##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB/A
 Amendment No. 2
 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
   
 o þ




---



##### 



TABLE OF CONTENTS
 PageExplanatory Note
    
    
    3Cautionary Note About Forward-Looking Statements
    
    
    3PART IItem 1.
    
    Description of Business.
    
    
    4Item 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
   2




---



##### Table of Contents



Explanatory Note
  Other Revisions in this Amended Annual Report
       
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
     3




---



##### Table of Contents



PART I
 
 ITEM 1.
    
    DESCRIPTION OF BUSINESS
 Business Overview
     
    
    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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Ethical Issues
   Our Technology
  Our Products
 Specialty Research Products
     7




---



##### Table of Contents




    
    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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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;
  11




---



##### Table of Contents




    
    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




---



##### Table of Contents



Sales and Marketing
  Government Regulation
  FDA Approval Process
    13




---



##### Table of Contents



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.
   14




---



##### Table of Contents




    
    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.
   15




---



##### Table of Contents



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.
   16




---



##### Table of Contents



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.
   17




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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.
   22




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Research and Development
     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




---



##### Table of Contents




    
    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




---



##### Table of Contents



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 Board and Executive Vice PresidentJeff 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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### 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




---



##### 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 and Secretary (4)
    
    
    2,116,685
    
    
    
    6.20
    %Kenneth C. Aldrich  Chairman of the Board and Executive Vice President (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




---



##### 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




---



##### 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




---



##### 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: July 9, 2007  Signature:
    
    Capacity:
    
    Date:/s/ Kenneth C. Aldrich 
Kenneth C. Aldrich
    
    Chairman of the Board
    
    July 9, 2007/s/ Jeff Krstich 
Jeff Krstich
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    July 9, 2007/s/ Jeffrey Janus 
Jeffrey Janus
    
    President and Director
    
    July 9, 2007/s/ William B. Adams 
William B. Adams
    
    Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
    
    July 9, 2007/s/ Donald A. Wright 
Donald A. Wright
    
    Director
    
    July 9, 2007
  42




---



##### 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 Sheets
    
    F-3Statements of Operations (Restated)
    
    F-4Statements of Stockholders Equity
    
    F-5Statements of Cash Flows (Restated)
    
    F-6Notes to Financial Statements (Restated)
    
    F-7
 F-1  1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-2




---



##### Table of Contents



Financial Statements
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, Members Deficit and Stockholders EquityCurrent 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
    
    
    
    1,710,381Members deficit
    
    
    
    
    
    
    (856,105
    )Stockholders equityCapital stock, $0.001 par value 200,000,000
shares authorized, 33,996,495 issued.
    
    
    33,996
    
    
    
    Preferred stock, 20,000,000 shares authorized, none issued or outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    14,537,798
    
    
    
    Deficit accumulated during the development stage
    
    
    (9,875,032
    )
    
    
    Total members deficit and
stockholders equity
    
    
    4,696,762
    
    
    
    (856,105
    )Total liabilities, members deficit and
stockholders equity
    
    $
    5,545,226
    
    
    $
    854,276
  F-3




---



##### Table of Contents



Financial Statements
INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
 
 Consolidated Statements of Operations
 Inception(August 2001)throughYear Ended December 31,
    
    
    December 312006
    
    
    2005
    
    
    2006(Restated)
    
    
    (Restated)
    
    
    (Restated)Sales
    
    $
    2,828
    
    
    $
    158
    
    
    $
    2,986Development expensesCost of sales
    
    
    30,825
    
    
    
    47
    
    
    
    30,872Research and development
    
    
    1,858,458
    
    
    
    837,375
    
    
    
    3,888,965Marketing
    
    
    97,924
    
    
    
    36,361
    
    
    
    136,448General and administrative
    
    
    3,731,341
    
    
    
    428,450
    
    
    
    4,743,534Total development expenses
    
    
    5,718,548
    
    
    
    1,302,233
    
    
    
    8,799,819Loss from development activities
    
    
    (5,715,720
    )
    
    
    (1,302,075
    )
    
    
    (8,796,833
    )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 (Note I)
    
    
    ($0.28
    )
    
    
    ($0.07
    )
    
    
    n/aWeighted average shares -
basic and diluted
    
    
    23,136,695
    
    
    
    18,700,824
    
    
    
    n/a
  F-4




---



##### Table of Contents



Financial Statements
INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
 
 Consolidated
Statements of Members Deficit and Stockholders
Equity
From Inception to December 31, 2006
 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
    
    
    
    
    
    
    
    1,350,000
    
    
    
    Issuance 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
    
    
    $
    
  F-5




---



##### Table of Contents



Financial Statements
INTERNATIONAL STEM CELL CORPORATION AND SUBSIDIARY
 
 Consolidated Statements of Cash Flows
 Inception(August2001)throughYear ended December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006(Restated)
    
    
    
    
    
    (Restated)Cash flows from operating activitiesNet 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 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
    
    
    (3,352,380
    )
    
    
    (1,295,902
    )
    
    
    (5,760,018
    )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 activitiesProceeds from members contribution
    
    
    250,000
    
    
    
    780,000
    
    
    
    2,685,000Issuance of common stock
    
    
    10,381,948
    
    
    
    
    
    
    
    10,381,948Issuance of convertible promissory notes
    
    
    
    
    
    
    600,000
    
    
    
    2,099,552Payment of promissory notes
    
    
    (1,000,000
    )
    
    
    
    
    
    
    (2,202,856
    )Payment of offering costs
    
    
    (1,547,433
    )
    
    
    
    
    
    
    (1,547,433
    )Net cash provided by financing activities
    
    
    8,084,515
    
    
    
    1,380,000
    
    
    
    11,416,201Net 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
    
    
    $
    5,700Non-cash financing activities:Warrants issued with promissory notes
    
    $
    637,828
    
    
    $
    
    
    
    $
    637,828Warrants issued for placement agent services
    
    $
    1,230,649
    
    
    $
    
    
    
    $
    1,230,649
  F-6




---



##### Table of Contents



International Stem Cell Corporation and Subsidiary
(A Development Stage Company)
 
 Notes to consolidated financial statements
 1. Organization and Significant Accounting Policies
 BUSINESS COMBINATION AND CORPORATE RESTRUCTURE (Restated)
    Going Concern
 Proforma Information and Basis of Presentation
 Principles of Consolidation
 Cash Equivalents
 F-7




---



##### Table of Contents



Property and Equipment
 Patent Licenses
 Long-Lived Asset Impairment
 Product Sales
 Cost of Sales
 Research and Development Costs
 Registration Payment Arrangements
  Recent Accounting Pronouncements
  F-8




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, Accounting for Income Taxes.
 Fair Value Measurements,
 Considering the Effects of Prior Year Misstatements when Quantifying Current Year
Misstatements.
 FASB 158
   Income Taxes
 Accounting for Income Taxes
 F-9




---



##### Table of Contents



Use of Estimates
  Concentration of Credit Risk
 Fair Value of Financial Instruments
 Income (Loss) Per Common Share
 2. Property and Equipment
  December 31, 2006
    
    
    December 31, 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
 Option to License Intellectual Property
   F-10




---



##### Table of Contents



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
  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
   5. Promissory Notes
  F-11




---



##### Table of Contents



6. Capital Stock (Restated)
       F-12




---



##### Table of Contents



7. Income Taxes
  8. Stock Options and Warrants (Restated)
    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
    
    
    
    1,087,500
    
    
    $
    1.00
 Weighted AverageNumber of Shares
    
    
    Price Per ShareOutstanding at December 31, 2005
    
    
    
    
    
    
    Granted
    
    
    3,087,500
    
    
    $
    1.00Exercised
    
    none
    
    
    
    Canceled or expired
    
    none
    
    
    
    Outstanding at December 31, 2006
    
    
    3,087,500
    
    
    $
    1.00
  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
  F-13




---



##### Table of Contents



9. Commitments and Contingencies (Restated)
 Leases
 Amount2007
    
    $
    149,6682008
    
    
    154,1582009
    
    
    113,8592010
    
    
    94,8002011
    
    
    64,134Total
    
    $
    576,618
 American Stem Cell Corporation (ASC)
  F-14




---



##### Table of Contents



10. Subsequent Events (unaudited)
   11. Restatement of Consolidated Financial Statements
   License fee amortization erroneously classified as general and administrative expense
    
    $
    49,776
  As Previously
    
    
    IncreaseReported
    
    
    (Decrease)
    
    
    RestatedBalance Sheet Data:Total assets
    
    $
    5,545,226
    
    
    $
    
    
    
    $
    5,545,226Total liabilities
    
    
    848,464
    
    
    
    
    
    
    
    848,464Total stockholders equity
    
    
    4,696,762
    
    
    
    
    
    
    
    4,696,762Statement of Operations Data:Research and development expense
    
    
    1,808,682
    
    
    
    49,776
    
    
    
    1,858,458General and administrative expense
    
    
    3,781,117
    
    
    
    (49,776
    )
    
    
    3,731,341Total development expenses
    
    
    5,687,723
    
    
    
    
    
    
    
    5,687,723Net loss
    
    $
    (6,583,927
    )
    
    $
    
    
    
    $
    (6,583,927
    )
  License fee amortization erroneously classified as general and administrative expense
    
    $
    33,184
  As Previously
    
    
    IncreaseReported
    
    
    (Decrease)
    
    
    RestatedBalance Sheet Data:Total assets
    
    $
    854,276
    
    
    $
    
    
    
    $
    854,276Total liabilities
    
    
    1,710,381
    
    
    
    
    
    
    
    1,710,381Total members deficit
    
    
    (856,105
    )
    
    
    
    
    
    
    (856,105
    )Statement of Operations Data:Research and development expense
    
    
    804,191
    
    
    
    33,184
    
    
    
    837,375General and administrative expense
    
    
    461,634
    
    
    
    (33,184
    )
    
    
    428,450Total development expenses
    
    
    1,302,186
    
    
    
    
    
    
    
    1,302,186Net loss
    
    $
    (1,385,745
    )
    
    $
    
    
    
    $
    (1,385,745
    )
 F-15




---



##### Table of Contents



License fee amortization erroneously classified as general and administrative expense
    
    $
    82,960
  As Previously
    
    
    IncreaseReported
    
    
    (Decrease)
    
    
    RestatedBalance Sheet Data:Total assets
    
    $
    5,545,226
    
    
    $
    
    
    
    $
    5,545,226Total liabilities
    
    
    848,464
    
    
    
    
    
    
    
    848,464Total stockholders equity
    
    
    4,696,762
    
    
    
    
    
    
    
    4,696,762Statement of Operations Data:Research and development expense
    
    
    3,806,005
    
    
    
    82,960
    
    
    
    3,888,965General and administrative expense
    
    
    4,826,494
    
    
    
    (82,960
    )
    
    
    4,743,534Total development expenses
    
    
    8,768,947
    
    
    
    
    
    
    
    8,768,947Net loss
    
    $
    (9,875,032
    )
    
    $
    
    
    
    $
    (9,875,032
    )
    F-16




---



##### 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.