individual instrument. These calculations resultedin an aggregate value of derivative instruments of approximately $18,400,000.As a result, for the three months ended March 31, 2006 the Company recordedapproximately $7,200,000 as a credit to Adjustment to Fair Value ofDerivatives.

**Of the total proceeds from theissuance of the debentures as more fully described in Note 3, approximately$5,700,000 was initially allocated to the freestanding warrants associated withthe debentures based upon the fair value of the Warrants. The assumptions usedin the Black Scholes model for determining the initial fair value of thewarrants were as follows: (1) dividend yield of 0%; (2) expectedvolatility of 64%, (3) risk-free interest rate of 3.99%, and (4) expected lifeof 5 years. In accordance with FAS 133 "Accounting for DerivativeInstruments and Hedging Activities", EITF 00-19 "Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in aCompany's Own Stock" and EITF 05-04 "The Effect of a LiquidatedDamages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.00-19", the amounts allocated to the warrant represent a derivativeliability that has been recorded in the accompanying balance sheet. Thecarrying value of warrant derivative at March 31, 2006 has been adjusted toreflect its "fair value" of approximately $3,600,000 based upon aBlack Scholes calculation as follows: (1) dividend yield of 0%; (2) expectedvolatility of 74%, (3) risk-free interest rate of 4.82%, and (4) expectedremaining life of 4.50 years. During the period ended March 31, 2006, adecrease in the fair value of the warrant liability of approximately $1,960,000was recorded through results of operations as a credit to Adjustment to FairValue of Derivatives.**

**5.**                 STOCKHOLDERS’ EQUITY TRANSACTIONS

We are authorized to issue two classes of capitalstock, to be designated, respectively, Preferred Stock and Common Stock. Thetotal number of shares of Preferred Stock we are authorized to issue is50,000,000, par value $0.001 per share. The total number of shares of Common Stockwe are authorized to issue is 100,000,000, par value $0.001 per share. We hadno Preferred Stock outstanding as of March 31, 2006. We had 24,459,771 sharesof Common Stock outstanding as of March 31, 2006.

In March 2006 the Company issued 250,000 warrantsto purchase common stock at $2.54 per share in connection with consultingservices provided during the quarter. The warrants have been valued at$156,894, using the Black Scholes pricing model with the following assumptions:(1) dividend yield of 0%; (2) expected volatility of 74%, (3) risk-freeinterest rate of 4.82%, and (4) expected life of 3.5 years.This warrant isclassified as a warrant derivative.

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**6.**                 OPTIONSOUTSTANDING

**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 December 31,2005 and 2004, ACT had granted 2,604,000 common share purchase options underthe plan.

On December 13, 2004, ACT’s Board of Directorsand stockholders approved the establishment of the 2004 Stock Option Plan II(the “*2004 Stock Plan II*”). The total number of common sharesavailable for grant and issuance under the plan may not exceed 1,301,161shares, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by the Boardof Directors or a committee established by the Board of Directors. At December 31,2005 and 2004, ACT had granted 1,301,161 common share purchase options underthe plan.

On January 31, 2005, the Company’s Board ofDirectors approved the establishment of the 2005 Stock Incentive Plan (the “2005Plan”), subject to approval of our shareholders. The total number of commonshares available for grant and issuance under the plan may not exceed 9 millionshares, plus an annual increase on the fist day of each of the Company’s fiscalyears beginning in 2006 equal to 5% of the number of shares of our common stockoutstanding on the last day of the immediately preceding fiscal year, subjectto adjustment in the event of certain recapitalizations, reorganizations andsimilar transactions. Common stock purchase options may be exercisable by thepayment of cash or by other means as authorized by the Board of Directors or acommittee established by the Board of Directors.

Pursuant to the 2005 Plan, on January 26, 2006,we granted 230,000 common stock purchase options to employees and directors.The options granted have an exercise price of $2.04 per share, the market priceof the Company’s stock on the date of grant and vest over periods not exceeding4 years. The fair value of the options was estimated at $314,328 using theBlack Scholes option pricing model. The assumptions used in the Black Scholesmodel are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 74%, (3) risk-free interest rate of 4.38%, and (4) expectedlife of 6 years. The fair value was treated in accordance with FAS 123 andis being amortized over a period of four years.

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Aggregate option activityfor the 2004 and 2005 stock option plans is as follows:

|                                    | ** ** | **Shares**         | ** ** | ** **             | ** ** | ** **         | ** **            | **Weighted**            | ** ** | **Weighted** | ** ** |
|------------------------------------|------------|--------------------|------------|------------------------|------------|--------------------|-----------------------|-------------------------|------------|--------------|------------|
| ** **                         | ** ** | **Available**      | ** ** | **Stock Options** | ** ** | **Price Per** | ** **            | **Average**             | ** ** | **Average**  | ** ** |
| ** **                         | ** ** | **For Grant** | ** ** | **Out5standing**       | ** ** | **Share**          | ** **            | **Exercise Price** | ** ** | **Life**     | ** ** |
| Balance at  December 31, 2005 |       | 285,269            |       | 12,703,809             |       | $                  | 0.05 - $2.4 | 8                       | $          | 0.76         |       | 8.7  years |   |
| Annual increase  pursuant to plan  |       | 1,172,035          |       | —                 |       | —             |                  | —                  |       | —       |       |
| Options granted                    |       | (230,000           | )          | 230,000                |       | $                  | .05                   |                    | $          | 0.05         |       | 9.0  years |   |
| Options  exercised                 |       | —             |       | (20,000                | )          | $                  | .05                   |                    | .05        |         | —     |   |
| Options  exercised                 |       | —             |       | (6,000                 | )          | $                  | 0.85                  |                    | 0.85       |         | —     |   |
| Balance at  March 31, 2006    |       | 1,227,304          |       | 12,907,809             |       | $                  | .0 - $0.25  |                    | $          | 0.12         |       | 8.6 years |   |

 

As of March 31, 2006and December 31, 2005, there were 7,037,430 and 6,320,961 exercisableoptions outstanding at a weighted average exercise price per share of $0.50 and$0.57, respectively.

Thefollowing table illustrates the effect on net income and earnings per share forthe period ended March 31, 2005 if the company had applied the fair valuerecognition provisions of Statement 123 to options granted under the company’sstock option plans in all periods presented. For purposes of this pro forma disclosure, the value of the options isestimated using a Black-Scholes calculation and  amortized to expense over the options’ vestingperiods.
| ** **                                      | ** ** | **For the  Three Months  Ended  March 31, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Net loss as  reported                           |       | $                                                                    | (1,164,333 | ) |
| Current period  expense calculated under APB 25 |       | —                                                               |       |
| Stock  compensation calculated under SFAS 123   |       | (126,481                                                             | )          |
| Pro forma net  loss                             |       | $                                                                    | (1,290,814 | ) |
| Basic and  diluted historical loss per share    |       | $                                                                    | (0.06      | ) |
| Pro forma basic and  diluted loss per share     |       | $                                                                    | (0.07      | ) |

 

Note that theabove pro forma disclosures are provided for 2005 because employee stockoptions were not accounted for using the fair-value method during thatperiod.  

A summary of the status of unvested employee stockoptions as of March 31, 2006 and changes during the period then ended, ispresented below:
| ** **                     | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|--------------------------------|------------|-------------|------------|---------------------------|------------|
| ** **                     | ** ** | ** **  | ** ** | **Grant Date**       | ** ** |
| ** **                     | ** ** | ** **  | ** ** | **Fair Value**       | ** ** |
| ** **                     | ** ** | **Options** | ** ** | **Per Share**        | ** ** |
| Unvested at  December 31, 2005 |       | 5,489,041   |       | $                         | 0.19       |   |
| Granted                        |       | 230,000     |       | $                         | 1.367      |   |
| Vested                         |       | (618,477    | )          | $                         | 0.37       |   |
| Unvested at March 31,  2006    |       | 5,100,565   |       | $                         | 0.23       |   |

 

As of March 31, 2006, the total remainingunrecognized compensation cost related to unvested stock options amounted to$1.2 million, which will be amortized over the weighted-average remainingrequisite service period of 4.0 years.

The following table summarizes the charges related toemployee stock options during the three months ended March 31, 2006:
| ** **                                                  | ** ** | **Three Months**        | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **Ended**                    | ** ** |
| ** **                                                  | ** ** | **March 31, 2006** | ** ** |
| Net income as  reported                                     |       | 4,813,369                    |       |
|                                                        |       |                         |       |
| Stock  compensation charged to Research & Development   |       | (42,545                      | )          |
|                                                        |       |                         |       |
| Stock  compensation charged to General & Administrative |       | (47,572                      | )          |
|                                                        |       |                         |       |
| Pro forma net  income                                       |       | 4,723,252                    |       |
|                                                        |       |                         |       |
| Basic earnings  per share as reported                       |       | $                            | 0.20       |   |
| Diluted earnings  per share as reported                     |       | $                            | 0.09       |   |
|                                                        |       |                         |       |
| Basic pro forma  earnings per share                         |       | $                            | 0.20       |   |
| Diluted pro forma  earnings per share                       |       | $                            | 0.08       |   |

 

**7.**                 ACT GROUP SETTLEMENT

On September 14,2005, we entered into a Settlement Agreement (“Settlement Agreement”) with GaryD. Aronson and John S. Gorton (“Plaintiffs”) and our majority shareholder,A.C.T. Group, Inc., a Delaware corporation that has since filed acertificate of dissolution in the state of Delaware (“ACT Group”), AdvancedCell, Inc., a Delaware Corporation, Michael D. West, Gunnar L. Engstrom,William M. Caldwell, IV, Anthem Venture Partners and Greg Bonfiglio (referredto collectively with the Company as the “Defendants”). The Settlement Agreementresolved certain disputes relating to the litigation entitled Gary D.Aronson and John Gorton v. A.C.T. Group, Inc., Advanced Cell Technology, Inc.,Michael D. West, and Gunnar L. Engstrom**which was pendingin Commonwealth of Massachusetts Superior Court, Worcester, C.A. No. 040523Band two companion Contempt Complaints filed by the Plaintiffs against certainof the Defendants, including the Company. The Settlement Agreement extinguishedin full ACT Group’s obligations and indebtedness to Plaintiffs, and Plaintiffsdismissed pending claims and actions.

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We analyzed the convertible promissory notes payableand determined that the conversion option and the anti-dilution provisionsrepresent embedded derivative instruments under the provisions of FAS 133,"Accounting for Derivative Instruments and Hedging Activities".Accordingly, we separately valued these instruments and recorded discountsoffsetting Notes Payable—Other. During the three months ended March 31,2006, a net decrease in the fair value of the embedded derivative amounts ofapproximately $99,000 related to these derivatives was recorded through resultsof operations as Adjustment to Fair Value of Derivatives.

**8.**                 LEGAL PROCEEDINGS

**Geron-RelatedProceedings**

University of Massachusetts and Advanced CellTechnology, Inc. v. Roslin Institute (Edinburgh), Geron Corporation andExeter Life Sciences, Inc. , U.S. District Court for theDistrict of Columbia. We filed an action on February 18, 2005 in the U.S.District Court for the District of Columbia. We brought this action under 35U.S.C. 146 to reverse the decision of the Board of Patent Appeals andInterferences regarding a patent to a method of cloning non-human animals. Thepatent, U.S. Patent No. 5,945,577, is licensed by the University ofMassachusetts exclusively to us.  Theparties have engaged in discovery and are awaiting a ruling from the court onthe scope of permissible discovery. The parties are actively engaged insettlement discussions. Adverse determinations in this proceeding would likelyhave a materially adverse effect on our business.

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

University of Massachusetts v. James M. Robl andPhillippe Collas**,Massachusetts Superior Court (Suffolk County). The University of Massachusetts,referred to as UMass, filed a complaint on February 22, 2004 in theSuperior Court (Suffolk County) for the Commonwealth of Massachusetts. Adecision adverse to UMass in this litigation could have had a materiallyadverse effect on our business. The complaint alleged the misappropriation bythe defendants of valuable inventions in the fields of animal cloning and cellreprogramming, made by the defendants at UMass and with UMass support, that areexclusively licensed to ACT by UMass. The complaint included counts fordeclaratory judgment, breach of contract seeking specific performance,injunctive relief and damages, intentional interference with contract andprospective contractual relations, conversion, breach of duty, and breach ofthe covenant of good faith and fair dealing. ACT successfully intervened in thelitigation to protect its interests. As more fully discussed in Note 15 —Subsequent Events, in May 2006 the parties to the litigation reached asettlement agreement, and we anticipate this case will be dismissed during thesecond quarter.

**9.**                 COMMITMENTS AND 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 2005 and 2004, 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 March 2006 weentered into an exclusive sublicense agreement with TranXenoGen, Inc. wherebywe are the exclusive licensee of certain of TranXenoGen’s technology andintellectual property.  Pursuant to thisagreement we issued 163,399 shares of common stock with a fair value ofapproximately $239,000 and made a cash payment during the quarter of $140,000.  We had previously paid $20,000 as an optionpayment related to the TranXenoGen technology. The total value paid for this license agreement of $399,000 has beencapitalized and will be amortized over the life of the underlying intellectualproperty, estimated to be approximately seven years.

 

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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 reasonable assured.

The Company entered into a lease for office andlaboratory space in Massachusetts commencing December, 2004 and expiring April,2010 and for office space in California commencing November, 2005 and expiring May 2008.Annual minimum lease payments are as follows:

| 2006 |   | 409,160 |   |
|------|--------|---------|--------|
| 2007 |   | 568,509 |   |
| 2008 |   | 386,311 |   |
| 2009 |   | 246,146 |   |
| 2010 |   | 83,400  |   |

 

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

| 2006                                      |   | 65,979   |   |
|-------------------------------------------|--------|----------|--------|
| 2007                                      |   | 87,972   |   |
| 2008                                      |   | 36,655   |   |
|                                      |   | 190,606  |   |
| Imputed interest                          |   | (22,581  | )      |
| Net asset value                           |   | (168,025 | )      |
| Less current  portion                     |   | (77,584  | )      |
| Long-term  commitment under capital lease |   | $        | 90,441 |   |
|                                           |        |          |        |  |

Rent expense recorded in the financial statements forthe three month periods ended March 31, 2006 and 2005 was $325,571 and$97,318, respectively.

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

**10.**          SUBSEQUENT EVENTS

In  March 2006,the Company filed with the Securities and Exchange Commission Amendment No. 2to the Form SB-2 which registers shares related to the convertibledebentures, and related warrants, described in Note 3 — Convertible Debentures.The primary purpose of the amendment was to update the registration statementfor current financial information as of December 31, 2005 which was filedin the Company’s Form 10-KSB. In April 2006 the Company wasnotified that the registration statement had been declared effective.

In April and May 2006, the Company made itsmonthly redemptions of convertible debentures described in Note 3. The terms ofthe agreement provide for payment in cash, or company stock under certaincircumstances. In connection with the April redemption, the Company paidcash of approximately $236,000 and issued approximately 440,000 shares ofcommon stock. At  March 31, 2006,approximately 144,000 of the shares related to the April redemption hadbeen preliminarily issued by the transfer agent in accordance with the terms ofthe debenture agreement. Such shares are not reflected as issued andoutstanding by the company prior to finalizing share and cash payments inconnection with the redemption in April 2006. In connection with the May redemption,the Company paid cash of approximately $186,000 and issued approximately486,000 shares.

In May 2006, the Company entered into a series ofagreements that resolved certain legal matters described more fully in Note 8 —Legal Proceedings under *University ofMassachusetts v. James M. Robl and Phillipe Collas.*In resolvingthis matter, the Company sold a minority interest it owned in an entity forcash proceeds of approximately $800,000, which will result in a gain on sale asthe Company had no asset value recorded as there was no assurance that suchasset value would be realized. In resolving this matter, the Company alsoentered into a licensing agreement that required payment of approximately$500,000 for license fees and legal fees. The Company also executed asettlement agreement with the parties involved in the litigation andanticipates dismissal of all litigation in the second quarter upon filing ofthe final documents.

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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 earlystage of 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 27 for a morecomplete discussion of these factors. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datethat they are made. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

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

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

**SIGNIFICANTACCOUNTING POLICIES**

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses. Note 1 of the Notes to Financial Statementsdescribes the significant accounting policies used in the preparation of thefinancial statements. Certain of these significant accounting policies areconsidered to be critical accounting policies, as defined below. We do notbelieve that there have been significant changes to our accounting policiesduring the three months ended March 31, 2006, as compared to those policiesdisclosed in the December 31, 2005 financial statements filed in our AnnualReport on Form 10-KSB with the SEC on March 31, 2006.

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

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

***Use of Estimates -***Thesefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States and, accordingly, requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period. Specifically,our management has estimated the expected economic life and value of ourlicensed technology, our net operating loss for tax purposes and our stock,option and warrant expenses related to compensation to employees and directors,consultants and 

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investment banks. Actual results could differ fromthose estimates.

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

***Valuation of DerivativeInstruments*** —These financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States and, accordingly, require management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts during the reportingperiods. Specifically, FAS 133, “Accounting for Derivative Instruments andHedging Activities” requires bifurcation of embedded derivative instruments andmeasurement of fair value for accounting purposes. In determining theappropriate fair value, the Company uses a variety of valuation techniquesincluding Black Scholes models, Binomial Option Pricing models, Standard PutOption Binomial models and net present value of certain penalty amounts.Derivative liabilities are adjusted to reflect fair value at each period end,with any increase or decrease in the fair value being recorded in results ofoperations as Adjustments to Fair Value of Derivatives. In addition, the fairvalue of freestanding derivative instruments such as warrant derivatives arevalued using Black Scholes models.

***Cash andEquivalents -****Cash equivalents are comprised of certain highly liquidinvestments with maturity 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 in such account.*

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

***Revenue Recognition-***Our revenues are generated from license and researchagreements with collaborators. Licensing revenue is recognized ratably over thelife of 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 the same term as the revenue.Reimbursements of research expense pursuant to grants are recorded as areduction of research and development expense once the reimbursements areapproved and the Company is assured of collectibility.

***Intangible andLong-Lived Assets -***We follow SFAS No. 144, “*Accounting for Impairment of Disposal of Long-LivedAssets*”, whichestablished a “primary asset” approach to determine the cash flow estimationperiod for a group of assets and liabilities that represents the unit ofaccounting for a long lived asset to be held and used. Long-lived assets to beheld and used are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. The carrying amount of a long-lived asset is not recoverable if itexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of the asset. Long-lived assets to be disposed of arereported at the lower of carrying amount or fair value less cost to sell. Duringthe period ended March 31, 2006 no impairment losses were recognized.

***Research andDevelopment Costs -***Research and development costsconsist of expenditures for the research and development of patents andtechnology, which are not capitalizable. Our research and development costsconsist mainly of payroll and payroll related expenses, research supplies andcosts incurred in connection with specific research grants.

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

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

At March 31, 2006, the Company has twostock-based employee compensation plans, which are described more fully in Note6. Prior to January 1, 2006, the Company accounted for those plans underthe recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, aspermitted by FASB Statement No. 123, Accounting for Stock-BasedCompensation. No stock-based employee compensation cost was recognized in theStatement of Operations for the years ended December 31, 2005 or 2004, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

Effective January 1,2006, the Company adopted the fair value recognition provisions of FASBStatement No. 123(R) Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2006includes: (a) compensation cost for all share-based payments granted priorto, but not yet vested as of

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January 1, 2006,based on the grant date fair value estimated in accordance with the originalprovisions of Statement 123, and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006, based on the grant-datefair value estimated in accordance with the provisions of Statement 123(R). Resultsfor prior periods have not been restated.

**RESULTS OFOPERATIONS**

***Revenues***

Revenues for the three months ended March 31,2006 and 2005 were approximately $83,000 and $108,000 respectively. Theseamounts relate primarily to license fees and royalties collected that are beingamortized over the period of the license granted. The reduction in revenue incurrent periods was due to decreased revenue levels from licensees’ operations.

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

Research and development expenses for the three monthsended March 31, 2006 and 2005 were approximately $1,809,000 and $276,000,respectively. The increase in expenses in current periods, which consist mainlyof facility costs, payroll and payroll related expenses, research supplies andcosts incurred in connection with specific research grants, relate principallyto increased staffing and spending for scientific research.

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

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

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

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

Grant reimbursements for the three months ended March 31,2006 and 2005 were approximately $201,000 and $236,000, respectively. Theseamounts represent approved reimbursements pursuant the grant from NIST. At March 31,2006, the Company had approximately $500,000 of funds available under the grantthat can be used to reimburse future approved research expenditures through May 2006.Under the terms of the grant, the Company will lose any unused funds upon theexpiration of the grant. Based upon current spending levels, it is likely thatthe Company will be unable to fully utilize funds available under the grant,and a portion of the grant will go unused.

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**General andAdministrative Expenses**

General and administrative expenses for the threemonths ended March 31, 2006 and 2005 were approximately $2,630,000 and$1,204,000, respectively. The principal increase in expense in the currentperiods versus the same periods last year is a result of additional salarycosts related to the addition of key personnel and approximately $500,000 ofcosts incurred by the Company for investor relations related expenses duringthe current period.

***Other Income***

Other income for the three months ended March 31,2006 and 2005 were approximately $9,029,000 and $18,000, respectively. Theincrease in other income in the three months ended March 31, 2006,compared to other expense in the prior periods, relates primarily adjustmentsto fair value of derivatives related to the Convertible Debenture financing.The increase in interest expense and late fees in the three months ended March 2006,compared to interest expense in the prior periods relates primarily to interestrecorded in connection with the convertible debentures.

***Net Profit/ ( Loss)***

Net profit / (loss) for the three months ended March 31,2006 and 2005 was approximately $4,813,000 and ($1,164,000), respectively. Theincrease in profit in the current period is the result of changes to the fairvalue of derivatives, partially offset by increased general and administrativeand research and development expenses.

***Recent Accounting Pronouncements***

In February 2006, the FASB issued FASB Statement No. 155,Accounting for Certain Hybrid Instruments. This standard amends the guidance inFASB Statements No. 133, Accounting for Derivative Instruments and HedgingActivities, and No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities. Statement 155 allowsfinancial instruments that have embedded derivatives to be accounted for as awhole (eliminating the need to bifurcate the derivative from its host) if theholder elects to account for the whole instrument on a fair value basis.

Management has adopted FASB Statement No. 155 andwill apply it to all future transactions as applicable.

In September 2005, the Emerging Issues TaskForce, or EITF, reached a consensus on Issue 05-8, “Income TaxConsequences of Issuing Convertible Debt with a Beneficial Conversion Feature.”EITF Issues No. 98-5, “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios,”and No. 00-27, “Application of Issue No. 98-5 to CertainConvertible Instruments,” provide guidance on how companies should bifurcateconvertible debt issued with a beneficial conversion feature into a liabilityand an equity component. For income tax purposes, such an instrument is onlyrecorded as a liability. A question has been raised as to whether a basisdifference results from the issuance of convertible debt with a beneficialconversion feature and, if so, whether the basis difference is a temporarydifference. We do not expect the provisions of this consensus to have amaterial impact on our financial position, results of operations or cash flows.

In November 2004, the Emerging Issues Task Forceor EITF reached final consensus on Issue 04-8, “The Effect ofContingently Convertible Debt on Diluted Earnings per Share.” Contingentlyconvertible debt instruments, commonly referred to as Co-Cos, are structuredfinancial transactions that combine the features of contingently issuableshares with a convertible debt instrument. Co-Cos are convertible into commonshares of the issuer after the common stock price has exceeded a predeterminedthreshold for a specified time period (market price trigger). The issue is whenthe dilutive effect of Co-Cos should be included in diluted earnings per share.Management does not expect the implementation of this new standard to have amaterial impact on our financial position, results of operations and cash flows.

In September 2005, the Emerging Issues Task Forceor EITF discussed Issue 05-4, The Effect of a Liquidated DamagesClause on a Freestanding Instrument Subject to EITF Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock.” The Effect of a Liquidated Damages Clauseon a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock.” Issuance of a registration rights agreementwith a liquidated damages clause is common when equity instruments, stockpurchase warrants, and financial instruments that are convertible into equitysecurities are issued. The agreement requires the issuer to use its “bestefforts” to file a registration statement for the resale of the equityinstruments or the shares of stock underlying the stock purchase warrant orconvertible financial instrument and have it declared effective by the end of aspecified grace period. The issuer may also be required to maintain theeffectiveness of the registration statement for a period of time or pay aliquidated damage penalty to the investor each month until the registrationstatement is declared effective. Given the potential significance of thepenalty, a question arises as to the effect, if any, this feature has on therelated financial instruments if they are subject to the scope of Issue 00-19.The company took the provisions of this issue into account in their accountingfor the period.

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In September 2005, the Emerging Issues TaskForce, or EITF, reached a consensus on Issue 05-7, “Accounting forModifications to Conversion Options Embedded in Debt Securities and RelatedIssues.” EITF Issue No. 96-19, “Debtor’s Accounting for aModification or Exchange of Debt Instruments,” provides guidance on whethermodifications of debt result in an extinguishment of that debt. In certainsituations, companies may change the terms of a conversion option as part of adebt modification, which may result in the following circumstances: (a) thechange in the conversion option’s terms causes the fair value of the conversionoption to change but does not result in the modification meeting the conditionin Issue 96-19 that would require the modification to be accounted for asan extinguishment of debt, and (b) the change in the conversion option’sterms did not result in separate accounting for the conversion option underStatement 133. When both of these circumstances exist, questions have arisenregarding whether (a) the modification to the conversion option, whichchanges its fair value, should affect subsequent interest expense recognitionrelated to the debt and (b) a beneficial conversion feature related to adebt modification should be recognized by the borrower if the modificationincreases the intrinsic value of the debt. We do not expect the provisions ofthis consensus to have a material impact on our financial position, results ofoperations or cash flows.

In June 2005, the Emerging Issues Task Force, orEITF, reached a consensus on Issue 05-2, “The Meaning of “ConventionalConvertible Debt Instrument” in EITF Issue 00-19. Paragraph 4 ofIssue 00-19 states that “the requirements of paragraphs 12-32 ofthis issue do not apply if the hybrid contract is a conventional convertibledebt instrument in which the holder may only realize the value of theconversion option by exercising the option and receiving the entire proceeds ina fixed number of shares or the equivalent amount of cash (at the discretion ofthe issuer)”. The term “conventional convertible debt instrument” is notdefined in Issue 00-19 and, as a result, questions have arisen regardingwhen a convertible debt instrument should be considered “conventional” forpurposes of Issue 00-19. A question has also arisen related to whetherconventional convertible preferred stock should be treated similar toconventional convertible debt. We do not expect the provisions of thisconsensus to have a material impact on our financial position, results ofoperations or cash flows.

In June 2005, the Emerging Issues Task Force, orEITF, reached a consensus on Issue 05-6, Determining the AmortizationPeriod for Leasehold Improvements, which requires that leasehold improvements acquiredin a business combination or purchased subsequent to the inception of a leasebe amortized over the lesser of the useful life of the assets or a term thatincludes renewals that are reasonably assured at the date of the businesscombination or purchase. EITF 05-6 is effective for periods beginningafter July 1, 2005. We do not expect the provisions of this consensus tohave a material impact on the our financial position, results of operations orcash flows.

In March 2005, the FASB issued FASB InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”).FIN 47 provides guidance relating to the identification of and financialreporting for legal obligations to perform an asset retirement activity. TheInterpretation requires recognition of a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated. FIN 47 also defines when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation. The provision is effective no later than the end offiscal years ending after December 15, 2005. The Company will adopt FIN 47beginning the first quarter of fiscal year 2006 and does not believe theadoption will have a material impact on its financial position or results ofoperations or cash flows.

In May 2005, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154,Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20and FASB Statement No. 3. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS No. 154 also requiresthat retrospective application of a change in accounting principle be limitedto the direct effects of the change. Indirect effects of a change in accountingprinciple, such as a change in nondiscretionary profit-sharing paymentsresulting from an accounting change, should be recognized in the period of theaccounting change. SFAS No. 154 also requires that a change indepreciation, amortization or depletion method for long-lived, non-financialassets be accounted for as a change in accounting estimate effected by a changein accounting principle. SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after the date this Statement is issued. Managementdoes not expect the implementation of this new standard to have a materialimpact on our financial position, results of operations and cash flows.

In March 2005, the SEC released Staff AccountingBulletin No. 107, “Share-Based Payment”(“SAB 107”), which providesinterpretive guidance related to the interaction between SFAS 123(R) andcertain SEC rules and regulations. It also provides the SEC staff’s viewsregarding valuation of share-based payment arrangements. In April 2005,the SEC amended the compliance dates for SFAS 123(R), to allow companies toimplement the standard at the beginning of their next fiscal year, instead ofthe next reporting period beginning after June 15, 2005. Management iscurrently evaluating the impact SAB 107 will have on our financial statements.

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 153, “Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions.” The amendments made by Statement 153 are based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. Previously, Opinion 29 required that

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the accounting for an exchange of a productive assetfor a similar productive asset or an equivalent interest in the same or similarproductive asset should be based on the recorded amount of the asset relinquished.Opinion 29 provided an exception to its basic measurement principle (fairvalue) for exchanges of similar productive assets. The FASB believes thatexception required that some nonmonetary exchanges, although commerciallysubstantive, be recorded on a carryover basis. By focusing the exception onexchanges that lack commercial substance, the FASB believes this statementproduces financial reporting that more faithfully represents the economics ofthe transactions. SFAS 153 is effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. Earlierapplication is permitted for nonmonetary asset exchanges occurring in fiscalperiods beginning after the date of issuance. The provisions of SFAS 153 shallbe applied prospectively. The Company has evaluated the impact of the adoptionof SFAS 153, and does not believe the impact will be significant to the Company’soverall results of operations or financial position.

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

In December 2004, the FASB issued SFAS No. 152,“Accounting for Real Estate Time-Sharing Transactions, an amendment of FASBStatements No. 66 and 67 (SFAS 152)”. The amendments made by Statement 152amend FASB Statement No. 066, “Accounting for Sales of Real Estate”, toreference the financial accounting and reporting guidance for real estatetime-sharing transactions that is provided in AICPA Statement of Position (SOP)04-2, “Accounting for Real Estate Time-Sharing Transactions”. ThisStatement also amends FASB Statement No. 67, “Accounting for Costs andInitial Rental Operations of Real Estate Projects”, to state that the guidancefor (1) incidental operations and (2) costs incurred to sell realestate projects does not apply to real estate time-sharing transactions. Theaccounting for those operations and costs is subject to the guidance in SOP 04-2.This statement is effective for financial statements for fiscal years beginningafter June 15, 2005, with earlier application encouraged. The Company hasevaluated the impact of the adoption of SFAS 152, and does not believe theimpact will be significant to the Company’s overall results of operations orfinancial position since the Company does not enter into such transactions.

In December 2004, the FASB issued two FASB StaffPositions—FSP FAS 109-1, Application of FASB Statement 109 “Accountingfor Income Taxes” to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004, and FSP FAS 109-2Accounting and Disclosure Guidance for the Foreign Earnings RepatriationProvision within the American Jobs Creation Act of 2004. Neither of theseaffected the Company as it does not participate in the related activities.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4”. The amendmentsmade by Statement 151 clarify that abnormal amounts of idle facility expense,freight, handling costs, and wasted materials (spoilage) should be recognizedas current period charges and require the allocation of fixed productionoverheads to inventory based on the normal capacity of the productionfacilities. The guidance is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after November 23,2004. The Company has evaluated the impact of the adoption of SFAS 151, anddoes not believe the impact will be significant to the Company’s overallresults of operations or financial position since the Company currently doesnot have any manufacturing operations or inventory.

In March 2004, the FASB approved the consensusreached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” The objective of this Issue is to provide guidancefor identifying impaired investments. EITF 03-1 also provides newdisclosure requirements for investments that are deemed to be temporarilyimpaired. The accounting provisions of EITF 03-1 are effective for all reportingperiods beginning after June 15, 2004, while the disclosure requirementsfor certain investments are effective for annual periods ending after December 15,2003, and for other investments such disclosure requirements are effective forannual periods ending after June 15, 2004.

In December 2003, the SEC issued Staff AccountingBulletin (“SAB”) No. 104 (“SAB No. 104”), “Revenue Recognition.” SAB No. 104supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SABNo. 104, which was effective upon issuance, rescinded certain guidancecontained in SAB No. 101 related to multiple element revenue arrangements,and replaced such guidance with that contained in EITF 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104

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rescinded the SEC’s Revenue Recognition in FinancialStatements Frequently Asked Questions and Answers issued with SAB No. 101.The revenue recognition principles of SAB No. 101 remain largely unchangedby the issuance of SAB No. 104, and therefore the adoption of SAB No. 104did not have a material effect on the Company’s results of operations orfinancial condition.

In January 2003, the FASB issued FASBInterpretation No. (“FIN”) 46, “Consolidation of Variable InterestEntities” (“FIN 46”). In December 2003, FIN 46 was replaced by FASBinterpretation No. 46(R) “Consolidation of Variable InterestEntities.” FIN 46(R) clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” to certain entitiesin which equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. FIN 46(R) requires an enterprise to consolidate a variableinterest entity if that enterprise will absorb a majority of the entity’sexpected losses, is entitled to receive a majority of the entity’s expectedresidual returns, or both. FIN 46(R) is effective for entities beingevaluated under FIN 46(R) for consolidation no later than the end of thefirst reporting period that ends after March 15, 2004. The Company doesnot currently have any variable interest entities that will be impacted byadoption of FIN 46(R).

***LIQUIDITY AND CAPITAL RESOURCES***

We are financing our operations primarily with$17,750,000 of proceeds of convertible debentures issued September 15,2005 and described in our Current Report on Form 8-K filed with theSecurities and Exchange Commission on September 19, 2005, and $8,000,000of proceeds from a January 2005 preferred unit offering. To asubstantially lesser degree, financing of our operations is provided throughgrant funding, payments received under license agreements, and interest earned oncash and cash equivalents.

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

Cash and cash equivalents at March 31, 2006 and December 31,2005 were approximately $9,385,000 and $13,858,000, respectively. The decreasein the current period is primarily the result of cash utilized in operations,capital expenditures, and $500,000 of costs incurred by the Company forinvestor relations related expenses in the current period.

Our cash and cash equivalents are limited. We expectto require substantial additional funding. Our future cash requirements willdepend on many factors, including the pace and scope of our research anddevelopment programs, the costs involved in filing, prosecuting, maintainingand enforcing patents and other costs associated with commercializing ourpotential products. We intend to seek additional funding primarily throughpublic or private financing transactions, and, to a lesser degree, newlicensing or scientific collaborations, grants from governmental or otherinstitutions, and other related transactions.  If we are unable to raise additional funds, wewill be forced to either scale back our business efforts or curtail ourbusiness activities entirely. We anticipate that our available cash andexpected income will be sufficient to finance most of our current activitiesfor at least twelve months from the date of the financial statements, althoughcertain of these activities and related personnel may need to be reduced. Wecannot assure you that public or private financing or grants will be availableon acceptable terms, if at all. Several factors will affect our ability toraise additional funding, including, but not limited to, the volatility of ourCommon Stock.

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**RISK FACTORS THAT MAY AFFECTOUR BUSINESS**

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

**Risks Relating toOur Early Stage of Development**

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

·                                          wehave fewer resources than an established company,

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

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

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

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

Although we have revenues from license fees androyalties, we have no commercially marketable products and no immediate abilityto generate revenue from commercial products, nor any assurance of being ableto develop our technologies for commercial applications. As a result, we may neverbe able to operate profitably. We are just beginning to identify productsavailable for pre-clinical trials and may not receive significant revenuesfrom commercial 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 andinvestment prior to material commercialization and, in the case of anybiomedical products, pre-clinical and clinical testing and regulatoryapprovals. We cannot assure you that we will be able to develop any suchtechnologies or any products or services, or that such technologies, productsor services will prove to be safe and efficacious in clinical trials, meetapplicable regulatory standards, be capable of being produced in commercialquantities at acceptable costs or be successfully marketed. For that reason, wemay not be able to generate revenues from commercial production or operateprofitably.

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

**We will require substantialadditional funds to continue operating which may not be available onacceptable terms, if at all.   **We have losses from operations, negative cash flowsfrom operations and a substantial stockholders’ deficit that raise substantialdoubt about the Company’s ability to continue as a going concern. We do notbelieve that our cash from all sources, including cash, cash equivalents andanticipated revenue stream from licensing fees and sponsored research contractsis sufficient for us to continue operations through March 31, 2007 withoutraising additional financing.

Management continues to evaluate alternatives andsources for additional funding, which may include public or private investors,strategic partners, and grant programs available through specific states orfoundations, although there is no assurance that such sources will result inraising additional capital. Lack of necessary funds may require us to delay,scale back or eliminate some or all of our research and

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product developmentprograms and/or our capital expenditures, to license our potential products ortechnologies to third parties, to consider business combinations related toongoing business operations, or shut down some, or all, of our operations.

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

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

**Risks Relating toCompetition**

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

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 therapiesmay present for substantive breakthroughs in the fight against disease.

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

The United States is encountering tremendouscompetition from many foreign countries that are providing an environment moreattractive for stem cell research. The governments of numerous foreign countriesare investing in stem cell research, providing facilities, personnel and legalenvironments intended to attract biotechnology companies and encourage stemcell research and development of stem cell-related technologies.

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

**Risks Relating toOur Technology**

**We rely on nucleartransfer and embryonic stem cell technologies that we may not be able tosuccessfully develop, which will prevent us from generating revenues, operatingprofitably or providing investors any return on their investment**.  We have concentrated our research on ournuclear transfer and embryonic stem cell technologies, and our ability tooperate profitably will depend on being able to successfully develop thesetechnologies for human applications. These are emerging technologies with, asyet, limited human applications. We cannot guarantee that we will be able tosuccessfully develop our nuclear transfer and

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**embryonicstem cell technologies or that such development will result in products orservices with any significant commercial utility. We anticipate that thecommercial sale of such products or services, and royalty/licensing feesrelated to our technology, would be our primary sources of revenues. If we areunable to develop our technologies, investors will likely lose their entireinvestment in us.**

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

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

**We may not beable to commercially develop our technologies and proposed product lines,which, in turn, would significantly harm our ability to earn revenues andresult in a loss of investment**. Our ability to commercially develop our technologies will be dictated inlarge part by forces outside our control which cannot be predicted,including, but not limited to, general economic conditions, the success of ourresearch and pre-clinical and field testing, the availability of collaborativepartners to finance our work in pursuing applications of nuclear transfertechnology and technological or other developments in the biomedical fieldwhich, due to efficiencies, technological breakthroughs or greater acceptancein the biomedical industry, may render one or more areas ofcommercialization more attractive, obsolete or competitively unattractive. Itis possible that one or more areas of commercialization will not be pursued atall if a collaborative partner or entity willing to fund research anddevelopment cannot be located. Our decisions regarding the ultimate productsand/or services we pursue could have a significant adverse affect on ourability to earn revenue if we misinterpret trends, underestimate developmentcosts and/or pursue wrong products or services. Any of these factors eitheralone or in concert could materially harm our ability to earn revenues andcould result in a loss of any investment in us.

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

**We may not be able toprotect our proprietary technology, which could harm our ability to operateprofitably**.  The biotechnology andpharmaceutical industries place considerable importance on obtaining patent andtrade secret protection for new technologies, products and processes. Oursuccess will depend, to a substantial degree, on our ability to obtain and enforcepatent protection for our products, preserve any trade secrets and operatewithout infringing the proprietary rights of others. We cannot assure you that:

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

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

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

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

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

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**Our business is highlydependent upon maintaining licenses with respect to key technology**.  Several of the key patents we utilize arelicensed to us by third parties. These licenses are subject to terminationunder certain circumstances (including, for example, our failure to makeminimum royalty payments or to timely achieve development and commercializationbenchmarks). The loss of any of such licenses, or the 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.

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

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

**Patent litigation presentsan ongoing threat to our business with respect to both outcomes and costs.** We have previously been involved in patentinterference litigation with Infigen, Inc., and are currently involved intwo patent disputes with Geron Corporation, and it is possible that furtherlitigation over patent matters with one or more competitors could arise. Wecould incur substantial litigation or interference costs in defending ourselvesagainst suits brought against us or in suits in which we may assert ourpatents against others. If the outcome of any such litigation, including ourcurrent disputes with Geron Corporation, is unfavorable, our business wouldlikely be materially adversely affected. To determine the priority ofinventions, we may also have to participate in interference proceedingsdeclared by the United States Patent and Trademark Office, which could resultin substantial cost to us. Without additional capital, we may not have theresources to adequately defend or pursue this litigation.

**Risks Relating tothe September 2005 Financing**

**If we are requiredfor any reason to repay our outstanding convertible 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 haveoutstanding, as of May 12, 2006, $18,996,125 aggregate original principalamount of convertible debentures with an original issue discount of 20.3187%.Beginning on March 14, 2006, and continuing for each successive monththroughout the three year term of the debentures, we are required to redeem, bypayment with cash or with shares of our common stock, 1/30th of the aggregateoriginal principal amount of the debentures. Unless waived by the holders ofthe debentures, in order to redeem with shares of our common stock we mustsatisfy certain conditions which have yet to be satisfied, including suchconditions as the listing of our shares of common stock on either the NASDAQNational Market, the NASDAQ Small Cap Market, or the American Stock Exchange.These monthly payments will impact the amount of working capital available tous. The convertible debentures are due and payable on September 14, 2008,unless sooner converted into shares of our common stock. Any event of defaultcould require the early repayment of the convertible debentures, including theaccruing of interest on the outstanding principal balance of the debentures ifthe default is not cured with the specified grace period. We anticipate thatthe full amount of the convertible debentures will be converted into shares ofour common stock, in accordance with the terms of the convertible debentures.If, prior to the maturity date, we are required to repay the convertibledebentures in full, we would be required to use our limited working capital andraise additional 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 number of shares underlying ourconvertible debentures in full, and warrants that are registered and availablefor sale and the sale of these shares may depress the market price of ourcommon stock. As of  May 12, 2006,we had:

·                                          outstandingconvertible debentures that may be converted into an estimated 8,259,185shares of common stock based on a conversion price of $2.30, and

·                                          outstandingwarrants to purchase 6,004,902 shares of common stock with an exercise price of$2.53, that were issued in connection with the sale of the convertibledebentures.

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

**The issuance ofshares upon conversion of the convertible debentures and exercise ofoutstanding warrants will cause immediate and substantial dilution to ourexisting stockholders.  **Theissuance of shares upon conversion of the convertible debentures and exerciseof warrants will result in substantial dilution to the interests of otherstockholders since the selling security holders may ultimately convert andsell the full amount issuable on conversion. Although no single sellingsecurity holder may convert its convertible debentures and/or exercise itswarrants if such conversion or exercise would cause it to own more than 4.99%of our outstanding common stock, this restriction does not prevent each sellingsecurity holder from converting and/or exercising some of its holdings and thenconverting the rest of its holdings. In this way, each selling security holdercould sell more than this limit while never holding more than this limit. Thereis no upper limit on the number of shares that may be issued which willhave the effect of further diluting the proportionate equity interest andvoting power of holders of our common stock, including investors in thisoffering.

**Payment ofmandatory monthly redemptions in shares of common stock will result insubstantial dilution.**Weexpect to satisfy our obligation to redeem 1/30th of the aggregate originalprincipal amount of debentures per month beginning March, 2006 through issuanceof additional shares of our common stock. This approach will result insubstantial dilution to the interests of other stockholders.

**Risks Relating toGovernment Regulation**

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

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

**Restrictions onthe 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**.  Some of our most important programs involvethe use of stem cells that are derived from human embryos. The use of humanembryonic stem cells gives rise to ethical, legal and social issues regardingthe appropriate use of these cells. In the event that our research related tohuman embryonic stem cells becomes the subject of adverse commentary orpublicity, the market price for our common stock could be significantly harmed.Some political and religious groups have voiced opposition to our technologyand practices. We use stem cells derived from human embryos that have beencreated for in vitro fertilization procedures but are no longer desired orsuitable for that use and are donated with appropriate informed consent forresearch use . Many research institutions, including some of our scientificcollaborators, have adopted policies regarding the ethical use of humanembryonic tissue. These policies may have the effect of limiting the scopeof research conducted using human embryonic stem cells, thereby impairing ourability to conduct research in this field.

Potential and actual legislation and regulation at thefederal or state level related to our technology could limit our activities andability to develop products for commercial sales, depriving us of ouranticipated source of future revenues. For example, in July 2001, theHouse of Representatives of the United States Congress passed a bill, HR 2505,the “Human Cloning Prohibition Act of 2001.” This bill was placed on thecalendar of the U.S. Senate in August 2002, where it did not pass.However, similar bills could be introduced in the future aiming to prohibit theuse or commercialization of somatic cell nuclear transfer technology or of anyproducts resulting from it, including those related to human therapeuticcloning and regenerative medicine. Such legislation could have a significantinfluence on our ability to pursue our research, development andcommercialization plans in the United States.

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

·              harmingour ability to establish critical partnerships and collaborations,

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·                                          delayingor preventing progress in our research and development,

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

·                                          causinga decrease in the price of our stock.

**Because we or ourcollaborators must obtain regulatory approval to market our products in theUnited States and other countries, we cannot predict whether or when we will bepermitted to commercialize our products.** Federal, state and local governments in theUnited States and governments in other countries have significant regulationsin place that govern many of our activities. We are or may become subjectto various federal, state and local laws, regulations and recommendationsrelating to safe working conditions, laboratory and manufacturing practices,the experimental use of animals and the use and disposal of hazardous orpotentially hazardous substances used in connection with our research anddevelopment work. The preclinical testing and clinical trials of the productsthat we or our collaborators develop are subject to extensive governmentregulation that may prevent us from creating commercially viable productsfrom our discoveries. In addition, the sale by us or our collaborators of anycommercially viable product will be subject to government regulation fromseveral standpoints, including manufacturing, advertising and promoting,selling and marketing, labeling, and distributing.

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

Our products may not receive FDA approval, whichwould prevent us from commercially marketing our products and producingrevenues. The FDA and comparable government agencies in foreign countriesimpose substantial regulations on the manufacture and marketing ofpharmaceutical products through lengthy and detailed laboratory, pre-clinicaland clinical testing procedures, sampling activities and other costly andtime-consuming procedures. Satisfaction of these regulations typically takesseveral years or more and varies substantially based upon the type, complexityand novelty of the proposed product. We cannot yet accurately predict when wemight first submit any Investigational New Drug, or IND, application to the FDA,or whether any such IND application would be granted on a timely basis, if atall, nor can we assure you that we will successfully complete any clinicaltrials in connection with any such IND application. Further, we cannot yetaccurately predict when we might first submit any product license applicationfor FDA approval or whether any such product license application would begranted on a timely basis, if at all. As a result, we cannot assure you thatFDA approvals for any products developed by us will be granted on a timelybasis, if at all. Any such delay in obtaining, or failure to obtain, suchapprovals could have a material adverse effect on the marketing of our productsand our ability to generate product revenue. For additional information about governmentalregulations that will affect our planned and intended business operations, seeCompany’s Annual Report on Form 10-KSB filed with the SEC on March 31,2006 under the heading “DESCRIPTION OF BUSINESS—*Government Regulation*.

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

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

**Risks Relating toOur Reliance on Third Parties**

**We depend on ourcollaborators to help us develop and test our proposed products, and ourability to develop and commercialize products may be impaired or delayedif collaborations are unsuccessful.  **Our strategy for the development, clinical testingand commercialization of our proposed products requires that we enter intocollaborations with corporate partners, licensors, licensees and others. We aredependent upon the subsequent success of these other parties in performingtheir respective responsibilities and the continued cooperation of our partners.Our collaborators may not cooperate with us or perform theirobligations under our agreements with them. We cannot control the amount andtiming of our collaborators’ resources that will be devoted to our research anddevelopment activities related to our collaborative agreements with them. Ourcollaborators may choose

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**topursue existing or alternative technologies in preference to those beingdeveloped in collaboration with us.**

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

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

·                                          fundresearch and development activities with us,

·                                          payus fees upon the achievement of milestones, and

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

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

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

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

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

**General RisksRelating to Our Business**

**We may be subject tolitigation that will be costly to defend or pursue and uncertain in its outcome.** Our businessmay bring us into conflict with our licensees, licensors, or others withwhom we have contractual or other business relationships, or with ourcompetitors or others whose interests differ from ours. If we are unable toresolve those conflicts on terms that are satisfactory to all parties, wemay become involved in litigation brought by or against us. Thatlitigation is likely to be expensive and may require a significant amountof management’s time and attention, at the expense of other aspects of ourbusiness. The outcome of litigation is always uncertain, and in some casescould include judgments against us that require us to pay damages, enjoin usfrom certain activities, or otherwise affect our legal or contractual rights,which could have a significant adverse effect on our business. Additionaldiscussion regarding litigation in which we are involved is set forth inPart II Item I of this Quarterly Report and contained in the Company’sAnnual Report on Form 10-KSB filed with the SEC on March 31,2006.

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

**Our products arelikely to be expensive to manufacture, and they may not be profitable ifwe are unable to control the costs to manufacture them.  **Our products are likely to be significantly moreexpensive to manufacture than most other drugs currently on the market today.Our present manufacturing processes produce modest quantities of productintended for use in our ongoing research activities, and we have not developedprocesses, procedures and capability to produce commercial volumes of product.We hope to substantially reduce manufacturing costs through process improvements,development of new science, increases in manufacturing scale and outsourcing toexperienced manufacturers. If we are not able to make these or otherimprovements, and

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**dependingon the pricing of the product, our profit margins may be significantly lessthan that of most drugs on the market today. In addition, we may not beable to charge a high enough price for any cell therapy product we develop,even if they are safe and effective, to make a profit. If we are unable torealize significant profits from our potential product candidates, our businesswould be materially harmed.**

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

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

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

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

·                                          reimbursementpolicies of government and third-party payors.

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

**Our current source ofrevenues depends on the stability and performance of our sublicensees.** Our ability to collect royalties on product salesfrom our sublicensees will depend on the financial and operational success ofthe companies operating under a sublicense. We have numerous licensees to thirdparties including Lifeline Cell Technology, Exeter Life Sciences and GTCBiotherapeutics, as well as others that hold licenses to our technology.Revenues from those licensees will depend upon the financial and operationalsuccess of those third parties. We cannot assure you that these licensees willbe successful in obtaining requisite financing or in developing andsuccessfully 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.

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

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

**Our insurance policiesmay be inadequate and potentially expose us to unrecoverable risks.** We have limited director and officer insurance andcommercial insurance policies. Any significant insurance claims would have amaterial adverse effect on our business, financial condition and results ofoperations. Insurance availability, coverage terms and pricing continue to varywith market conditions. We endeavor to obtain appropriate insurance coveragefor insurable risks that we identify, however, we may fail to correctlyanticipate or quantify insurable risks, we may not be able to obtainappropriate insurance coverage, and insurers may not respond as we intendto cover insurable events that may occur. We have observed rapidlychanging conditions in the insurance markets relating to nearly all areas oftraditional corporate insurance. Such conditions have resulted in higherpremium costs, higher policy deductibles, and lower coverage limits. For somerisks, we may not have or maintain insurance coverage because of cost oravailability.

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

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

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

In our opinion, we have not established and did notmaintain effective internal control over financial reporting as of March 31,2006. We also believe that because of the effect of the material weakness wehave identified, we have not maintained effective internal control overfinancial reporting as of March 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. We have taken initial remedial steps,and will continue our on-going evaluation of internal controls and expect toimprove our internal controls over financial reporting as necessary to assuretheir effectiveness, but there can be no assurance that we will succeed or thatother deficiencies will not be identified.

**We presently havemembers of management and other key employees located in various locationsthroughout the country which adds complexities to the operation of the business. **Presently, we havemembers of management and other key employees located in both California andMassachusetts, which adds complexities to the operation of our business. Weintend to maintain our research facilities in Massachusetts and establishcorporate offices and an additional research facility in California. We willlikely continue to incur significant costs associated with maintaining multiplelocations.

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

**Risks Relating toOur Common Stock**

**Stock prices forbiotechnology companies have historically tended to be very volatile.** Stock prices and trading volumes for manybiotechnology companies fluctuate widely for a number of reasons, including butnot limited to the following factors, some of which may be unrelated totheir 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

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·                                          activitiesof various interest groups or organizations

·                                          mediacoverage

·                                          statusof the investment markets

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

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

Not including the shares of common stock underlying theconvertible debentures and the warrants issued in connection with the September 2005financing, as of March 31, 2006, there are presently approximately 26,000,000outstanding options, warrants and other securities convertible or exercisableinto shares of our common stock.

We may also sell a substantial number ofadditional shares of our common stock in connection with a private placement orpublic offering of shares of our common stock (or other series orclass of capital stock to be designated in the future). The terms of anysuch private placement would likely require us to register the resale of anyshares of capital stock issued or issuable in the transaction. We have alsoissued common stock to certain parties, such as vendors and service providers, aspayment for products and services. Under these arrangements, we may agreeto register the shares for resale soon after their issuance. We may alsocontinue to pay for certain goods and services with equity, which would diluteyour 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 do not intend to pay cashdividends on our common stock in the foreseeable future.** Any payment of cash dividends will depend upon ourfinancial condition, results of operations, capital requirements and otherfactors and will be at the discretion of our board of directors. We do notanticipate paying cash dividends on our common stock in the foreseeable future.Furthermore, we may incur additional indebtedness that may severelyrestrict or prohibit the payment of dividends.

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

**Our common stock is subjectto “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. CONTROLSAND PROCEDURES**

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

(b)    *Changes in internal controls.*Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Our internal control system is intended toprovide reasonable assurance to our management and board of directors regardingthe preparation and fair presentation of published financial statements. Ourmanagement assessed the effectiveness of our internal control over financialreporting as of March 31, 2006. In making its assessment of internalcontrol over financial reporting, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.

Management’s assessment identified materialdeficiencies in our internal control over financial reporting. Thesedeficiencies include lack of segregation of duties, limited capability tointerpret and apply United States generally accepted accounting principles,lack of adequate documentation of our system of internal controls, lack offormal accounting policy and procedures and related documentation, deficienciesin our information technology systems and lack of a formal budgeting process.We also have not yet instituted new internal control processes related to ouridentified material weaknesses, significant deficiencies and deficiencies, ashas been characteristic of companies that have completed their review ofinternal controls and have had to report on the effect of such review.Accordingly, our internal control over financial reporting may be subjectto additional material weaknesses and deficiencies that we have not identified.Management has determined that these significant deficiencies, in theaggregate, constituted a material weakness in the design and operation of ourinternal controls in effect prior to March 31, 2006. We hired a chieffinancial officer on April 1, 2005, and we are in the process ofimplementing new controls; however, these controls were not fully in operationduring the first quarter of 2006. As a result of the material weaknessesdescribed in the preceding paragraph, we believe that, as of March 31,2006, our internal control over financial reporting was not effective based onthe COSO criteria.

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**PART II.OTHER INFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

*University ofMassachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc., U.S.District Court for the District of Columbia*. We filed an action on February 18, 2005 in theU.S. District Court for the District of Columbia. We brought this action under35 U.S.C. 146 to reverse the decision of the Board of Patent Appeals andInterferences regarding a patent to a method of cloning non-human animals. Thepatent, U.S. Patent No. 5,945,577, is licensed by Umass exclusively to us.The parties have engaged in discovery and are awaiting a ruling from the courton the scope of permissible discovery . The parties are actively engaged insettlement discussions. Adverse determinations in this proceeding would likelyhave a materially adverse effect on our business.

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

*University ofMassachusetts v. James M. Robl and Philippe Collas, Massachusetts SuperiorCourt (Suffolk County).*UMassfiled a complaint on February 22, 2004 in the Superior Court (SuffolkCounty) for the Commonwealth of Massachusetts. Adecision adverse to UMass in this litigation could have had a materiallyadverse effect on our business. The complaint alleged the misappropriation bythe defendants of valuable inventions in the fields of animal cloning and cellreprogramming, made by the defendants at UMass and with UMass support, that areexclusively licensed to us by UMass. The complaint included counts fordeclaratory judgment, breach of contract seeking specific performance,injunctive relief and damages, intentional interference with contract andprospective contractual relations, conversion, breach of duty, and breach ofthe covenant of good faith and fair dealing. The Company successfullyintervened in the litigation to protect its interests. In May 2006, theparties to the litigation reached a settlement agreement and we anticipate thatthis case will be dismissed during the second quarter.

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

The issuances of the equity securities described belowwere made in reliance upon the exemption from registration under Section 4(2) ofthe Securities Act of 1933, as amended, relating to sales by an issuer notinvolving a public offering, and/or pursuant to the requirements of one or moreof the safe harbors provided in Regulation D under the Securities Act or,in the case of equity compensation to employees, directors and eligibleconsultants, Rule 701 therewith.

On March 23, 2006, we issued a warrant topurchase 250,000 shares of common stock at an exercise price of $2.54 per shareto MarketByte in connection with investor relation services provided to us.

On March 29, 2006, we issued 163,399 shares ofour common stock to TranXenoGen, Inc. in connection with the transactionscontemplated by a sublicense agreement entered into by the Company and TranXenoGen, Inc.

**ITEM 3. DEFAULTSUPON SENIOR SECURITIES**

None.

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

None.

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**ITEM 5. OTHERINFORMATION**

None.

**ITEM 6. EXHIBITSAND REPORTS ON FORM 8-K**

(a)           Exhibits.
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1         |       | Agreement between  Capital Financial Media, LLC and Advanced Cell Technology, Inc., dated  February 9, 2006 (previously filed as Exhibit 10.1 to the  Registrant’s current report on Form 8-K filed on February 10,  2006 (File No. 000-50295) and incorporated by reference herein) |
| 10.2         |       | Sublease Agreement  between Avigen, Inc. and Advanced Cell Technology, Inc., dated  November 29, 2005. (Previously filed as Exhibit 10.1 to the  Registrant’s current report on Form 8-K filed on February 7,  2006 (File No. 000-50295) and incorporated by reference herein). |
| 10.3         |       | Exclusive Sublicense  Agreement between Advanced Cell Technology, Inc. and TranXenoGen, Inc.,  dated March 29, 2006*                                                                                                                                                                                     |
| 31.1         |       | Section 302 Certification of Chief Executive Officer*                                                                                                                                                                                                                                                              |
| 31.2         |       | Section 302 Certification of Chief Financial Officer*                                                                                                                                                                                                                                                              |
| 32.1         |       | Certification of Chief Executive Officer pursuant to 18  U.S.C. Section 1350*                                                                                                                                                                                                                                      |
| 32.2         |       | Certification of Chief Financial Officer pursuant to 18  U.S.C. Section 1350*                                                                                                                                                                                                                                      |

 

*              Filedherewith

(b)           Reportson Form 8-K

On February 7, 2006, the Company filed a CurrentReport on Form 8-K announcing that it had entered into a leaseagreement with respect to laboratory and office facilities at 1201 Harbor BayParkway, Alameda, California.

On February 9, 2006, the Company filed a CurrentReport on Form 8-K announcing that it had entered into an Agreementwith Capital Financial Media, LLC with respect to the Company’s publicrelations and investor awareness program.

On March 29, 2006, the Company filed a CurrentReport on Form 8-K announcing that the consolidated financialstatements and information contained in the Company’s Form 10-QSBfiled with the SEC on November 14, 2005 for the quarter and nine monthsended September 30, 2005, should not be relied upon.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                          | ** ** | **ADVANCED CELL TECHNOLOGY, INC.** |
|--------------------------|------------|------------------------------------|
|                     |       | By:                                |  /s/ William M. Caldwell, IV |   |
|                     |       |                               | William M. Caldwell, IV |
|                     |       |                               | Chief Executive Officer |
| Dated: May 15, 2006 |       |                               |

 

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**Exhibit Index**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1         |       | Agreement between  Capital Financial Media, LLC and Advanced Cell Technology, Inc., dated  February 9, 2006 (previously filed as Exhibit 10.1 to the  Registrant’s current report on Form 8-K filed on February 10,  2006 (File No. 000-50295) and incorporated by reference herein) |
| 10.2         |       | Sublease Agreement  between Avigen, Inc. and Advanced Cell Technology, Inc., dated  November 29, 2005. (Previously filed as Exhibit 10.1 to the  Registrant’s current report on Form 8-K filed on February 7,  2006 (File No. 000-50295) and incorporated by reference herein). |
| 10.3         |       | Exclusive Sublicense  Agreement between Advanced Cell Technology, Inc. and  TranXenoGen, Inc., dated March 29, 2006*                                                                                                                                                                                     |
| 31.1         |       | Section 302 Certification of Chief Executive  Officer*                                                                                                                                                                                                                                                             |
| 31.2         |       | Section 302 Certification of Chief Financial  Officer*                                                                                                                                                                                                                                                             |
| 32.1         |       | Certification of Chief Executive Officer pursuant to 18  U.S.C. Section 1350*                                                                                                                                                                                                                                      |
| 32.2         |       | Certification of Chief Financial Officer pursuant to 18  U.S.C. Section 1350*                                                                                                                                                                                                                                      |

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*                    Filedherewith

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