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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
 For the transition period from _________ to _________
 Commission File No. 0-51891
 INTERNATIONAL STEM CELL CORPORATION
   Delaware
    
    20-4494098(State of other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)2595 Jason CourtOceanside, CA
    
    92056(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  Common Stock, $0.001 par value per share
 o
 þ o
 þ
 o þ
   
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##### 



TABLE OF CONTENTS
 PageCautionary Note About Forward-Looking Statements
    
    
    3PART IItem 1.
    
    Description of Business.
    
    
    3Item 2.
    
    Description of Property.
    
    
    24Item 3.
    
    Legal Proceedings.
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    25PART IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities.
    
    
    25Item 6.
    
    Managements Discussion and Analysis or Plan of Operation.
    
    
    26Item 7.
    
    Financial Statements.
    
    
    29Item 8.
    
    Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
    
    
    29Item 8A.
    
    Controls and Procedures.
    
    
    29Item 8B.
    
    Other Information.
    
    
    30PART IIIItem 9.
    
    Directors, Executive Officers, Promoters,
Control Persons and Corporate Governance; Compliance
With Section 16(a) of the Exchange Act.
    
    
    30Item 10.
    
    Executive Compensation.
    
    
    34Item 11.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
    
    
    37Item 12.
    
    Certain Relationships and Related Transactions,
and Director Independence.
    
    
    38Item 13.
    
    Exhibits.
    
    
    39Item 14.
    
    Principal Accountant Fees and Services.
    
    
    40SIGNATURES
    
    
    42Exhibit 4.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
 PART I
 
 ITEM 1.
    
    DESCRIPTION OF BUSINESS
 Business Overview
    3




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
    
    proliferate extensively and generate sufficient quantities of tissue;
    
    differentiate into the desired cell type(s);
    
    survive in the recipient after transplant;
    
    integrate into the surrounding tissue after transplant;
    
    function appropriately;
    
    avoid harming the recipient; and
    
    avoid or reduce the problem of immune rejection.
    History
   4




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Frequently Asked Questions
 What are Stem Cells?
 embryonic stem cells adult stem cells,
 What are Embryonic Stem Cells?
 blastocyst.
  Why are Embryonic Stem Cells Important?
   5




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What are Adult Stem Cells?
  Why Not Use Stem Cells Derived from Adults?
  What is Therapeutic Cloning?
  Why is Stem Cell Research Controversial?
  Is Stem Cell Research Banned in the United States?
  Why Not Use the Currently Approved Embryonic Stem Cells Lines?
  How Will Stem Cells from International Stem Cell be Different?
   6




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Ethical Issues
   Our Technology
  Our Products
 Specialty Research Products
     7




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
    
    FibrolifeTM a serum-free human fibroblast medium.
    
    Human fibroblast cells for use as feeder layers to grow human
embryonic stem cells (eliminates contamination from mouse cells).
    
    Two types of low serum human endothelial media
 1.
    
    VascuLifeTM VEGF2.
    
    VascuLifeTM EnGS.
 
    
    Human endothelial cells. (Endothelial cells form blood vessels).
    
    Line of adult neural stem cells with the ability to produce neurons
that can survive in low-oxygen and low glucose conditions, a product
useful for the discovery of drugs for the treatment of strokes.
    
    Two types of media for the culture of the adult neural cells
 1.
    
    NeuralLifeTM ags NSC expansion medium kit2.
    
    NeuralLifeTM ags NSC differentiation medium kit.
      
    
    Stem cells derived functional human liver cells provided in plates or frozen (a
byproduct of therapeutic research). These cells must have active and inducible enzyme
systems, they must have a correct morphology, they must express albumin and they must
attach to the cell culture dish.
    
    Stem cells derived functional islet cells provided in plates or frozen. These cells
must produce and express insulin in response to glucose.
    
    A complete line of reagents for the culture and differentiation of embryonic stem cells.
  8




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Therapeutic Products
   Our Markets
 Therapeutic Market
 Retinal Diseases
 Blindness and Blinding Diseases in the U.S.
  Diabetes 
  Liver Disease 
  9




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Research Market
    
    
    The need for experimental human cells which are more predictive of human biology than non-human cells or
genetically modified cell lines.
    
    The desire to lower the cost of drug development in the pharmaceutical industry. We believe that human
cell systems may provide a platform for screening toxic drugs early in the development process, thus
avoiding late stage failures in clinical trials and reducing costs.
    
    The need to eliminate animal products in research reagents that may contaminate future therapeutic
products.
    
    The need for experimental control. Serum-free defined media provides the benefit of experimental control
because there are fewer undefined components.
    
    The need for consistency in experiments that can be given by quality controlled products.
    
    The need to eliminate the necessity to formulate media in-house, obtain tissue or perform cell isolations.
    
    The need to reduce animal testing in the consumer products industry.
  Intellectual Property
 Patents
    10




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License Agreements
    Exclusive License Agreement Number One, as amended
 
    
    the research, development, manufacture and sale of human and non-human
animal cells for commercial research; and
    
    the manufacture and selling of hES cells for therapeutic and
diagnostic use in the treatment of human diabetes, liver diseases,
retinal diseases and retinal degenerative diseases.
 Exclusive License Agreement Number Two, as amended
 
    
    the research, development, manufacture and sale of human and non-human
animal cells and defined animal cell lines for commercial research;
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
    
    the manufacture and selling of human cells for therapeutic and
diagnostic use in the treatment of human diabetes, liver diseases,
retinal diseases and retinal degenerative diseases; and
    
    the use of defined animal cell lines in the process of manufacturing
and selling human cells for therapeutic and diagnostic use in the
treatment of human diabetes, liver diseases and retinal diseases.
 Exclusive License Agreement Number Three, as amended
 Research Agreements
   Competition
   12




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Sales and Marketing
  Government Regulation
  FDA Approval Process
    13




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European and Other Regulatory Approval
  Other Regulations
  Employees
  Risks Related to Our Business
 Our business is at an early stage of development and we may not develop products that can be
commercialized.
  We have a history of operating losses and do not expect to be profitable in the near future.
  We will need additional capital to conduct our operations and develop our products and our ability
to obtain the necessary funding is uncertain.
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
    
    the accuracy of the assumptions underlying our estimates for capital needs in 2007 and beyond;
    
    scientific progress in our research and development programs;
    
    the magnitude and scope of our research and development programs and our ability to
establish, enforce and maintain strategic arrangements for research, development, clinical
testing, manufacturing and marketing;
    
    our progress with preclinical development and clinical trials;
    
    the time and costs involved in obtaining regulatory approvals;
    
    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing
patent claims; and
    
    the number and type of product candidates that we pursue.
  Clinical trials are subject to extensive regulatory requirements, very expensive, time-consuming
and difficult to design and implement. Our products may fail to achieve necessary safety and
efficacy endpoints during clinical trials.
  
    
    unforeseen safety issues;
    
    determination of dosing issues;
    
    lack of effectiveness during clinical trials;
    
    slower than expected rates of patient recruitment;
    
    inability to monitor patients adequately during or after treatment; and
    
    inability or unwillingness of medical investigators to follow our clinical protocols.
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Patents obtained by other persons may result in infringement claims against us that are costly to
defend and which may limit our ability to use the disputed technologies and prevent us from
pursuing research and development or commercialization of potential products.
   We may not be able to adequately protect against piracy of intellectual property in foreign
jurisdictions.
  Our competition includes fully integrated biotechnology and pharmaceutical companies that have
significant advantages over us.
  If we fail to meet our obligations under our license agreements, we may lose our rights to key
technologies on which our business depends.
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Restrictive and extensive government regulation could slow or hinder our production of a cellular
product.
  Research in the field of nuclear transfer and embryonic stem cells is currently subject to strict
government regulations, and our operations could be restricted or outlawed by any legislative or
administrative efforts impacting the use of nuclear transfer technology or human embryonic
material.
   Restrictions on the use of human embryonic stem cells, and the ethical, legal and social
implications of that research, could prevent us from developing or gaining acceptance for
commercially viable products in these areas.
  To the extent we utilize governmental grants in the future, the governmental entities involved may
retain certain rights in technology that we develop using such grant money and we may lose the
revenues from such technology if we do not commercialize and utilize the technology pursuant to
established government guidelines.
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We rely on parthenogenesis, cell differentiation and other stem cell technologies that we may not
be able to successfully develop, which may prevent us from generating revenues, operating
profitably or providing investors any return on their investment.
  The outcome of pre-clinical, clinical and product testing of our products is uncertain, and if we
are unable to satisfactorily complete such testing, or if such testing yields unsatisfactory
results, we will be unable to commercially produce our proposed products.
  If we are unable to keep up with rapid technological changes in our field or compete effectively,
we will be unable to operate profitably.
  We may not be able to protect our proprietary technology, which could harm our ability to operate
profitably.
  
    
    we will succeed in obtaining any patents, obtain them in a timely manner, or
that the breadth or degree of protection that any such patents will protect our
interests;
    
    the use of our technology will not infringe on the proprietary rights of others;
    
    patent applications relating to our potential products or technologies will
result in the issuance of any patents or that, if issued, such patents will
afford adequate protection to us or will not be challenged, invalidated or
infringed; or
    
    patents will not be issued to other parties, which may be infringed by our
potential products or technologies.
  18




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Our business is highly dependent upon maintaining licenses with respect to key technology.
  e.g.
 Certain of our technology is not protectible by patent which leaves us vulnerable to theft of our
technology.
  We depend on our collaborators to help us develop and test our proposed products, and our ability
to develop and commercialize products may be impaired or delayed if collaborations are
unsuccessful.
   
    
    design and conduct advanced clinical trials in the event that we reach clinical trials;
    
    fund research and development activities with us;
    
    pay us fees upon the achievement of milestones; and
 
    
    market with us any commercial products that result from our collaborations.
  19




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Our reliance on the activities of our non-employee consultants, research institutions, and
scientific contractors, whose activities are not wholly within our control, may lead to delays in
development of our proposed products.
 
 We may be subject to litigation that will be costly to defend or pursue and uncertain in its
outcome.
  We may not be able to obtain third-party patient reimbursement or favorable product pricing, which
would reduce our ability to operate profitably.
  Our products may be expensive to manufacture, and they may not be profitable if we are unable to
control the costs to manufacture them.
   20




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To be successful, our proposed products must be accepted by the health care community, which can
be very slow to adopt or unreceptive to new technologies and products.
  
    
    our establishment and demonstration to the medical community of the clinical efficacy
and safety of our proposed products;
    
    our ability to create products that are superior to alternatives currently on the market;
    
    our ability to establish in the medical community the potential advantage of our
treatments over alternative treatment methods; and
    
    reimbursement policies of government and third-party payors.
  We depend on key personnel for our continued operations and future success, and a loss of certain
key personnel could significantly hinder our ability to move forward with our business plan.
  We may not have sufficient product liability insurance, which may leave us vulnerable to future
claims we will be unable to satisfy.
   21




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Risks Related to the Securities Markets and Our Capital Structure
 Stock prices for biotechnology companies have historically tended to be very volatile.
  
    
    clinical trial results;
    
    the amount of cash resources and such companys ability to obtain additional funding;
    
    announcements of research activities, business developments, technological
innovations or new products by competitors;
    
    entering into or terminating strategic relationships;
    
    changes in government regulation;
    
    disputes concerning patents or proprietary rights;
    
    changes in our revenues or expense levels;
    
    public concern regarding the safety, efficacy or other aspects of the products or
methodologies we are developing;
    
    reports by securities analysts;
    
    activities of various interest groups or organizations;
    
    media coverage; and
    
    status of the investment markets.
  The application of the penny stock rules to our common stock could limit the trading and
liquidity of the our common stock, adversely affect the market price of our common stock and
increase stockholder transaction costs to sell those shares.
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The market price for our common stock may be particularly volatile given our status as a
relatively unknown company with a limited operating history and lack of profits, which could lead
to wide fluctuations in our share price. The price at which stockholders purchase shares of our
common stock may not be indicative of the price of the our common stock that will prevail in the
trading market.
   
    
    quarterly variations in our revenues and operating expenses;
    
    announcements of new products or services by us;
    
    fluctuations in interest rates;
    
    significant sales of our common stock;
    
    the operating and stock price performance of other companies that investors
may deem comparable to us; and
    
    news reports relating to trends in our markets or general economic conditions.
 Shares eligible for future sale may adversely affect the market.
  Certain provisions of our Certificate of Incorporation and Delaware law may make it more difficult
for a third party to affect a change-in-control.
   23




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The sale or issuance of a substantial number of shares may adversely affect the market price
for our common stock.
  Limitations on director and officer liability and indemnification of our officers and directors by
us may discourage stockholders from bringing suit against a director.
  Compliance with the rules established by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002 will be complex. Failure to comply in a timely manner could adversely affect investor
confidence and our stock price.
  We do not expect to pay cash dividends in the foreseeable future.
  
 ITEM 2.
    
    DESCRIPTION OF PROPERTY.
   24




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ITEM 3.
    
    LEGAL PROCEEDINGS.
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 PART II
 
 ITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
     25




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Equity Compensation Plan Information
 Number of securitiesremaining available forNumber of securities to
    
    
    Weighted-average
    
    
    future issuance underbe issued upon exercise
    
    
    exercise price of
    
    
    equity compensation plansof outstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders:2006 Equity
Participation Plan
    
    
    3,087,500
    
    
    $
    1.00
    
    
    
    11,912,500Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    $
    0.00
    
    
    (Not Applicable)Total
    
    
    3,087,500
    
    
    $
    1.00
    
    
    
    11,912,500
 
 ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
  Overview
    26




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Plan of Operations
    Results of Operations
 Revenues
  General and Administrative Expenses
  Research and Development
   27




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Marketing expense
  Liquidity and Capital Resources
     
    
    the accuracy of the assumptions underlying our estimates
for capital needs in 2007 and beyond;
 
    
    scientific progress in our research and development
programs;
 
    
    the magnitude and scope of our research and development
programs and our ability to establish, enforce and maintain strategic
arrangements for research, development, clinical testing, manufacturing and
marketing;
 
    
    our progress with preclinical development and clinical
trials;
 
    
    the time and costs involved in obtaining regulatory
approvals;
  28




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
    
    the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; and
 
    
    the number and type of product candidates that we
pursue.
  Off-Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
 In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS No. 154), an amendment to Accounting Principles Bulletin Opinion No. 20, Accounting Changes
(APB No. 20), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Though SFAS No. 154
carries forward the guidance in APB No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes in
reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in
accounting principles, whereby all such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and
error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and
corrections made in years beginning after May 2005. The Company implemented SFAS No. 154 in its fiscal year beginning
January 1, 2006. The Company does not believe that SFAS No. 156 will have a material impact on its financial position,
results of operations or cash flows. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends
SFAS No. 133,
 Accounting for Derivatives Instruments and Hedging
Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS
No. 155 amends SFAS No. 133
 to narrow the scope exception for interest-only and principal-only strips on debt
instruments to include only such strips representing rights to receive a specified portion of the contractual interest
or principle cash flows. SFAS No. 155
 also amends SFAS No. 140
 to allow qualifying special-purpose entities to hold a
passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. The
Company is currently evaluating the impact this new Standard but believes that it will not have a material impact on
the Companys financial position, results of operations, or cash flows. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS No. 156),
which provides an approach to simplify efforts to obtain hedge-like
(offset) accounting. This Statement amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized servicing
assets and servicing liabilities. The Statement (1)
requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an
entity to choose either the amortization method or the fair value method for subsequent measurement for each class of
separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights,
provided the securities reclassified offset the entitys exposure to changes in the fair value of the servicing assets
or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets
and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as
of the beginning of an entitys fiscal year that begins after September 15, 2006, with earlier adoption permitted in
certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company
does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash
flows. In June 2006, the FASB
issued FIN No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax
benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is
effective for us beginning January 1, 2007. We are currently assessing the potential impact that adoption of FIN No. 48
will have on our financial statements. In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on
how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This
statement is effective for us beginning January 1, 2008. We are currently assessing the potential impact that adoption
of SFAS No. 157 will have on our financial statements. In September 2006, the
Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of Prior Year
Misstatements. SAB No. 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in
assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for
our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that adoption of SAB
No. 108 will have on our financial statements. In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an amendment of FASB Statements
No. 87, 88, 106, and 132(R) (FASB 158). FASB 158 requires the
full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored
postretirement benefit plan. Adoption of FASB 158 is required
effective for the Companys fiscal year ending December 31, 2007. We are currently assessing the potential impact that adoption of FASB 158 may have on our financial
statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). Under the provisions of SFAS 159, companies may choose to account for eligible financial instruments,
warranties and insurance contracts at fair value on a contract-by-contract basis. Changes in fair value will be
recognized in earnings each reporting period. SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans
to adopt the provisions of SFAS 159 beginning in the first quarter of 2008. The Company is currently assessing the
impact of the adoption of SFAS 159. 
 ITEM 7.
    
    FINANCIAL STATEMENTS
  
 ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 8A.
    
    CONTROLS AND PROCEDURES
   29




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ITEM 8B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 Directors and Executive Officers
  Name
    
    Age
    
    PositionKenneth C. Aldrich
    
    
    68
    
    
    Director, Chairman of the BoardJeff Krstich
    
    
    58
    
    
    Director, Chief Executive OfficerJeffrey Janus
    
    
    50
    
    
    Director, PresidentWilliam B. Adams
    
    
    63
    
    
    Director, Chief Financial Officer and SecretaryDonald A Wright
    
    
    54
    
    
    Director
 Kenneth C. Aldrich,
   30




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Jeff Krstich,
 Jeffrey Janus,
 William B. Adams
 Donald A Wright
 Key Employees
 Elena Revazova, Ph.D.,. M.D.
  Jeremy Hammond
  31




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Hoyt Matthai
 Alexa Dillberger
 Scientific Advisors
 Gregory S. Keller, M.D.
 Hans S. Keirstead, Ph.D.
 Bernard M. Wagner, M.D.
 Michael Karas, M.D., Ph.D, M.B.A.
  32




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Nominating Covenant
  Communications with the Board
  Code of Ethics
  
    
    honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
    
    full, fair, accurate, timely and understandable disclosure in reports
and documents that we file with, or submit to, the SEC and in other
public communications made by us; and
    
    compliance with applicable governmental laws, rules and regulations.
 Compensation and Term of Directors
  Board Committees
   33




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1.
    
    Reviewed and discussed the audited financial statements with management, and2.
    
    Reviewed and discussed the written disclosures and the letter from our
independent auditors on the matters relating to the auditors
independence.
  Family Relationships
  Involvement in Certain Legal Proceedings
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 10.
    
    EXECUTIVE COMPENSATION.
 Employment Agreements
   34




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Executive Compensation
  Non-EquityOption/
    
    
    IncentiveStock
    
    
    Warrant
    
    
    Plan
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Awards
    
    
    Awards
    
    
    Compensation
    
    
    Compensation
    
    
    TotalJeff Krstich
    
    
    2006
    
    
    $
    117,090
    (1)
    
    
    
    
    
    
    
    
    
    $
    935,000
    
    
    
    
    
    
    $
    25,000
    (2)
    
    $
    1,077,090Chief Executive
OfficerKenneth C. Aldrich
    
    
    2006
    
    
    $
    100,000
    (1)
    
    
    
    
    
    
    
    
    
    $
    233,750
    
    
    
    
    
    
    
    
    
    
    $
    333,750Chairman of the
BoardJeffrey Janus
    
    
    2006
    
    
    $
    153,757
    (1)
    
    
    
    
    
    
    
    
    
    $
    233,750
    
    
    
    
    
    
    
    
    
    
    $
    387,507President; Chief
Executive Officer
of Lifeline Cell
TechnologyWilliam B. Adams
    
    
    2006
    
    
    $
    105,269
    (1)
    
    
    
    
    
    
    
    
    
    $
    233,750
    
    
    
    
    
    
    
    
    
    
    $
    339,019Chief Financial
Officer
  35




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  Equity
    
    
    EquityIncentive
    
    
    IncentiveEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    
    PlanIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    
    Awards:Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Market orAwards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    Payout ValueNumber of
    
    
    Number of
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Market
    
    
    Shares,
    
    
    of UnearnedSecurities
    
    
    Securities
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    Shares or
    
    
    Value of
    
    
    Units or
    
    
    Shares,Underlying
    
    
    Underlying
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    Units of
    
    
    Shares or
    
    
    Other
    
    
    Units, orUnexercised
    
    
    Unexercised
    
    
    Unexercised
    
    
    Option
    
    
    Option
    
    
    Stock That
    
    
    Units That
    
    
    Rights That
    
    
    Other RightsOptions
    
    
    Options
    
    
    Unearned
    
    
    Exercise
    
    
    Expiration
    
    
    Have Not
    
    
    Have Not
    
    
    Have Not
    
    
    That HaveName
    
    Exercisable
    
    
    Exercisable
    
    
    Options
    
    
    Price
    
    
    Date
    
    
    Vested
    
    
    Vested
    
    
    Vested
    
    
    Not VestedJeff Krstich
    
    
    100,000
    
    
    
    900,000
    
    
    
    __
    
    
    $
    1.00
    
    
    
    2016
    
    
    
    __
    
    
    
    __
    
    
    
    __
    
    
    
    __Kenneth C. Aldrich
    
    
    100,000
    
    
    
    150,000
    
    
    
    __
    
    
    $
    1.00
    
    
    
    2016
    
    
    
    __
    
    
    
    __
    
    
    
    __
    
    
    
    __Jeffrey Janus
    
    
    100,000
    
    
    
    150,000
    
    
    
    __
    
    
    $
    1.00
    
    
    
    2016
    
    
    
    __
    
    
    
    __
    
    
    
    __
    
    
    
    __William B. Adams
    
    
    100,000
    
    
    
    150,000
    
    
    
    __
    
    
    $
    1.00
    
    
    
    2016
    
    
    
    __
    
    
    
    __
    
    
    
    __
    
    
    
    __
 2006 Equity Participation Plan
  Stock Option Grants
   36




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##### Table of Contents



Restricted Stock
  
 ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  Amount of
    
    
    Percent ofBeneficial
    
    
    BeneficialName of Beneficial Owner
    
    Ownership
    
    
    Ownership(1)Directors and Officers (2):Jeff Krstich  Chief Executive Officer (3)
    
    
    136,000
    
    
    
    *William B. Adams  Chief Financial Officer (4)
    
    
    2,116,685
    
    
    
    6.20
    %Kenneth C. Aldrich  Chairman (5)
    
    
    3,166,132
    
    
    
    9.24
    %Jeffrey Janus  President and CEO of Lifeline Cell Technology
    
    
    2,160,807
    
    
    
    6.39
    %Donald A. Wright  Director
    
    
    0
    
    
    
    0.0
    %All Executive Officers and Directors as a group (5 persons)
    
    
    8,972,624
    
    
    
    22.23
    %5% Holders:Gregory Keller (6)
    
    
    2,377,179
    
    
    
    6.99
    %William Peeples (7)
    
    
    2,779,174
    
    
    
    8.17
    %
 Footnotes are on following page
  37




---



##### Table of Contents



*
    
    Less than 1%.(1)
    
    Based on 35,321,495 shares currently outstanding plus shares issuable under derivative
securities which are exercisable within 60 days of February 28, 2007.(2)
    
    The business address for each director and officer is 2595 Jason Court, Oceanside, CA 92056.(3)
    
    Includes options to purchase up to 136,000 shares of our common stock under options
exercisable within 60 days of this filing. Mr. Krstich also holds options to purchase an
additional 900,000 shares which are not currently exercisable.(4)
    
    Includes options to purchase up to 106,000 shares of our common stock under options
exercisable within 60 days of February 28, 2007.(5)
    
    Mr. Aldrichs shares are held, in part, through YKA Partners, a California limited
partnership. Mr. Aldrich is the investment manager of YKA Partners and controls the
disposition of these shares. The address for YKA Partners is 157 Surfview Drive, Pacific
Palisades, CA 90272.(6)
    
    The address for Mr. Keller is 771 Via Manana, Santa Barbara, CA 93108.(7)
    
    The address for Mr. Peeples is 877 Gwyne Ave., Santa Barbara, CA 93111.
 
 ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
      38




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##### Table of Contents



ITEMS 13.
    
    EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    
    Certificate of Incorporation (incorporated by reference to
Exhibit 3.4 of the issuers Form 10-SB filed on April 4,
2006).3.2
    
    
    Certificate of Amendment of Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 of the Issuers
Preliminary Information Statement on Form 14C filed on
December 29, 2006).3.3
    
    
    Amended and Restated Bylaws of the Registrant (incorporated
by reference to Exhibit 3.2 of the Issuers Preliminary
Information Statement on Form 14C filed on December 29,
2006).4.1
    
    
    Form of Specimen Common Stock Certificate.4.2
    
    
    Form of Lifeline Warrant (incorporated by reference to
Exhibit 4.1 of the Registrants Form 8-K filed on December
29, 2006).4.3
    
    
    Form of Lifeline Warrant held by ISC Bridge lenders
(incorporated by reference to Exhibit 4.2 of the
Registrants Form 8-K filed on December 29, 2006).4.4
    
    
    Placement Agents Warrant (incorporated by reference to
Exhibit 4.3 of the Registrants Form 8-K filed on December
29, 2006).10.1
    
    
    Employment Agreement, dated December 1, 2006, by and
between International Stem Cell and Kenneth C. Aldrich
(incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K filed on December 29, 2006).10.2
    
    
    Employment Agreement, dated November 1, 2006, by and
between International Stem Cell and William B.
Adams(incorporated by reference to Exhibit 10.2 of the
Registrants Form 8-K filed on December 29, 2006).10.3
    
    
    Employment Agreement, dated March 27, 2006, by and between
International Stem Cell and Jeff Krstich (incorporated by
reference to Exhibit 10.3 of the Registrants Form 8-K
filed on December 29, 2006).10.4
    
    
    Employment Agreement, dated October 31, 2006, by and
between International Stem Cell and Jeffrey Janus
(incorporated by reference to Exhibit 10.4 of the
Registrants Form 8-K filed on December 29, 2006).10.5
    
    
    Advisory Agreement, dated as of October 18, 2006, by and
between International Stem Cell and Halter Financial Group,
L.P. (incorporated by reference to Exhibit 10.5 of the
Registrants Form 8-K filed on December 29, 2006).10.6
    
    
    Consulting Agreement, effective as of September 1, 2006, by
and between International Stem Cell and Capital Group
Communications, Inc. (incorporated by reference to Exhibit
10.6 of the Registrants Form 8-K filed on December 29,
2006).10.7
    
    
    Lifeline/ASC Final Settlement Agreement, effective as of
June 30, 2006, by and between each of the American Stem
Cell Corporation Parties (which include American Stem Cell
Corporation Kenneth Swaisland, Ken Sorensen, Milton
Datsopoulos, Michael McClain, Array Capital, Catalytix LDC,
Catalytix Life Sciences Hedge, Avion Holdings, Inc.,
jointly and severally) and the Lifeline Parties (which
include Lifeline Cell Technology, LLC (Lifeline), Jeffrey
Janus, William B. Adams, Kenneth C. Aldrich, jointly and
severally) (incorporated by reference to Exhibit 10.7 of
the Registrants Form 8-K filed on December 29, 2006).10.8
    
    
    Promissory Note, dated as of June 30, 2006, by Lifeline in
favor of American Stem Cell Corporation (incorporated by
reference to Exhibit 10.8 of the Registrants Form 8-K
filed on December 29, 2006).
  39




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##### Table of Contents



ExhibitNumber
    
    Description10.9
    
    
    First Amendment to Exclusive License Agreement (ACT IP), dated as of
August 1, 2005, by and between Advanced Cell, Inc. and Lifeline
(incorporated by reference to Exhibit 10.9 of the Registrants Form
8-K filed on December 29, 2006).10.10
    
    
    First Amendment to Exclusive License Agreement (UMass IP), dated as
of August 1, 2005, by and between Advanced Cell, Inc. and Lifeline
(incorporated by reference to Exhibit 10.10 of the Registrants Form
8-K filed on December 29, 2006).10.11
    
    
    First Amendment to Exclusive License Agreement (Infigen IP), dated
as of August 1, 2005, by and between Advanced Cell, Inc. and
Lifeline (incorporated by reference to Exhibit 10.11 of the
Registrants Form 8-K filed on December 29, 2006).10.12
    
    
    Exclusive License Agreement (Infigen IP), dated as of May 14, 2004,
by and between Advanced Cell Technology, Inc and PacGen Cellco, LLC
(predecessor company of Lifeline) (incorporated by reference to
Exhibit 10.12 of the Registrants Form 8-K filed on December 29,
2006).10.13
    
    
    Exclusive License Agreement (ACT IP), dated as of May 14, 2004, by
and between Advanced Cell Technology, Inc. and PacGen Cellco, LLC
(predecessor company of Lifeline) (incorporated by reference to
Exhibit 10.13 of the Registrants Form 8-K filed on December 29,
2006).10.14
    
    
    Exclusive License Agreement (UMass IP), dated as of May 14, 2004, by
and between Advanced Cell Technology, Inc. and PacGen Cellco, LLC
(predecessor company of Lifeline) (incorporated by reference to
Exhibit 10.14 of the Registrants Form 8-K filed on December 29,
2006).10.15
    
    
    International Stem Cell Corporation 2006 Equity Participation Plan
(incorporated by reference to Exhibit 10.15 of the Registrants Form
8-K filed on December 29, 2006).14.1
    
    
    Code of Ethics (incorporated by reference to Exhibit 14.1 of our
Form 8-K filed on December 29, 2006).21.1
    
    
    Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 of the Registrants Form 8-K filed on December 29, 2006).31.1
    
    
    Rule 13a-14(a)/15d-14a(a) Certification of Chief Executive Officer.31.2
    
    
    Rule 13a-14(a)/15d-14a(a) Certification of Chief Financial Officer.32.1
    
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    
    Section 1350 Certification of Chief Financial Officer.
 
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 Audit Fees
  Audit-Related Fees
  Tax Fees
   40




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##### Table of Contents



All Other Fees
   41




---



##### Table of Contents



SIGNATURES
  INTERNATIONAL STEM CELL
CORPORATIONBy:

/s/ William B. AdamsName:
    William B. AdamsTitle:
    Chief Financial OfficerDated: April 5, 2007  Signature:
    
    Capacity:
    
    Date:/s/ Kenneth C. Aldrich 
Kenneth C. Aldrich
    
    Chairman of the Board
    
    April 5, 2007/s/ Jeff Krstich 
Jeff Krstich
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    April 5, 2007/s/ Jeffrey Janus 
Jeffrey Janus
    
    President and Director
    
    April 5, 2007/s/ William B. Adams 
William B. Adams
    
    Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
    
    April 5, 2007/s/ Donald A. Wright 
Donald A. Wright
    
    Director
    
    April 5, 2007
  42




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##### Table of Contents



Financial Statements
International Stem Cell Corporation and Subsidiary
(A Development Stage Company)
Years Ended December 31, 2006 and 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    F-2Balance Sheet
    
    F-3Statement of Operations
    
    F-4Statement of Stockholders Equity
    
    F-5Statement of Cash Flows
    
    F-6Notes to Financial Statements
    
    F-7
 F-1  1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
International Stem Cell Corporation
(A Development Stage Company)
Los Angeles, California We have audited the accompanying consolidated balance sheets of International Stem Cell Corporation and subsidiary (a
development stage company) (the Company) as of December 31, 2006 and 2005, and the related consolidated statements
of operations, stockholders equity and members deficit and cash flows for each of the years then ended and for the
period from inception (August 17, 2001) through December 31, 2006. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of International Stem Cell Corporation and subsidiary as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended and for the period from inception (August 17,
2001) through December 31, 2006, in conformity with accounting principles generally accepted in the United States of
America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company expects to incur losses and needs to raise capital, which
raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters
are also described in Note 1. The financial statements do not include any adjustments that might result from the
outcome of the uncertainty. /s/VASQUEZ & Company LLP

Los Angeles, California

March 30, 2007 F-2  2




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##### Table of Contents



INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets December 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    4,696,694
    
    
    $
    33,305Other current assets
    
    
    20,759
    
    
    
    218Total current assets
    
    
    4,717,453
    
    
    
    33,523Property and equipment, net
    
    
    137,794
    
    
    
    101,586Patent licenses, net
    
    
    668,016
    
    
    
    717,142Deposits and other assets
    
    
    21,963
    
    
    
    2,025Total assets
    
    $
    5,545,226
    
    
    $
    854,276Liabilities and Stockholders Equity (Members Deficit)Current liabilitiesAccounts payable
    
    $
    321,589
    
    
    $
    43,823Accrued expenses
    
    
    21,430
    
    
    
    45,393Promissory note
    
    
    
    
    
    
    600,000Loan Payable
    
    
    25,000
    
    
    
    Related party payable
    
    
    480,445
    
    
    
    673,797Total current liabilities
    
    
    848,464
    
    
    
    1,363,013Promissory notes
    
    
    
    
    
    
    347,368Total liabilities
    
    
    848,464
    
    
    
    1,710,381Stockholders equityCapital Stock, $0.001 par value 200,000,000 shares
authorized, 33,996,495 issued.
    
    
    33,996
    
    
    
    Additional paid-in capital
    
    
    14,537,798
    
    
    
    Accumulated deficit
    
    
    (9,875,032
    )
    
    
    Total stockholders equity and members deficit
    
    
    4,696,762
    
    
    
    Members deficit
    
    
    
    
    
    
    (856,105
    )Total liabilities, stockholders equity and members deficit
    
    $
    5,545,226
    
    
    $
    854,276
 See accompanying notes F-3  3




---



##### Table of Contents



INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations Inception(August 2001)ThroughYear Ended December 31,
    
    
    December 312006
    
    
    2005
    
    
    
    2006Sales
    
    $
    2,828
    
    
    $
    158
    
    
    $
    2,986Cost of Sales
    
    
    30,825
    
    
    
    47
    
    
    
    30,872Gross Profit
    
    
    (27,997
    )
    
    
    111
    
    
    
    (27,886
    )Development expensesResearch and development
    
    
    1,808,682
    
    
    
    804,191
    
    
    
    3,806,005Marketing
    
    
    97,924
    
    
    
    36,361
    
    
    
    136,448General and administrative
    
    
    3,781,117
    
    
    
    461,634
    
    
    
    4,826,494Total development expenses
    
    
    5,687,723
    
    
    
    1,302,186
    
    
    
    8,768,947Loss from development activities
    
    
    (5,715,721
    )
    
    
    (1,302,075
    )
    
    
    (8,796,834
    )Other income (loss)Settlement with related company
    
    
    (93,333
    )
    
    
    
    
    
    
    (93,333
    )Miscellaneous income
    
    
    435
    
    
    
    5,045
    
    
    
    5,480Interest income
    
    
    22,146
    
    
    
    405
    
    
    
    22,590Interest expense
    
    
    (806,155
    )
    
    
    (96,120
    )
    
    
    (1,026,323
    )Sublease income
    
    
    10,400
    
    
    
    7,800
    
    
    
    19,087Total other loss
    
    
    (866,507
    )
    
    
    (82,870
    )
    
    
    (1,072,499
    )Loss before tax
    
    
    (6,582,227
    )
    
    
    (1,384,945
    )
    
    
    (9,869,332
    )Provision for taxes
    
    
    1,700
    
    
    
    800
    
    
    
    5,700Net loss
    
    
    (6,583,927
    )
    
    
    ($1,385,745
    )
    
    
    (9,875,032
    )Net loss per common share -basic and diluted
    
    
    ($0.28
    )
    
    
    ($0.07
    )
    
    
    ($0.46
    )Weighted average shares -basic and diluted
    
    
    23,136,695
    
    
    
    18,700,824
    
    
    
    21,416,517
 See accompanying notes F-4  4




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##### Table of Contents



INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders Equity and Members Defit
For the years ended December 31, 2006 and 2005 Additional
    
    
    
    
    
    
    TotalCommon Stock
    
    Paid-In
    
    
    Accumulated
    
    
    Stockholders'
    
    
    Members'Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity
    
    
    DeficitBalance at August 17, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Net loss for the period
from inception
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140,996
    )Balance at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,996
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (390,751
    )Balance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (181,747
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,000Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (518,895
    )Balance at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (505,642
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,110,000Net loss for the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (854,718
    )Balance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250,360
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,000Net loss for the year ended
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,385,745
    )Balance at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (856,105
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Effect of the Reorganization
Transactions
    
    
    20,000,000
    
    
    
    20,000
    
    
    
    2,665,000
    
    
    
    (3,291,105
    )
    
    
    (606,105
    )
    
    
    606,105BTHC transactions
    
    
    2,209,993
    
    
    
    2,210
    
    
    
    (2,210
    )
    
    
    
    
    
    
    
    
    
    
    Offering costs
    
    
    
    
    
    
    
    
    
    
    (2,778,082
    )
    
    
    
    
    
    
    (2,778,082
    )
    
    
    Warrants issued for equity
placement services
    
    
    
    
    
    
    
    
    
    
    1,230,649
    
    
    
    
    
    
    
    1,230,649
    
    
    
    Warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    222,077
    
    
    
    
    
    
    
    222,077
    
    
    
    Warrants issued with
promissory note
    
    
    
    
    
    
    
    
    
    
    637,828
    
    
    
    
    
    
    
    637,828
    
    
    
    Common stock issued for
services
    
    
    1,350,000
    
    
    
    1,350
    
    
    
    1,348,650
    
    
    
    
    
    
    
    1,350,000Issuance of common stock
    
    
    10,436,502
    
    
    
    10,436
    
    
    
    10,371,512
    
    
    
    
    
    
    
    10,381,948
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    842,374
    
    
    
    
    
    
    
    842,374
    
    
    
    Net loss for the year ended
December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,583,927
    )
    
    
    (6,583,927
    )
    
    
    Balance at December 31, 2006
    
    
    33,996,495
    
    
    $
    33,996
    
    
    $
    14,537,798
    
    
    $
    (9,875,032
    )
    
    $
    4,696,762
    
    
    $
    
 See accompanying notes F-5  5




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##### Table of Contents



INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
Statement of Cash Flows Inception(August2001)throughYear ended December 31,
    
    December 31,2006
    
    
    2005
    
    
    2006Net loss
    
    $
    (6,583,927
    )
    
    $
    (1,385,745
    )
    
    $
    (9,875,032
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    81,664
    
    
    
    54,716
    
    
    
    153,689Accretion of discount on notes payable
    
    
    52,632
    
    
    
    32,926
    
    
    
    103,304Accretion of discount on bridge loans
    
    
    637,828
    
    
    
    
    
    
    
    637,828Non-cash warrants for services
    
    
    222,077
    
    
    
    
    
    
    
    222,077Non-cash warrants for equity placement services
    
    
    1,230,649
    
    
    
    
    
    
    
    1,230,649Non-cash compensation expense
    
    
    842,374
    
    
    
    
    
    
    
    842,374Common stock issued for services
    
    
    1,350,000
    
    
    
    
    
    
    
    1,350,000Changes in operating assets and liabilities:Increase in other current assets
    
    
    (20,542
    )
    
    
    (218
    )
    
    
    (20,760
    )Increase in deposits
    
    
    (19,938
    )
    
    
    
    
    
    
    (21,963
    )Increase in accounts payable
    
    
    277,766
    
    
    
    39,391
    
    
    
    321,589Increase (decrease) in accrued expenses
    
    
    (23,963
    )
    
    
    (10,915
    )
    
    
    21,430Increase in loan payable
    
    
    25,000
    
    
    
    
    
    
    
    25,000Increase (decrease) in related party payables
    
    
    (193,352
    )
    
    
    (26,057
    )
    
    
    480,445Net cash used in operating activities
    
    
    (2,121,732
    )
    
    
    (1,295,902
    )
    
    
    (4,529,370
    )Investing activitiesPurchases of property and equipment
    
    
    (68,096
    )
    
    
    (56,899
    )
    
    
    (208,523
    )Payments for patent licenses
    
    
    (650
    )
    
    
    (3,630
    )
    
    
    (750,976
    )Net cash used in investing activities
    
    
    (68,746
    )
    
    
    (60,529
    )
    
    
    (959,499
    )Financing activitiesMembers contributions
    
    
    250,000
    
    
    
    780,000
    
    
    
    2,685,000Conversion of members contribution
    
    
    (2,685,000
    )
    
    
    
    
    
    
    (2,685,000
    )Issuance of common stock
    
    
    13,066,949
    
    
    
    
    
    
    
    13,066,949Issuance of convertible promissory notes
    
    
    
    
    
    
    600,000
    
    
    
    2,099,552Payment of promissory notes
    
    
    (1,000,000
    )
    
    
    
    
    
    
    (2,202,856
    )Payment of offering costs
    
    
    (2,778,082
    )
    
    
    
    
    
    
    (2,778,082
    )Net cash provided by financing activities
    
    
    6,853,867
    
    
    
    1,380,000
    
    
    
    10,185,563Net increase in cash and cash equivalents
    
    
    4,663,389
    
    
    
    23,569
    
    
    
    4,696,694Cash and cash equivalent at beginning of period
    
    
    33,305
    
    
    
    9,736
    
    
    
    Cash and cash equivalent at end of period
    
    $
    4,696,694
    
    
    $
    33,305
    
    
    $
    4,696,694Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    115,695
    
    
    $
    100,156
    
    
    $
    224,214Cash paid for income taxes
    
    $
    1,700
    
    
    $
    800
    
    
    $
    5,700
 See accompanying notes F-6  6




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##### Table of Contents



International Stem Cell Corporation and Subsidiary
(A Development Stage Company)
Notes to financial statements 1. Organization and Significant Accounting Policies BUSINESS COMBINATION AND CORPORATE RESTRUCTURE BTHC III, Inc. (BTHC III or the Company) was organized in Delaware in June 2005 as a shell company to effect the
reincorporation of BTHC III, LLC, a Texas limited liability company. On December 28, 2006, we affected a Share
Exchange pursuant to which we acquired all of the stock of International Stem Cell Corporation, a California
corporation (ISC California). After giving effect to the Share Exchange, the stockholders of ISC California owned
93.7% of our issued and outstanding shares of common stock. As a result of the Share Exchange, ISC California is now
our wholly owned subsidiary, though for accounting purposes it was deemed to have been the acquirer in a reverse
merger. In the reverse merger, BTHC III is considered the legal acquirer and ISC California is considered the
accounting acquirer. On January 29, 2007, we changed our name from BTHC III, Inc. to International Stem Cell
Corporation. Lifeline Cell Technology, LLC (Lifeline) was formed in the State of California on August 17, 2001. Lifeline is in
the business of developing and manufacturing human embryonic stem cells and reagents free from animal protein
contamination. Lifelines scientists have used a technology, called basal medium optimization to systematically
eliminate animal proteins from cell culture systems. Lifeline is unique in the industry in that it has in place
scientific and manufacturing staff with the experience and knowledge to set up systems and facilities to produce a
source of consistent, standardized, animal protein free ES cell products suitable for FDA approval. On July 1, 2006, Lifeline entered into an agreement among Lifeline, ISC California and the holders of membership units
and warrants for the purchase of membership interests of Lifeline. Pursuant to the terms of the agreement, all the
membership units in Lifeline were exchanged for 20,000,000 shares of ISC California Common Stock and for ISC
Californias assumption of Lifelines obligations under the warrants. Lifeline became a wholly owned subsidiary of ISC
California. Going Concern
The Company continues in the development stage and as such has accumulated losses from inception and expects to incur
additional losses in the near future. The Company believes that it has sufficient working capital to finance
operations through the third quarter of 2008. Thereafter, the Company will need to raise additional working capital.
The timing and degree of any future capital requirements will depend on many factors. There can be no assurance that
the Company will be successful in maintaining its burn rate of approximately $250,000 per month and the timing of its
capital expenditures will result in cash flow sufficient to sustain the Companys operations through 2007 or 2008.
Based on the above, there is substantial doubt about the Companys ability to continue as a going concern. The
financial statements were prepared assuming that the Company is a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome of this uncertainty. `Managements
plans in regard to these matters are focused on maintaining its burn rate, the proper timing of its capital
expenditures, and raising additional capital or financing in the future. Proforma Information and Basis of Presentation
International Stem Cell Corporation was formed in June 2006. BTHC III, Inc. was a shell company that had no operations
and no net assets. For accounting purposes the acquisition has been treated as a recapitalization of BTHC III with ISC
California as the accounting acquirer (reverse acquisition). The historical statements prior to June 2006 are those of
Lifeline Cell Technology, the wholly owned subsidiary of ISC California. F-7  7




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##### Table of Contents



Principles of Consolidation

The consolidated financial statements of the Company include the accounts of International Stem Cell Corporation and
its subsidiary after intercompany balances and transactions have been eliminated. Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents. Short-Term Investments

Management determines the appropriate classification of marketable securities at the time of purchase, and has
classified all short-term investments as available-for-sale. Such securities are stated at fair value, with the
unrealized gains and losses reported as a separate component of equity. Fair value is determined based on quoted market
prices. Property and Equipment

Property and equipment are stated at cost. The provision for depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the assets, which generally range from three to five years. The
costs of major remodeling and leasehold improvements are capitalized and depreciated over the shorter of the remaining
term of the lease or the life of the asset. Long-Lived Asset Impairment

The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their
carrying value may not be recovered. The Company considers assets to be impaired and writes them down to fair value if
expected associated cash flows are less than the carrying amounts. Fair value is the present value of the associated
cash flows. The Company has determined that no material long-lived assets are impaired at December 31, 2006. Recent Accounting Pronouncements In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154), an amendment to
Accounting Principles Bulletin Opinion No. 20, Accounting Changes (APB No. 20), and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. Though SFAS No. 154 carries forward the guidance in APB No.20 and
SFAS No.3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of
errors, SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such
changes must be accounted for by retrospective application to the financial statements of prior periods unless it is
impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning
after May 2005. The Company implemented SFAS No. 154 in its fiscal year beginning January 1, 2006. The Company does not
believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends
SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 155 amends SFAS No. 133 to
narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips
representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155
also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument
pertaining to beneficial interests that itself is a derivative instrument. The Company is currently evaluating the
impact this new Standard but believes that it will not have a material impact on the Companys financial position,
results of operations, or cash flows. F-8  8




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##### Table of Contents



In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS NO. 156), which
provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1)
requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an
entity to choose either the amortization method or the fair value method for subsequent measurement for each class of
separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights,
provided the securities reclassified offset the entitys exposure to changes in the fair value of the servicing assets
or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets
and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as
of the beginning of an entitys fiscal year that begins after September 15, 2006, with earlier adoption permitted in
certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company
does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash
flows. In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109,which clarifies the accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.The interpretation
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that
satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for us
beginning January 1, 2007. We are currently assessing the potential impact that adoption of FIN No. 48 will have on our
financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement
is effective for us beginning January 1, 2008. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements.SAB No. 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in
assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for
our fiscal year 2007 annual financial statements. In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R) (FASB 158). FASB 158 requires the
full recognition, as an asset or liability, of the overfunded or underfunded status of a company-sponsored
postretirement benefit plan. Adoption of FASB 158 is required effective for the Companys fiscal year ending
December 31, 2007. We are currently assessing the potential impact that adoption of FASB 158 may have on our
financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). Under the provisions of SFAS 159, Companies may choose to account for eligible financial instruments,
warranties and insurance contracts at fair value on a contract-by-contract basis. Changes in fair value will be
recognized in earnings each reporting period. SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans
to adopt the provisions of SFAS 159 beginning in the first quarter of 2008. The Company is currently assessing the
impact of the adoption of SFAS 159. F-9  9




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##### Table of Contents



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). Under the provisions of SFAS 159, Companies may choose to account for eligible financial instruments,
warranties and insurance contracts at fair value on a contract-by-contract basis. Changes in fair value will be
recognized in earnings each reporting period. SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans
to adopt the provisions of SFAS 159 beginning in the first quarter of 2008. The Company is currently assessing the
impact of the adoption of SFAS 159. Income Taxes Income taxes are recorded in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the
liability method for deferred income taxes. Use of Estimates The  preparation  of consolidated financial  statements  in conformity  with  accounting principles   generally 
accepted  in  the  United  States  of  America  requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements.  Significant estimates include patent life (remaining legal
life versus remaining useful life) and transactions using the Black Scholes option pricing model, e.g., promissory
notes, warrants, and stock options.  Actual results could differ from those estimates. Concentration of Credit Risk

The Company maintains its cash and cash equivalents in banks located primarily in the United States.  Bank accounts are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per financial institution.  At December
31, 2006, the Companys cash balances on deposit with the financial institutions in excess of the FDIC insurance limit
amounted to $5,636,326. Fair Value of Financial Instruments

The Company believes that the carrying value of its cash and cash equivalents, accounts payable and accrued liabilities
as of December 31, 2006 and 2005 approximate their fair values due to the short-term nature of those instruments. Income (Loss) Per Common Share Statement of Financial Accounting Standards No. 128, Earnings Per Share, requires presentation of basic earnings per
share (Basic EPS) and diluted earnings per share (Diluted EPS). The computation of net loss per common share is
based on the weighted average number of shares outstanding during each period based on the exchange ratio of shares
issued in the merger. The computation of diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the common stock equivalents, which would arise from the exercise of stock
options and warrants outstanding using the treasury stock method and the average market price per share during the
period. At year end, December 31, 2006, there were 3,605,813 warrants, 987,500 vested stock options and 2,100,000
unvested options outstanding. These options and warrants were not included in the diluted loss per share calculation
because the effect would have been anti dilutive. The weighted average number of shares prior to 2006 was calculated
based on the members contribution, as if converted to shares in the ratio of the share exchange with BTHC III. At
year end December 31, 2005, there were no warrants, and no vested stock options or unvested options outstanding. Comprehensive Income The Company displays comprehensive income or loss, its components and accumulated balances in its consolidated
financial statements. Comprehensive income or loss includes all changes in equity except those resulting from
investments by owners and distributions to owners. The Company did not have any items of comprehensive income or loss
for the years ended December 31, 2006, and 2005. F-10  10




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##### Table of Contents



2. Property and Equipment Property and equipment consists of the following: December 31,
    
    
    December 31,2006
    
    
    2005Machinery and equipment
    
    $
    138,625
    
    
    $
    115,516Computer equipment
    
    
    30,179
    
    
    
    10,887Office equipment
    
    
    18,849
    
    
    
    4,117Leasehold improvements
    
    
    20,869
    
    
    
    9,906208,522
    
    
    
    140,426Accumulated depreciation and amortization
    
    
    (70,728
    )
    
    
    (38,840
    )$
    137,794
    
    
    $
    101,586
 3. Patent Licenses At December 31, 2006 and December 31, 2005, the Company had patent licenses recorded at cost of $750,976 and $750,325
respectively. Patent licenses are amortized on a straight line basis over their patent lives or useful lives which
ever is shorter. Amortization of patent licenses at December 31, 2006 and December 31, 2005 amounted to $49,776 and
$33,184 respectively. On December 31, 2003, Lifeline entered into an Option to License Intellectual Propertyagreement with Advanced Cell
Technology, Inc. (ACT) for patent rights and paid ACT $340,000 in option and license fees. On February 13, 2004, Lifeline and ACT amended the Option agreement and Lifeline paid ACT additional option fees of
$22,500 for fees related to registering ACTs patents in selected international countries. On May 14, 2004, Lifeline amended the licensing agreement with ACT for the exclusive worldwide patent rights for the
following ACT technologies: Infigen IP, UMass IP and ACT IP, which terms are summarized below. The license fees
aggregate a total of $400,000 and were secured by separate convertible promissory notes. The notes bear no interest
unless they are not repaid at maturity, in which event they shall thereafter bear interest at an annual rate equal the
lesser of 10% or the maximum non-usurious rate legally allowed. The note could be converted at the option of ACT into
the first equity financing of Lifeline with cash proceeds in excess of $5,000,000 under the following conditions: i)
Upon the consummation of the First Equity Financing; or ii) Immediately prior to the closing of any merger, sale or
other consolidation of the Company or of any sale of all or substantially all assets of the Company which occurs prior
to the First Equity Financing (an Acquisition Event). Notwithstanding the above, and only in the event that a
conversion resulting from such Acquisition Event would result in a security not traded on a national stock exchange
(including NASDAQ and NASDAQ small cap), upon written notice to the Company not later than five days after the
consummation of the Acquisition Event and notice of the Acquisition Event to the holder of the note, the holder may
elect to receive payment in cash of the entire outstanding principal of this Note. On December 21, 2006, ACT elected
to receive payment in cash in lieu of conversion of the notes. F-11  11




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##### Table of Contents



The Company still maintains an obligation to pay ACT royalties and other fees in accordance with the following
schedule: Infigen IP
    
    
    UMass IP
    
    
    ACT IPLicense fee
    
    $
    25,000
    
    
    $
    150,000
    
    
    $
    225,000Royalty rates
    
    
    6
    %
    
    3% to 12%
    
    3% to 10%Minimum royaltiesAt 12 months
    
    $
    7,500
    
    
    $
    15,000
    
    
    $
    15,000At 24 months
    
    $
    7,500
    
    
    $
    30,000
    
    
    $
    37,500At 36 months
    
    $
    6,875
    
    
    $
    45,000
    
    
    $
    60,625Annually thereafter
    
    $
    15,000
    
    
    $
    60,000
    
    
    $
    75,000Milestone paymentsFirst commercial product
    
    $
    250,000
    
    
    $
    250,000
    
    
    $
    250,000Sales reaching $5,000,000
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000Sales reaching $10,000,000
    
    $
    1,000,000
    
    
    $
    1,000,000
    
    
    $
    1,000,000
 4. Related Party Payables The Company has incurred obligations to the following related parties: December 31,2006
    
    
    2005Management fee
    
    $
    467,137
    
    
    $
    496,159SeaCrest Capital
    
    
    
    
    
    
    19,419SeaCrest Partners
    
    
    
    
    
    
    13,990YKA Partners
    
    
    
    
    
    
    32,779Gregory Keller
    
    
    
    
    
    
    69,717Janus Biologics, LLC
    
    
    13,308
    
    
    
    41,733$
    480,445
    
    
    $
    673,797
 The management fee was paid to Mr. Adams and Mr. Aldrich, who acted as managing members of the Company (and prior to
the Share Exchange of ISC California and Lifeline) for management of the Company since inception of Lifeline for an
aggregate of $10,000 per month plus accrued interest at 10% per annum on the unpaid balance. Effective June 1, 2006
the management fee was increased to $20,000 per month. The management fee ceased as on November 1, 2006, at which time
Mr. Adams and Mr. Aldrich became employees of ISC. SeaCrest Capital and SeaCrest Partners are controlled by Mr. Adams and Mr. Aldrich, YKA Partners is controlled by Mr.
Aldrich and the amounts represent advances to the Company for operating expenses. 5. Promissory Notes During the year ended December 31, 2006, in connection with loans to ISC California of $1,202,856, ISC California
issued warrants granting the holders the right to acquire 1,202,856 shares of common stock at a price of $0.80 per
share. The loans were repaid during December 2006. The Company recognized the value attributable to the warrants in the
amount of $637,828 and applied it to additional paid-in capital and a discount against the loan. The Company valued the
warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: contractual
terms of 3.25 years, an average risk free interest rate of 5.03%, a dividend yield of 0%, and volatility of 65%. The
debt discount attributed to the value of the warrants was $637,828 and upon repayment of the loans was recorded as
interest expense. In addition, a convertible promissory note in the amount of $400,000 issued in payment for patent licenses (see Note
3.) was reduced by a discount in the amount of $52,632 to reflect a 10% fair market rate of interest. The note was
repaid before December 31, 2006 and the unamortized discount was recorded as interest expense. F-12  12




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##### Table of Contents



6. Capital Stock As of December 31, 2006, the Company was authorized to issue 200,000,000 shares of common stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share. As of December 31, 2006, the Company has
issued and outstanding 33,996,495 shares of common stock and no shares of preferred stock. In October 2006, the board of directors of BTHC III approved a stock split of 4.42 shares to 1. As a result of the
split, the outstanding common stock of BTHC III increased from 500,000 to 2,209,993 shares. Pursuant to the Share
Exchange Agreement, each share of International Stem Cell Corporation common stock was exchanged for one share of BTHC
III common stock. All numbers in the financial statements and notes to the financial statements have been adjusted to
reflect the stock split for all periods presented. On December 27, 2006, the Companys Board of Directors and holders of a majority of the outstanding shares approved a
change in the Companys name to International Stem Cell Corporation, which change became effective in January 2007. The
accompanying financial statements have been changed to reflect the change as if it had happened at the beginning of the
periods presented. On December 27, 2006, the Companys Board of Directors and holders of a majority of the outstanding shares approved an
increase in the authorized capital stock of the Company to 200,000,000 shares of Common Stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share. The increase did not become effective
until January 2007. In November and December of 2006, the Company issued 9,880,950 shares of common stock for cash at $1.00 per share for
net proceeds after commissions and expenses of $8,442,475. In addition, ISC California issued 555,552 shares of common
stock for $500,000 In December 2006, the Company issued 1,350,000 shares of common stock, 350,000 of such shares in consideration for
legal consulting services relating to the reverse merger and 1,000,000 shares in consideration for a contract to
provide investor relations services which commenced September 1, 2006 for a period of one year. 7. Income Taxes Income taxes are provided based on the liability method for financial reporting purposes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be removed or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of
operations in the period that includes the enactment date. 8. Stock Options and Warrants The Company has adopted the 2006 Equity Participation Plan (the Plan). The options granted under the Plan may be
either qualified or non-qualified options. Up to 15,000,000 options may be granted to employees, directors and
consultants under the Plan. Options may be granted with different vesting terms and expire no later than 10 years from
the date of grant. In 2006, 3,087,500 options with an exercise price of $1.00 were granted under the Plan.
Stockholders approved the Plan effective December 1, 2006. F-13  13




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Stock Options Transactions involving stock options issued to employees, directors and consultants under the Plan are summarized
below. Options issued under the plan have a maximum life of 10 years. The following table summarizes the changes in
options outstanding and the related exercise prices for the shares of the Companys common stock issued under the Plan
and as of December 31, 2006 : Options Outstanding
    
    Options ExercisableWeighted Average
    
    
    Weighed
    
    
    
    
    
    WeightedExercise
    
    Number
    
    
    Remaining Contractual
    
    
    Average
    
    
    Number
    
    
    AveragePrices
    
    Outstanding
    
    
    Life (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$1.00
    
    
    3,087,500
    
    
    
    10
    
    
    $
    1.00
    
    
    
    200,000
    
    
    $
    1.00
  Weighted AverageNumber of Shares
    
    
    Price Per ShareOutstanding at December 31, 2006
    
    
    
    
    
    
    Granted
    
    
    3,087,500
    
    
    $
    1.00Exercised
    
    none
    
    
    Canceled or expired
    
    none
    
    
    Outstanding at December 31, 2006
    
    
    3,087,500
    
    
    $
    1.00
 The weighted-average fair value of stock options vested during the year ended December 31, 2006 and the
weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing
model are as follows : 2006Significant assumptions (weighted-average):Risk-free interest rate at grant date
    
    
    4.43
    %Expected stock price volatility
    
    
    84
    %Expected dividend payout
    
    
    0
    %Expected option life-years based on managements estimate
    
    3.75 yrs
 In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS123R). This Statement requires public entities to measure the cost of equity
awards to employees based on the grant-date value of the award. During 2006, the Company recognized $842,374 as
expenses; $501,159 of this expense is included in the Consolidated Statement of Operations as R&D expense and the
remainder is included in General and Administrative expense. Warrants As of December 31, 2006 Brookstreet Securities Corporation had earned 1,976,190 warrants as partial compensation for
their services as placement agent for the raising of equity capital and 426,767 warrants were granted to a number of
individuals as compensation for services rendered to the Company. Each Warrant entitles the holder thereof to purchase
the number of shares of common stock that could be purchased by the dollar amount of the Warrant being exercised at
$1.00 in the case of the Brookstreet warrants and $0.80 in the case of the individuals warrants. The Company
recognized the value attributable to the individuals warrants in the amount of $222,077 and applied it to general and
administrative expense. The Company recognized the value attributable to the Brookstreet warrants in the amount of
$1,230,649. The Company recognized the Brookstreet warrants as a component of additional paid-in capital with a
corresponding reduction in additional paid-in capital to reflect this as a non-cash cost of the offering. Proceeds
from the private equity placement totaled $9,880,950 and are offset by cash offering costs of $1,547,433 as well as the
non-cash offering cost of $1,230,649 related to the fair value of the Brookstreet warrants. The Company valued the
Brookstreet warrants and the warrants issued to the individuals in accordance with EITF 00-27 using the Black-Scholes
pricing model and the following assumptions: contractual terms of 5 years and 3 years, an average risk free interest
rate of 4.70% and 5.13%, a dividend yield of 0% and 0%, and volatility of 71% and 63%, respectively. F-14  14




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##### Table of Contents



9. Commitments and Contingencies Leases The Company leases office space under a noncancelable operating lease. Future minimum lease payments required under
operating leases that have initial or remaining noncancelable lease terms in excess of one year as of January 1, 2007,
are as follows: Amount2007
    
    $
    162,8682008
    
    
    168,5582009
    
    
    129,3592010 and thereafter
    
    
    144,200Total
    
    $
    604,985
 American Stem Cell Corporation (ASC) On July 1, 2005, Lifeline entered into a Share Exchange Agreement (the ASC Agreement) between ASC, Lifeline and
members of Lifeline. Pursuant to the terms of the ASC Agreement, if the transaction was not completed by December 31,
2005 then the contract was cancelled by its own terms. On June 30, 2006 Lifeline and ASC formally terminated the ASC
Agreement with the following provisions 1) Lifeline returned all of the 15,500,000 of ASC stock to ASC and 2) Lifeline
issued a promissory note for $500,000 to ASC in recognition of the cash advances and other services that ASC had
provided to Lifeline. The term of the promissory note specify a maturity date of June 30, 2007 and that early
repayments are required when Lifeline consummates equity financing in excess of $2,000,000 prior to the maturity date,
Lifeline shall make partial early repayment of the note in an amount equal to 10% of such financing up to the amount of
$500,000. The note was paid in full December 21, 2006. 10. Subsequent Events In January and February 2007, the Company issued 1,370,000 shares of its common stock at $1.00 per share in exchange
for $1,157,125 net of fees and expenses. In connection with the sale of shares, the Company issued 274,000 warrants,
which entitles the holder thereof to purchase the number of shares of common stock for $1.00 each. Commencing February 1, 2007, the Company entered into a lease for approximately 1,700 sq. ft. of commercial space in
Walkersville, Maryland. The lease for this facility expires on January 31, 2010, subject to a three-year extension at
the Companys option. The base rent is $1,200 per month. The administrative staff is in the process of relocating to
this location, which will allow the full utilization of the laboratory facilities for laboratory-related development. On February 13, 2007, we completed a private placement commenced by ISC California whereby we sold an aggregate of
11,250,950 shares of our common stock to accredited investors at $1.00 per share, resulting in gross proceeds of
$11,250,950. F-15  15




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description4.1
    
    
    Form of Specimen Common Stock Certificate.31.1
    
    
    Rule 13a-14(a)/15d-14a(a) Certification of Chief Executive Officer.31.2
    
    
    Rule 13a-14(a)/15d-14a(a) Certification of Chief Financial Officer.32.1
    
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    
    Section 1350 Certification of Chief Financial Officer.
  43