Ocata Therapeutics 10Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 0-50295

ADVANCED CELL TECHNOLOGY, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

381 PLANTATION STREET, WORCESTER, MASSACHUSETTS 01605

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 748-4900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

Class:		Outstanding at April 28, 2009:
Common Stock, $0.001 par value per share		499,905,541 shares

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS		1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION		36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		64
ITEM 4. CONTROLS AND PROCEDURES		64
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		65
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		66
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		67
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		67
ITEM 5. OTHER INFORMATION		67
ITEM 6. EXHIBITS		67
SIGNATURE		68

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007

	June 30,			December 31,
	2008			2007
	(unaudited)			(restated)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	33,271		$	1,166,116
Accounts receivable		6,793			27,026
Prepaid expenses		107,608			68,416
Deferred royalty fees, current portion		257,911			341,274
Total current assets		405,583			1,602,832

Property and equipment, net		643,617			914,504
Deferred royalty fees, less current portion		852,380			1,202,430
Deposits		-			115,192
Deferred issuance costs, net of amortization of $5,471,041 and $3,874,300		1,895,438			4,772,087

TOTAL ASSETS	$	3,797,018		$	8,607,045

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable	$	8,320,902		$	5,517,876
Accrued expenses		1,827,721			1,120,781
Deferred revenue, current portion		884,874			497,374
Advances payable – other		130,000			130,000
2005 Convertible debenture and embedded derivatives, net of discounts of $19,850 and $600,246		186,987			1,276,871
2006 Convertible debenture and embedded derivatives (fair value $2,033,457 and $3,939,862)		1,087,454			1,625,327
2007 Convertible debenture and embedded derivatives (fair value $3,655,749 and $3,874,026)		1,800,655			1,160,847
February 2008 Convertible debenture and embedded derivatives (fair value $693,947 and $0)		634,581			-
April 2008 Convertible debenture and embedded derivatives (fair value $4,429,544 and $0)		1,833,732			-
Warrant and option derivatives - current portion		7,504,525			14,574
Short term capital leases		12,955			31,605
Notes payable – other		468,425			468,425
Total current liabilities		24,692,811			11,843,680

2006 Convertible debenture and embedded derivatives, less current portion (fair value $412,340 and $3,447,230)		220,512			1,422,164
2007 Convertible debenture and embedded derivatives, less current portion (fair value $4,386,898 and $7,748,052)		2,160,787			2,321,695
February 2008 Convertible debenture and embedded derivatives (fair value $452,994 and $0)		414,241			-
Warrant and option derivatives, less current portion		-			13,011,751
Deferred revenue, less current portion		1,285,825			1,534,485
Total liabilities		28,774,176			30,133,775

Commitments and contingencies		-			-

STOCKHOLDERS' DEFICIT:
Preferred stock, $0.01 par value; 50,000,000 shares authorized, 0 issued and outstanding		-			-
Common stock, $0.01par value; 500,000,000 shares authorized, 174,828,360 and 85,027,461 issued and outstanding.		174,828			85,027
Additional paid-in capital		45,871,181			34,302,334
Accumulated deficit		(71,023,167	)		(55,914,091	)
Total stockholders' deficit		(24,977,158	)		(21,526,730	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	3,797,018		$	8,607,045

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

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
				(restated)						(restated)

Revenue (License fees and royalties)	$	174,388		$	274,326		$	298,731		$	398,669
Cost of Revenue		120,186			110,318			310,914			171,754
Gross profit (loss)		54,202			164,008			(12,183	)		226,915

Operating expenses:
Research and development		2,786,870			2,828,842			6,754,422			6,477,930
Grant reimbursements		-			(9,597	)		(105,169	)		(67,179	)
General and administrative expenses		1,840,116			1,246,180			3,565,938			2,987,284
Total operating expenses		4,626,986			4,065,425			10,215,191			9,398,035
Loss from operations		(4,572,784	)		(3,901,417	)		(10,227,374	)		(9,171,120	)

Non-operating income (expense):
Interest income		1,317			24,960			8,166			103,007
Interest expense and late fees		(8,540,674	)		(6,362,454	)		(12,747,290	)		(13,435,004	)
Charges related to issuance of 2008 convertible debentures		(531,769	)		-			(1,217,342	)		-
Charges related to repricing of 2005 convertible debenture and warrants		-			-			-			(843,277	)
Income related to repricing of 2006 and 2007 convertible debentures and warrants		847,588			-			847,588			-
Adjustments to fair value of derivatives		7,206,905			23,247,555			8,227,176			11,614,037
Gain on settlement		-			193,862			-			193,862
Total non-operating income (expense)		(1,016,633	)		17,103,923			(4,881,702	)		(2,367,375	)

Income (loss) before income tax		(5,589,417	)		13,202,506			(15,109,076	)		(11,538,495	)

Income tax		-			-			-			-
Net Income (loss)	$	(5,589,417	)	$	13,202,506		$	(15,109,076	)	$	(11,538,495	)


Earnings (loss) per share:
Basic	$	(0.04	)	$	0.26		$	(0.12	)	$	(0.24	)
Diluted	$	(0.04	)	$	0.20		$	(0.12	)	$	(0.24	)

Weighted average shares outstanding :
Basic		153,438,333			51,138,077			124,654,606			48,978,418
Diluted		153,438,333			67,410,984			124,654,606			48,978,418

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

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2008

					Additional					Total
	Common Stock				Paid in		Accumulated			Stockholders'
	Shares		Amount		Capital		Deficit			Deficit
Balance December 31, 2007		85,027,461	$	85,027	$	34,302,334	$	(55,914,091	)	$	(21,526,730	)

Convertible debentures redemptions		45,030,046		45,030		4,589,191		-			4,634,221

Convertible debentures conversions		38,100,654		38,101		5,877,341		-			5,915,442

Issuance of stock for debenture financing costs		2,944,177		2,944		313,115					316,059

Option compensation charges		-		-		283,577		-			283,577

Adjustment to fair value of derivatives		-		-		78,367		-			78,367

Issuance in respect of anti-dilution provision of convertible debenture		70,503		71		15,510		-			15,581

Issuance of stock in payment of expenses		958,256		958		212,010		-			212,968

Issuance of stock under stock incentive plan		1,497,263		1,497		140,936					142,433

Issuance of stock upon exercise of options		1,200,000		1,200		58,800		-			60,000

Net loss for the six months ended June 30, 2008		-		-		-		(15,109,076	)		(15,109,076	)

Balance at June 30, 2008		174,828,360	$	174,828	$	45,871,181	$	(71,023,167	)	$	(24,977,158	)

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

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

	Six Months Ended June 30,
	2008			2007
				(restated)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(15,109,076	)	$	(11,538,495	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		211,893			189,813
Write-off of uncollectible accounts receivable		25,000			-
Amortization of deferred charges		433,413			146,753
Amortization of deferred revenue		(311,160	)		(248,669	)
Stock based compensation		645,602			324,219
Amortization of deferred issuance costs		2,896,649			2,593,843
Amortization of discounts		9,525,843			10,748,822
Loss on extinguishment of debt		-			193,862
Adjustements to fair value of derivatives		(8,227,176	)		(11,614,037	)
Charges related to issuance of 2008 convertible debentures		1,217,342			-
Repricing of 2005 convertible debentures and warrants		-			843,277
Repricing of 2006 annd 2007 convertible debentures and warrants		(847,588	)		-
Shares of common stock issued for services		8,616			1,376,842
Warrants issued for consulting services		155,281			-
Charges related to settlement of anti-dilution provision		15,581			-
Issuance of note for services received		750,000			-
Shares of common stock issued for financing costs		316,059			-
Non-cash rent expense		254,231			-
Forfeiture of rent deposits		88,504			-
(Increase) / decrease in assets:
Accounts receivable		(4,767	)		37,922
Prepaid expenses		(39,192	)		(16,718	)
Deferred charges		-			(573,000	)
Increase / (decrease) in current liabilities:
Accounts payable and accrued expenses		3,785,714			89,141
Interest Payable		4,813			(75,833	)
Deferred revenue		450,000			-

Net cash used in operating activities		(3,754,418	)		(7,522,258	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(168,549	)		(39,139	)
Payment of deposits		-			(10,000	)

Net cash used in investing activities		(168,549	)		(49,139	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes		2,812,432			-
Payments on convertible debentures		-			(139,123	)
Payments on notes and leases		(18,650	)		(38,980	)
Payment for issuance costs on note payable		(3,660	)		-
Settlement payment		-			(170,249	)

Net cash provided by (used in) financing activities		2,790,122			(348,352	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,132,845	)		(7,919,749	)

CASH AND CASH EQUIVALENTS, BEGINNING BALANCE		1,166,116			8,689,336

CASH AND CASH EQUIVALENTS, ENDING BALANCE	$	33,271		$	769,587

CASH PAID FOR:
Interest	$	2,504		$	5,008
Income taxes	$	-		$	-

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of 45,030,046 and 5,209,598 shares of common stock in redemption of convertible debentures	$	4,634,221		$	3,290,000
Issuance of 38,100,654 and 14,040,870 shares of common stock in conversion of convertible debentures	$	5,915,442		$	7,638,000
Issuance of 70,503 shares of common stock to settle an anti-dilution provision feature of
convertible debenture	$	15,581		$	-
Issuance of 1,200,000 shares of common stock upon exercise of employee stock options	$	60,000		$	-

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

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(UNAUDITED)

1. ORGANIZATIONAL MATTERS

Organization

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

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

The transaction has been accounted for as a recapitalization of ACT, the accounting acquirer. The historical financial statements presented for periods prior to the merger are those of ACT.

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

Nature of Business

The Company is a biotechnology company focused on developing and commercializing human embryonic and adult stem cell technology in the emerging fields of regenerative medicine. Principal activities to date have included obtaining financing, securing operating facilities, and conducting research and development. The Company has no therapeutic products currently available for sale and does not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that the Company’s ability to continue its research and development activities is dependent upon the ability of management to obtain additional financing as required.

Going Concern

As reflected in the accompanying financial statements, the Company has losses from operations, negative cash flows from operations, a substantial stockholders’ deficit and current liabilities exceed current assets. The Company may thus not be able to continue as a going concern and fund cash requirements for operations through the next 12 months with current cash reserves. As discussed below, the Company was able to raise additional cash in the second half of 2008 and the first quarter of 2009. Notwithstanding success in raising capital, there continues to be substantial doubt about the Company’s ability to continue as a going concern.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and ultimately generate positive cash flows from operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.

Management has taken or plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence:

On April 4, 2008, the Company released closing escrow on the issuance of $4,038,880 of its amortizing senior secured convertible debentures and associated warrants. The purchasers purchased from the Company senior secured convertible debentures and warrants to purchase shares of the Company’s common stock. The net cash and cash in-kind received by the Company related to this financing was $2,212,432.

On April 30, 2008 the Company received a one time payment of $300,000 from Terumo International which extended their ability to commence a Phase I Clinical Trial in Japan by one year.

On May 31, 2008, the Company closed its Alameda, California and Charlestown, Massachusetts facilities in an effort to streamline and focus on its most advanced clinical programs as part of a cost reduction program designed to reduce annual operating expenses by $5-6 million. In conjunction with the cost reduction activities, the Company has not renewed its Alameda, California sublease and has vacated its Charlestown, Massachusetts facility.

On June 17, 2008, the Company drew down $60,000 and received $50,000 (reflecting a 16.66% original issue discount) under Note B described in Note 6 to the financial statements.

On July 10, 2008, the Company granted an exclusive license to Embryome Sciences, Inc., a wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate” embryonic stem cell technology and a bank of over 140 diverse progenitor cell lines derived using that technology. Under the agreement, the Company received an up-front payment of $470,000, and is eligible to receive an 8% royalty on sales of products, services, and processes that utilize the licensed technology. However, as discussed in more detail in Note 17, in connection with unpaid rents ordered to be paid to a landlord, the Company has assigned the landlord rights and interest to 62.5% of all royalties on this contract, and 65% of all other consideration payable under this license agreement until such time that the Company has repaid amounts owed to the landlord that total $475,000.

Between September 29, 2008 and January 20, 2009, the Company settled certain past due accounts payable by the issuance of shares of its common stock. In aggregate, the Company settled $1,108,673 in accounts payable through the issuance of 260,116,283 shares of its common stock.

On December 18, 2008, the Company entered into a license agreement with an Ireland-based investor, Transition Holdings Inc. (“Transition”), for certain of its non-core technology. Under the agreement, Transition agreed to acquire a license to the technology for $3.5 million in cash. As of April 30, 2009, the Company has received the entire $3.5 million in cash under this agreement. The Company expects to apply the proceeds towards its retinal epithelium (“RPE”) cells program.

On March 30, 2009, the Company entered into a second license agreement with CHA under which the Company will license its RPE technology, for the treatment of diseases of the eye, to CHA for development and commercialization exclusively in Korea. The Company is eligible to receive up to a total of $1.9 million in fees based upon the parties achieving certain milestones, including the Company making an IND submission to the US FDA to commence clinical trials in humans using the technology. The Company received an up-front fee under the license in the amount of $750,000. Under the agreement, CHA will incur all of the cost associated with the RPA clinical trials in Korea. The agreement is part of the joint venture between the two companies.

On March 11, 2009, the Company entered into a $5 million credit facility (“Facility”) with a life sciences fund. Under the agreement, the proceeds from the Facility must be used exclusively for the Company to file an investigational new drug (“IND”) for its retinal pigment epithelium (“RPE”) program, and will allow the Company to complete both Phase I and Phase II studies in humans. An IND is required to commence clinical trials. Under the terms of the agreement, the Company may draw down funds, as needed for clinical development of the RPE program, from the investor through the issuance of Series A-1 convertible preferred stock. The preferred stock pays dividends, in kind of preferred stock, at an annual rate of 10%, matures in four years from the drawdown date, and is convertible into common stock at $0.75 per share.

Management anticipates raising additional future capital from its current convertible debenture holders, or other financing sources, that will be used to fund any capital shortfalls. The terms of any financing will likely be negotiated based upon current market terms for similar financings. No commitments have been received for additional investment and no assurances can be given that this financing will ultimately be completed.

Management has focused its scientific operations on product development in order to accelerate the time to market products which will ultimately generate revenues. While the amount or timing of such revenues cannot be determined, management believes that focused development will ultimately provide a quicker path to revenues, and an increased likelihood of raising additional financing.

Management will continue to pursue licensing opportunities of the Company’s extensive intellectual property portfolio.

2. RESTATEMENT

As indicated in Notes 7 through 9, the Company has issued a series of complex convertible debentures over the past several years. The convertible debentures are issued for less than face value, thus generating significant original issue discounts. In conjunction with the instruments, the Company has issued substantial numbers of warrants, and the value of these warrants as of the issue date is treated in the same manner as an original issue discount. These discounts are amortized into interest expense over the life of the debenture, which is a complex calculation due to the planned monthly redemptions after a certain point included in the debenture agreements. Further, the Debentures are converted into shares at the holder’s option, the timing of which depends on the price of the Company’s stock. The Company also gives brokers and other intermediaries considerable value via cash and warrants in order to assist in selling the debentures. The costs associated with issuing the debt are capitalized and amortized over the life of the debt.

On September 6, 2006, the Company entered into a securities purchase agreement in which the purchasers purchased from the Company amortizing convertible debentures and warrants to purchase shares of the Company’s common stock. In connection with that transaction, and for each quarter thereafter, the Company performed a valuation of the debentures and warrants (see Note 8).

On March 24, 2008, the Company discovered that it had been using an incorrect number of warrants in calculating the appropriate fair value. The Company had been using 4,541,672 warrants instead of the correct number of 19,064,670 warrants. Upon learning of the error, the Company recalculated the correct fair value and noted that this change in warrant valuation had no impact on the value of the related convertible debentures and all the related embedded derivatives.

In mid-May 2008, the Company discovered that the Deferred Issuance costs and discounts had been amortized over a period longer than the weighted average life of the instruments, with the result that the discounts and debt issuance costs should have been charged to interest expense on a faster basis than had been the case. Upon learning of the error the Company has recalculated the amortization and resulting interest expense. The Company also discovered that its calculations of the weighted average shares used in calculating basic and diluted earnings per share for the three and six month periods ended June 30, 2007 were in error. The actual basic weighted average shares outstanding for the three months ended June 30, 2007 was not changed. The actual basic and diluted weighted average shares outstanding for the six months ended June 30, 2007 was approximately 53,000 shares higher than reported.

In accordance with Statement of Accounting Standards No. 154, the Company has determined that these were errors, and has therefore restated the accompanying statements of operations, and cash flows for the three and six months ended June 30, 2007 and the balance sheet as of December 31, 2007.

	As Originally Reported			Restated			Difference

December 31, 2007

Balance Sheet
Deferred issuance costs	$	5,107,599		$	4,772,087		$	(335,512	)
2005 Convertible debenture and embedded derivatives – current portion	$	1,040,156		$	1,276,871		$	236,715
2006 Convertible debenture and embedded derivatives – current portion	$	906,860		$	1,625,327		$	718,467
2007 Convertible debenture and embedded derivatives – current portion	$	363,805		$	1,160,847		$	797,042
2006 Convertible debenture and embedded derivatives, less current portion	$	793,504		$	1,422,164		$	628,660
2007 Convertible debenture and embedded derivatives, less current portion	$	2,364,731		$	2,321,695		$	(43,036	)
Accumulated deficit	$	(53,240,732	)	$	(55,914,091	)	$	(2,673,359	)
Total stockholders’ deficit at December 31, 2007	$	(18,853,371	)	$	(21,526,730	)	$	(2,673,359	)

	As Originally Reported			Restated			Difference
June 30, 2007

Balance Sheet
Deferred issuance costs	$	3,476,600		$	3,025,375		$	(451,225	)
2005 Convertible debenture and embedded derivatives – current portion	$	2,968,064		$	3,016,660		$	48,596
2006 Convertible debenture and embedded derivatives – current portion	$	3,273,470		$	1,513,046		$	(1,760,424	)
2005 Convertible debenture and embedded derivatives, less current portion	$	267,943		$	272,330		$	4,387
2006 Convertible debenture and embedded derivatives, less current portion	$	6,546,939		$	3,026,091		$	(3,520,848	)
Warrant derivatives, less current portion	$	-		$	-		$	-
Accumulated deficit	$	(50,635,448	)	$	(51,553,860	)	$	(918,412	)
Total stockholders’ deficit at June 30, 2007	$	(23,287,349	)	$	(24,205,761	)	$	(918,412	)

Three Months Ended June 30, 2007

Statement of Operations
Interest expense	$	(3,390,678	)	$	(6,362,454	)	$	(2,971,776	)
Adjustments related to fair value of warrants	$	(18,242,544	)	$	(23,247,555	)	$	5,005,011
Net income	$	11,169,271		$	13,202,506		$	2,033,235
Basic earnings per share	$	0.22		$	0.26		$	0.04
Diluted earnings per share	$	0.17		$	0.20		$	0.03

Weighted average shares - basic		51,114,251			51,114,251			23,826
Weighted average shares - diluted		67,410,984			67,410,984			-

Six Months Ended June 30, 2007

Statement of Operations
Interest expense	$	(8,367,818	)	$	(13,435,004	)	$	(5,067,186	)
Adjustments related to fair value of warrants	$	9,323,413	)	$	11,614,037		$	2,290,624
Net loss	$	(8,761,933	)	$	(11,538,495	)	$	(2,773,562	)
Basic and diluted loss per share	$	(0.18	)	$	(0.24	)	$	(0.06	)

Weighted average shares – basic and diluted		48,925,339			48,978,418			53,079

Statement of Cash Flows
Net loss	$	(8,761,933	)	$	(11,538,495	)	$	(2,773,562	)
Amortization of discount	$	6,132,861		$	10,748,822		$	4,615,961
Amortization of deferred issuance cost	$	2,142,618		$	2,593,843		$	451,225
Adjustments related to fair value of derivatives	$	(9,323,414	)	$	(11,614,038	)	$	(2,290,624	)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-KSB filed with the SEC on April 18, 2008 and amended on June 30, 2008.

Principles of Consolidation —The accounts of the Company and Mytogen, Inc. (“Mytogen”) are included in the accompanying consolidated financial statements for the period from September 20, 2007 to December 31, 2007. On September 20, 2007, a newly formed subsidiary of the Company merged into Mytogen to effect a reorganization of Mytogen. As a result of the merger, the Company became the owner of 100% of the outstanding shares of Mytogen. During the period from September 20, 2007 to June 30, 2008, all intercompany balances and transactions were eliminated in consolidation.

Use of Estimates —These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, the Company’s management has estimated variables used to calculate the Black-Scholes and binomial lattice model calculations used to value derivative instruments as discussed below under “Valuation of Derivative Instruments”. In addition, management has estimated the expected economic life and value of the Company’s licensed technology, the Company’s net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the Company’s fixed assets and its accounts receivable allowance. Actual results could differ from those estimates.

Reclassifications —Certain prior year financial statement balances have been reclassified to conform to the current year presentation. These reclassifications had no effect on the recorded net income (loss).

Cash and Cash Equivalents —Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses related to this concentration of risk.

Accounts Receivable —The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, the Company records an allowance for that doubtful account. Once the Company has exhausted efforts to collect, management writes off the account receivable against the allowance it has already created. The Company does not require collateral for its trade accounts receivable.

Equipment — The Company records its equipment at historical cost. The Company expenses maintenance and repairs as incurred. Depreciation is provided for using the straight-line method over three to six years. Upon disposition of equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged as collateral for the related lease.

Deferred Issuance Costs —Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures. The weighted average amortization period for deferred debt issuance costs is 36 months.

Intangible and Long-Lived Assets— The Company follows Statement of Financial Accounting Standards (“FAS”) No. 144, “Accounting for Impairment of Disposal of Long-Lived Assets,” which established a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. During the three and six months ended June 30, 2008 and 2007, no impairment loss was recognized.

Fair Value Measurements — For certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable, advances payable and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.

Emerging Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), provides a criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock options and warrants, should be designated as either an equity instrument, an asset or as a liability under FAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. Using the criteria in EITF 00-19, the Company has determined that its outstanding options and warrants require liability accounting and records the fair values as warrant and option derivatives.

On January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

FAS 133, “Accounting for Derivative Instruments and Hedging Activities” requires bifurcation of embedded derivative instruments and measurement of fair value for accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid Financial Instruments” requires measurement of fair values of hybrid financial instruments for accounting purposes. The Company applied the accounting prescribed in FAS 133 to account for its 2005 Convertible Debenture as described in Note 9.The Company applied the accounting prescribed in FAS 155 to account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures as described below in Notes 5, 6, 7, and 8. In determining the appropriate fair value, the Company used Level 2 inputs for its valuation methodology including Black-Scholes models, Binomial Option Pricing models, Standard Put Option Binomial models and the net present value of certain penalty amounts. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.

At June 30, 2008, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

			Fair Value Measurements at
	Fair Value As of		June 30, 2008 Using Fair Value Hierarchy
Derivative Liabilities	June 30, 2008		Level 1		Level 2		Level 3
Conversion feature - 2005 debenture	$	5		-	$	5		-
Anti-dilution provision - 2005 debenture		20,021		-		20,021		-
Default provisions - 2005 debenture		1,426		-		1,426		-
2006 Convertible debenture and embeded derivatives		2,445,797		-		2,445,797		-
2007 Convertible debenture and embedded derivatives		8,042,647		-		8,042,647		-
February 2008 Convertible debentures and embedded derivatives		1,146,941		-		1,146,941		-
April 2008 Convertible debenture and embedded derivatives		4,429,544		-		4,429,544		-
Warrant and option derivatives		7,504,525		-		7,504,525		-
	$	23,590,906		-	$	23,590,906		-

For the three months ended June 30, 2008 and 2007, the Company recognized a gain of $7,206,905 and $23,247,555, respectively, for the changes in the valuation of the aforementioned liabilities. For the six months ended June 30, 2008 and 2007, the Company recognized a gain of $8,227,176 and $11,614,037, respectively, for the changes in the valuation of the aforementioned liabilities.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with FAS 157.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted FAS 159 on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

Revenue Recognition — The Company’s revenues are generated from license and research agreements with collaborators. Licensing revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the patents related to the license. Deferred revenue represents the portion of the license and other payments received that has not been earned. Costs associated with the license revenue are deferred and recognized over the same term as the revenue. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval.

Research and Development Costs —Research and development costs consist of expenditures for the research and development of patents and technology, which cannot be capitalized. The Company’s research and development costs consist mainly of payroll and payroll related expenses, research supplies and research grants. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval. Research and development costs are expensed as incurred.

Share-Based Compensation—Effective January 1, 2006, the Company adopted the fair value recognition provisions of FAS 123(R), using the modified-prospective transition method. Under this method, stock-based compensation expense is recognized in the consolidated financial statements for stock options granted, modified or settled after the adoption date. In accordance with FAS 123(R), the unamortized portion of options granted prior to the adoption date is recognized into earnings after adoption. Results for prior periods have not been restated, as provided for under the modified-prospective method.

Under FAS 123(R), stock-based compensation expense recognized is based on the value of the portion of share-based payment awards that are ultimately expected to vest during the period. Based on this, the Company’s stock-based compensation is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions relative to volatility and anticipated forfeitures are determined at the time of grant with the following weighted average assumptions used in the three and six months ended June 30, 2008:

Expected life in years		4.0
Volatility		148	%
Risk free interest rate		2.50	%
Expected dividends	None
Expected forfeitures		13	%

The assumptions used in the Black-Scholes models referred to above are based upon the following data: (1) The expected life of the option is estimated by considering the contractual term of the option, the vesting period of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock price volatility of the underlying shares over the expected term of the option is based upon historical share price data. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4) Expected dividends are based on historical dividend data and expected future dividend activity. (5) The expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.

In accordance with FAS 123(R), the benefits of tax deductions in excess of the compensation cost recognized for options exercised during the period are classified as financing cash inflows rather than operating cash inflows.

Income Taxes — Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

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

Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.

Net Income (Loss) Per Share — The Company uses FAS No. 128, “Earnings Per Share” for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted income (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation because their exercise price was greater than the weighted average stock price for the period.

At June 30, 2008, approximately 214,976,000 potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive. There were 58,000,000 potentially dilutive shares at June 30, 2007 that were excluded from the calculation as their inclusion would be anti-dilutive.

Concentrations and Other Risks —Currently, the Company’s revenues and accounts receivable are concentrated in one customer. There is also a geographic concentration of the Company’s primary activities in Northern California and Massachusetts. Other risks include the uncertainty of the regulatory environment and the effect of future regulations on the Company’s business activities. As the Company is a biotechnology research and development company, there is also the attendant risk that someone could commence legal proceedings over the Company’s discoveries. Acts of God could also adversely affect the Company’s business.

Recent Accounting Pronouncements

In September 2006, the FASB issued FAS 157 “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company has adopted FAS 157 beginning January 1, 2008 and does not believe the adoption had a material impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” FAS No. 141 (Revised 2007) changes how a reporting enterprise accounts for the acquisition of a business. FAS No. 141 (Revised 2007) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. FAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. The Company believes adopting FAS No. 141R will significantly impact its financial statements for any business combination completed after December 31, 2008.

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of FAS 160 to have a significant impact on its results of operations or financial position.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted FAS No. 159 on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. Management is currently evaluating the effect of this pronouncement on financial statements.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No. 133 “Accounting for Derivatives and Hedging Activities” (“FAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the FAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will not have a material impact on the financial statements.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the useful life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors a company should consider when developing renewal assumptions used to determine the useful life of an intangible asset under FAS142. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FAS 142 requires companies to consider whether renewal can be completed without substantial cost or material modification of the existing terms and conditions associated with the asset. FSP FAS 142-3 replaces the previous useful life criteria with a new requirement—that an entity consider its own historical experience in renewing similar arrangements. If historical experience does not exist then the Company would consider market participant assumptions regarding renewal including 1) highest and best use of the asset by a market participant, and 2) adjustments for other entity-specific factors included in FAS 142. The Company is currently evaluating the impact that adopting FSP FAS 142-3 will have on its financial statements.

In May 2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Company is currently evaluating the impact that adopting FAS No. 162 will have on its financial statements.

In May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have an impact on the Company’s financial statements.

In June 2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5”. The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The Company is currently evaluating the impact that adopting EITF 08-4 will have on its financial statements.

On October 10, 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, FSP FAS” which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 became effective on October 10, 2008, and its adoption will not have a material impact on the Company’s financial position or results for the year ended December 31, 2008.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of FAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 will not have a material impact on the Company’s consolidated financial statements.

4. LICENSE REVENUE

On April 30, 2008 the Company received a one time payment of $300,000 from Terumo International which extended their ability to commence a Phase I Clinical Trial in Japan by one year. All other terms and conditions for the license agreement between Terumo and the Company remain the same. The Company has recorded $50,000 in license fee revenue for the three and six months ended June 30, 2008 in its accompanying statements of operations and the remainder of the license fee has been accrued in deferred revenue in the accompanying balance sheets at June 30, 2008. The Company is recognizing revenue from this agreement over the one-year extension period.

On May 23, 2008, the Company received $150,000 from International Stem Cells, Inc. as a continuing annual payment to renew its license fee for use of certain of the Company’s technologies. The Company has recorded $12,500 in license fee revenue for the three and six months ended June 30, 2008, respectively, in its accompanying consolidated statements of operations and the remainder of the license fee has been accrued in deferred revenue in the accompanying consolidated balance sheet at June 30, 2008. The Company is recognizing revenue from this agreement over a one-year period.

5. CONVERTIBLE NOTE PAYABLE—APRIL 2008

On April 4, 2008, the Company entered into a Securities Purchase Agreement with accredited investors for the issuance of an aggregate of $4,038,880 principal amount of senior secured convertible debentures with an original issue discount of $820,648 representing approximately 20.32%. The amortizing senior secured convertible debentures issued at the closing of the 2008 financing will be due and payable one (1) year from the closing, and will not bear interest. The debentures begin amortizing on October 1, 2008. The cash purchase price excluding refinancing of bridge debt and in-kind payments was $2,212,432. Refinanced bridge debt consisted of the aggregate $130,000 in unsecured convertible notes previously issued and sold to PDPI LLC and The Shapiro Family Trust on March 21, 2008. The net outstanding amount of principal plus interest of the Notes was converted into the debt within the 2008 Financing on a dollar-for-dollar basis. Dr. Shapiro, one of the Company’s directors, may be deemed the beneficial owner of the securities owned by The Shapiro Family Trust. The convertible debentures are convertible beginning on the six-month anniversary of the effective date of the note at the option of the holders into 26,925,867 shares of common stock at a fixed conversion price of $0.15 per share, subject to anti-dilution and other customary adjustments. The Company has classified the note as short term in the accompanying consolidated balance sheet as of June 30, 2008. The debenture contains no restrictions as to the use of the proceeds.

The note contains a provision that modifies the conversion rate to $0.15 per common share and a warrant exercise price of $0.165 per common share, issued to the April 2008 note payable subscribers who are also participants in the 2005, 2006, and 2007 debentures. The Company has considered the impact of Emerging Issue Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of FASB No. 15, and 05 - 7—Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues on the accounting treatment of the change in conversion price of the 2005, 2006, and 2007 Convertible Debentures described above. EITF 96 - 19 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The Company has concluded that the change in conversion price and warrant exercise price does not constitute a significant change in the nature of the debt and that the transaction should not be treated as an extinguishment of that debt. The Company recorded an additional debt discount in the amount of $847,588 in its accompanying consolidated balance sheets at June 30, 2008 for the impact of the change in the conversion price. See Notes 7 through 9.

In connection with this financing, the Company accrued cash fees to a placement agent of $20,000 and issued warrants to purchase 26,925,867 shares of Common Stock at an exercise price of $0.165 per share. The term of the warrants is five years and is subject to anti-dilution and other customary adjustments. The initial fair value of the warrants was estimated at approximately $2,587,521 using the Black-Scholes pricing model. The warrants were again valued at $1,771,289 at June 30, 2008 at fair value using the Black-Scholes model, representing a decrease in the fair value of the liability of approximately $816,232, which was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes model at June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 143% to 146%, (3) risk-free interest rate of 2.6% to 3.4%, and (4) expected life of 5 years. Cash fees accrued in the amount of $20,000, the initial fair value of the original issue discount in the amount of $820,649, and the initial fair value of the warrant discount in the amount of $2,587,521 have been capitalized as debt issuance costs (cash paid) and debt discounts (original issue discount and warrant discount), respectively, and are being amortized over then note’s term of 12 months, and as redemptions occur the Company writes off the proportional amount of the original deferred issuance cost to interest expense.

Under the terms of the agreement, beginning October 1, 2008, the Company is to amortize the note resulting in complete repayment by the maturity date. The Company may make the amortization payment in either cash or equity. If the payment is made in common stock, the stock will be issued at a price per share equal to the lesser of (i) the then conversion price, and (ii) 80% of the weighted average price for common shares for the 10 trading days prior to the amortization payment date.

The agreement entered into provides that the Company will pay certain cash amounts as liquidated damages in the event that the Company does not maintain an effective registration statement, or if the Company fails to timely execute stock trading activity. Additionally, penalties will be incurred by the Company in the event of potential default conditions.

The agreement included a number of other embedded derivative instruments, and the Company has complied with the provisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”, and recorded the fair value of the convertible debentures, and related embedded derivatives. The fair value of the debentures and related derivative instruments was valued using a combination of Binomial and Black-Scholes models, resulting in a fair value of $4,570,649 at April 4, 2008. The excess of $531,769 of this value over the face value of the note was recorded through the results of operations as charges related to issuance of April 2008 convertible note payable.

At June 30, 2008, the note and related embedded derivatives outstanding were again valued at fair value using a binomial option pricing model, resulting in the changes shown in the following table in the fair values of the respective liabilities versus the values at April 4, 2008. The changes were recorded through the results of operations as an adjustment to fair value of derivatives.

				Fair Value at
				April 4,		June 30,		Increase
Face Amount		Net Purchase Price		2008		2008		(Decrease)
$	4,038,880	$	3,218,232	$	4,570,649	$	4,429,544	$	(141,105	)

The following table summarizes the April 2008 convertible debentures and discounts outstanding at June 30, 2008:

	June 30, 2008
April 2008 convertible debentures at fair value	$	4,429,544
Original issue discount		(625,042	)
Warrant derivative discount		(1,970,770	)

Net convertible debentures	$	1,833,732
Less current portion		(1,833,732	)

April 2008 convertible debenture and embedded derivatives - long term	$	-

As of April 30, 2009, no repayments or redemptions had been made on the debenture. As of June 30, 2008, the outstanding principal amount for the 2008 Convertible Debentures is $4,038,880. Interest expense for the three and six months ended June 30, 2008 was $817,125.

6. CONVERTIBLE NOTES PAYABLE—FEBRUARY 2008

The Company issued and sold a $600,000 unsecured convertible note dated as of February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of $500,000 (reflecting a 16.66% original issue discount) in a private placement. Note A bears interest at the rate of 12% per annum, and is due by February 15, 2010. At any time after the 180th day following the effective date of Note A, the holder may at its election convert all or part of Note A plus accrued interest into shares of the Company's common stock at the conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest trade prices in the 20 trading days prior to the conversion. Pursuant to the Use of Proceeds Agreement entered into in connection with the issuance of Note A, the Company is required to use the proceeds from Note A solely for research and development dedicated to adult stem cell research.

Effective February 15, 2008, in exchange for $1,000,000 in the form of a Secured & Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the Company, the Company issued and sold an unsecured convertible note (“Note B”) to JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may be paid towards the balance of the JMJ Note. Note B bears interest at the rate of 10% per annum, and is due by February 15, 2010. At any time following the effective date of Note B, the holder may at its election convert all or part of Note B plus accrued interest into shares of the Company’s common stock at the conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest trade prices in the 20 trading days prior to the conversion. In connection with the issuance of Note B, the Company entered into a Collateral and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant to which the Company granted JMJ Financial a security interest in certain of its assets securing the JMJ Note. As of June 30, 2008, the Company had drawn down and received the following amounts under Note B:

· On March 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue discount).

· On June 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue discount).

Pursuant to the Use of Proceeds Agreement entered into in connection with the issuance of Note B, the Company is required to use the proceeds from Note B solely for research and development dedicated to adult stem cell research.

The conversion provisions included in Note A and Note B represent embedded derivative instruments. Accordingly, the Company has complied with the provisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”. The fair values of Note A and Note B and related embedded derivatives, valued using a Monte Carlo simulation model, were recorded as of February 15, 2008. The excess of these values over the face values of Note A and Note B was recorded through the results of operations as charges related to issuance of February 2008 convertible notes payable.

At June 30, 2008, Note A and Note B and related embedded derivatives outstanding were again valued at fair value using a Monte Carlo simulation model, resulting in the changes shown in the following table in the fair values of the respective liabilities versus the values at February 15, 2008, March 17, 2008, and June 17, 2008. The decreases were recorded through the results of operations as an adjustment to fair value of derivatives.

					Fair Value at
					February 15,			June 30,		Increase
	Face Amount		Net Purchase Price		2008			2008		(Decrease)
Note A	$	600,000	$	500,000	$	1,229,466		$	954,912	$	(274,554	)
Note B, Tranche 1		60,000		50,000		116,107	*		96,014		(20,093	)
Note B, Tranche 2		60,000		50,000		110,641	**		96,015		(14,626	)
Total	$	720,000	$	600,000	$	1,456,214		$	1,146,941	$	(309,273	)

Fair value at March 17, 2008

Fair value at June 17, 2008

The following table summarizes the February 2008 convertible debentures and discounts outstanding at June 30, 2008:

February 2008 convertible debentures at fair value	$	1,146,941
Original issue discount	$	(98,119	)

Net convertible debentures		1,048,822
Less current portion		(634,581	)

February 2008 convertible debenture and embedded derivatives - long term	$	414,241

As of June 30, 2008, the outstanding principal amount for the 2008 Convertible Debentures is $720,000. Interest expense for the three and six months ended June 30, 2008 was $5,006 and $21,881, respectively.

7. CONVERTIBLE DEBENTURES—2007

On August 31, 2007 the Company entered into a Securities Purchase Agreement with accredited investors for the issuance of an aggregate of $12,550,000 principal amount of convertible debentures with an original issue discount of $2,550,000 representing approximately 20.3%. In connection with the closing of the sale of the debentures, the Company received gross proceeds of $10,000,000. The convertible debentures are convertible at the option of the holders into 36,911,765 shares of common stock at a fixed conversion price of $0.34 per share, subject to anti-dilution and other customary adjustments. In connection with the Securities Purchase Agreement, the Company also issued warrants to purchase an aggregate of 43,240,655 shares of its common stock. The term of the warrants is five years and the exercise price is $0.38 per share, subject to anti-dilution and other customary adjustments. The conversion price and warrant exercise price have each been modified for those subscribers who also participated in the April 2008 convertible note. See Note 5. The investors have contractually agreed to restrict their ability to convert the convertible debentures, exercise the warrants and exercise the additional investment right and receive shares of the Company’s common stock such that the number of shares of the Company’s common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the Company’s then issued and outstanding shares of its common stock.

The April 2008 note (See Note 5) contains a provision that modifies the conversion rate to $0.15 per common share and a warrant exercise price of $0.165 per common share, issued to the April 2008 note payable subscribers who are also participants in the 2007 debentures. The Company has considered the impact of Emerging Issue Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of FASB No. 15, and 05 - 7—Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues on the accounting treatment of the change in conversion price of the 2007 Convertible Debentures. EITF 96 - 19 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The Company has concluded that the change in conversion price and warrant exercise price does not constitute a significant change in the nature of the debt and that the transaction should not be treated as an extinguishment of that debt. The Company recorded an additional debt discount in the amount of $451,389 in its accompanying consolidated balance sheets at June 30, 2008 for the impact of the change in the conversion price. See Note 5.

The agreements entered into provide that the Company will pay certain cash amounts as liquidated damages in the event that the Company does not maintain an effective registration statement, or if the Company fails to timely execute stock trading activity.

Under the terms of the agreements, principal amounts owed under the debentures become due and payable commencing six months following closing of the transaction. At that time, and each month thereafter, the Company is required to either repay 1/30 of the outstanding balance owed in common stock at the lesser of $0.34 per share or 80% of the prior ten day’s average closing stock price, immediately preceding the redemption. The agreements also provide that the Company may force conversion of outstanding amounts owed under the debentures into common stock, if the Company has met certain conditions and milestones, and additionally, has a stock price for 20 consecutive trading days that exceeds 200% of the conversion price.

The agreement included a number of other embedded derivative instruments, and the Company has complied with the provisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”, and recorded the fair value of the convertible debentures, and related embedded derivatives, as of August 31, 2007. The fair value of the debentures and related derivative instruments was valued using a combination of Binomial and Black-Scholes models, resulting in a fair value of $11,875,539. The excess of this value over the face value of the convertible debentures was recorded through the results of operations as charges related to issuance of 2007 convertible debentures and warrants.

The 2007 convertible debentures and related embedded derivatives outstanding at June 30, 2008 were again valued at fair value using a combination of Binomial and Black-Scholes models, resulting in an increase in the fair value of the liability of approximately $1,518,774 for the three months ended June 30, 2008 and $1,301,276 for the six months ended June 30, 2008, which was recorded through the results of operations as an adjustment to fair value of derivatives.

In connection with this financing, the Company paid cash fees to a placement agent of $1,001,800 and issued a warrant to purchase 6,328,890 shares of common stock at an exercise price of $0.38 per share (modified for holders who are also subscribers of the April 2008 note payable – see Note 5). The initial fair value of the warrant was estimated at approximately $2,025,000 using the Black-Scholes pricing model. The broker-dealer warrants were again valued at June 30, 2008 at fair value using the Black-Scholes model, resulting in a decrease in the fair value of the liability from December 31, 2007 of approximately $536,500, which was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes model at June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of 3.34%, and (4) expected life of 4.25 years. Cash fees paid, and the initial fair value of the warrant, have been capitalized as debt issuance costs and are being amortized over 36 months, and as redemptions occur the Company writes off the proportional amount of the original deferred issuance cost to interest expense.

The following table summarizes the 2007 Convertible Debentures and discounts outstanding at June 30, 2008 and December 31, 2007:

	June 30, 2008			December 31, 2007
2007 convertible debentures at fair value	$	8,042,647		$	11,622,078
Original issue discount		(2,848,949	)		(6,063,955	)
Warrant derivative discount		(1,232,256	)		(2,075,581	)

Net convertible debentures	$	3,961,442		$	3,482,542
Less current portion		(1,800,655	)		(1,160,847	)

2007 convertible debenture and embedded derivatives - long term	$	2,160,787		$	2,321,695

As of June 30, 2008, the outstanding principal amount for the 2007 Convertible Debentures is $7,669,282. Interest expense for the three and six months ended June 30, 2008 was $4,170,216 and $5,817,827, respectively.

8. CONVERTIBLE DEBENTURES—2006

On September 6, 2006, the Company entered into a Securities Purchase Agreement with accredited investors for the issuance of an aggregate of $10,981,250 principal amount of convertible debentures with an original issue discount of $2,231,250 representing approximately 20.3%. In connection with the closing of the sale of the debentures, the Company received gross proceeds of $8,750,000. The Company may make the amortization payment in either cash or equity. If the payment is made in common stock, the stock will be issued at a price per share equal to the lesser of (i) the then conversion price, and (ii) 85% of the weighted average price for common shares for the 10 trading days prior to the amortization payment date. The convertible debentures are convertible at the option of the holders into 38,129,340 shares of common stock at a fixed conversion price of $0.288 per share, subject to anti-dilution and other customary adjustments.

The April 2008 note (see Note 5) contains a provision that modifies the conversion rate to $0.15 per common share and a warrant exercise price of $0.165 per common share, issued to the April 2008 note payable subscribers who are also participants in the 2006 debentures. The Company has considered the impact of Emerging Issue Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of FASB No. 15, and 05 - 7—Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues on the accounting treatment of the change in conversion price of the 2006 Convertible Debentures. EITF 96 - 19 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The Company has concluded that the change in conversion price and warrant exercise price does not constitute a significant change in the nature of the debt and that the transaction should not be treated as an extinguishment of that debt. The Company recorded an additional debt discount in the amount of $396,199 in its accompanying consolidated balance sheets at June 30, 2008 for the impact of the change in the conversion price. See Note 5.

The following table summarizes the 2006 Convertible Debentures and discounts outstanding at June 30, 2008 and December 31, 2007:

	June 30,			December 31,
	2008			2007
2006 convertible debentures at fair value	$	2,445,797		$	7,386,912
Original issue discount		(865,519	)		(3,777,403	)
Warrant derivative discount		(272,312	)		(562,018	)

Net convertible debentures	$	1,307,966		$	3,047,491
Less current portion		(1,087,454	)		(1,625,327	)

2006 convertible debenture and embedded derivatives - long term	$	220,512		$	1,422,164

In connection with this financing, the Company paid cash fees to a broker-dealer of $525,000 and issued a warrant to purchase 4,575,521 shares of common stock at an exercise price of $0.3168 per share (modified for holders who are also subscribers of the April 2008 note payable – see Note 5). The broker-dealer warrants were again valued at June 30, 2008 at fair value using the Black-Scholes model, resulting in a decrease in the fair value of the liability of approximately $1,397,605 and $1,478,336 for the three and six months ended June 30, 2008, respectively, which was recorded through the results of operations as a debit to Adjustments to Fair Value of Derivatives. The assumptions used in the Black-Scholes model at June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 144% to 146%, (3) risk-free interest rate of 2.1% to 2.9%, and (4) expected life of 3.4 years. Cash fees paid, and the initial fair value of the warrant, have been capitalized as debt issuance costs and are being amortized over 36 months, and as redemptions occur the Company writes off the proportional amount of the original deferred issuance cost to interest expense.

As of June 30, 2008, the outstanding principal amount for the 2006 Convertible Debentures is $2,221,579. Interest expense for the three and six months ended June 30, 2008 was $2,880,835 and $4,893,878, respectively.

9. CONVERTIBLE DEBENTURES—2005

On September 15, 2005, the Company entered into a Securities Purchase Agreement with accredited investors for the issuance of an aggregate of $22,276,250 principal amount of convertible debentures with an original issue discount of $4,526,250 representing approximately 20.3%. In connection with the closing of the sale of the debentures, the Company received gross proceeds of $17,750,000.

The agreement included a number of embedded derivative instruments that required separate valuation in accordance with the requirements of FAS 133, EITF 05 - 04 and related accounting literature. The following summarizes the fair values of embedded derivatives at June 30, 2008 and December 31, 2007, followed by a description of the valuation methodology utilized to determine fair values:

	Fair value		Fair value
	June 30,		December 31,
Embedded Derivative Liability (Asset)	2008		2007
Conversion feature	$	5	$	1,736
Anti-dilution protection		20,021		194,356
Default provisions		1,426		3,122
Company right to force conversion		-		-
	$	21,452	$	199,214

The fair value at June 30, 2008 of the derivative for the conversion feature was valued as an American call option using the Binomial Option Pricing Model with the following inputs: (1) closing stock price from $0.08 to $0.12 (2) exercise price equal to the $0.34 conversion price (3) volatility based upon the Company’s stock trading of 103% to 144% (4) Treasury note rates with terms commensurate with the remaining term of the Notes of 1.5% to 1.9%, and (5) duration of the note as an amortizing debenture of approximately 0.04 to 0.09 years.

The fair value at June 30, 2008 of the derivative for anti-dilution protection was valued using a standard put option binomial model, adjusted for the probability of subsequent financing at prices below the principal’s conversion option with the following inputs: (1) closing stock price as of the valuation date from $0.08 to $0.12 (2) exercise price equal to the $0.34 conversion price (3) volatility based upon the Company’s stock trading of 103% to 144% (4) Treasury note rates with terms commensurate with the remaining term of the Notes of 1.5% to 1.9% and (5) duration of the note as an amortizing debenture of approximately 0.04 to 0.09 years.

The fair value at June 30, 2008 of the derivative for contractual default provisions was determined by taking the monthly amortization schedule, and multiplying the result by the contractual penalty of 120%. The present value of this penalty was then adjusted by the estimated probability of default for each valuation date.

The fair value at June 30, 2008 of the derivative asset related to the Company’s right to force conversion was based upon a binomial option pricing model with the following inputs: (1) closing stock price at the valuation date from $0.08 to $0.12 (2) exercise price of $0.68 per share which is required for the forced conversion (3) volatility based upon the Company’s stock trading of 103% to 144% (4) Treasury note rate with terms commensurate with the remaining term of the Notes of 1.5% to 1.9% and (5) duration of the note as an amortizing debenture of approximately 0.04 to 0.09 years.

During the three and six months ended June 30, 2008 a decrease in the fair value of the embedded derivative amounts of approximately $79,309 and $168,857, respectively, was recorded through results of operations as adjustment to fair value of derivatives.

In connection with this financing, we paid cash fees to a broker-dealer of $1,065,000 and issued a warrant to purchase 1,162,239 shares of Common Stock at an exercise price of $2.53 per share. The fair value of the warrant at June 30, 2008 was estimated at approximately $52,000 using the Black-Scholes pricing model. The assumptions used in the Black-Scholes model as of June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of 2.4%, and (4) expected life of 1.3 years. Cash fees paid, and the fair value of the warrant, have been capitalized as debt issuance costs and are being amortized over 36 months, and as redemptions occur the Company writes off the proportional amount of the original deferred issuance cost to interest expense. During the three and six months ended June 30, 2008 the Company recorded approximately $337,770 and $868,114, respectively, as interest expense in its accompanying consolidated statements of operations..

In January 2007, the Company’s Board of Directors agreed to reduce the exercise price of the warrants issued in connection with the 2005 debentures to $0.95 per share and to reduce the conversion price of the debentures to $0.90 per share. The conversion price and warrant exercise price have each been further modified in April 2008 for those subscribers who also participated in the April 2008 convertible note. See Note 5.

The Company has considered the impact of Emerging Issue Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of FASB No. 15, and 05 - 7—Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues on the accounting treatment of the change in conversion price of the 2005 Convertible Debentures described in the paragraph above. EITF 96 - 19 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The Company has concluded that the change in conversion price and warrant exercise price does not constitute a significant change in the nature of the debt and that the transaction should not be treated as an extinguishment of that debt.

Reduction of Exercise Price

On August 24, 2006, the Company’s Board of Directors agreed to reduce the exercise price of the warrants issued in connection with the 2005 debentures from $2.53 per share to $0.95 per share for approximately three days. As a result of this repricing, warrant holders with an aggregate of 4,541,672 warrants exercised their rights generating approximately $4,315,000 of cash proceeds. Warrant holders who exercised their warrants were issued replacement warrants to purchase an equivalent number of shares at an exercise price of $1.60 per share. Warrant holders who did not exercise their warrants had the conversion price of their convertible debentures reduced to $0.95. As a result of anti-dilution protection specified in the original warrant agreement, certain of the warrant holders who did not exercise their warrants received anti-dilution protection and had the number of shares covered under the warrant agreement increased to 2,135,615, and the exercise price reduced to $0.95 per share. One warrant holder waived the right to reprice the holder’s warrant from $2.53 to $0.95 and did not exercise all of the holder’s warrants. The holder’s remaining warrants on an aggregate of 581,119 common shares remain outstanding at an exercise price of $2.53 per share.

The Company has considered the impact of EITFs 96 - 19, 02 - 4 and 05 - 7 on the accounting treatment of the change in conversion price of a portion of the 2005 Convertible Debentures described in the paragraph above. EITF 96 - 19 states that a company should recognize as an extinguishment of debt a significant change in the nature of a debt instrument. EITF 05 - 7 states that if the change in the cash flows of the debt instrument plus the change in the fair value of the conversion derivative as a result of the change is greater than 10%, the change should be treated as significant and the debt is considered extinguished. The Company has concluded that the change in conversion price from $2.30 to $0.95 of a portion of the outstanding Debenture does not constitute an extinguishment of that debt.

Anti-dilution Impact

As a result of the 2007 Financing, described more fully in Note 7, the warrants issued in connection with the 2005 Financing were automatically diluted down to $0.34. The result of this was to impact both the number and price of the original warrants and replacement warrants issued to both the investors and the brokers.

The new number of original warrants issued to investors totaled 2,335,005. The broker-dealer warrants were again valued at June 30, 2008 at fair value using the Black-Scholes model, resulting in a decrease in the fair value of the liability of approximately $141,407 for the three months ended June 30, 2008 and a decrease of $156,014 for the six months ended June 30, 2008, which was recorded through the results of operations as adjustments to fair value of derivatives. The assumptions used in the Black-Scholes model to value the warrants as of June 30, 2008 were as follows: (1) dividend yield of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of 2.63%, and (4) expected life of 2 years.

The new number of replacement warrants issued to investors and brokers totaled 12,689,966. The warrants were valued at June 30, 2008 at fair value using the Black-Scholes model resulting in a decrease in the fair value of the liability of approximately $912,776 for the three months ended June 30, 2008 and a decrease of $956,978 for the six months ended June 30, 2008, which was recorded through the results of operations as a credit to adjustments to fair value of derivatives. The assumptions used in the Black-Scholes model as of June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of 2.9%, and (4) expected life of 3.3 years.

The following table summarizes the 2005 Convertible Debentures and embedded derivatives outstanding at June 30, 2008 and December 31, 2007:

	June 30,			December 31,
	2008			2007
2005 convertible debenture at $0.34 face value	$	185,383		$	1,677,904
Discounts on debentures
Original issue discount		(5,027	)		(152,073	)
Conversion feature derivative		(6,384	)		(193,084	)
Warrant derivative		(8,127	)		(245,825	)
Other derivatives		(311	)		(9,266	)
Net convertible debentures		165,534			1,077,656
Embedded derivatives		21,453			199,215
2005 convertible debentures and embedded derivatives		186,987			1,276,871
less current portion		(186,987	)		(1,276,871	)
2005 convertible debenture and embedded derivatives - long term portion	$	-		$	-

10.	WARRANT DERIVATIVES—OTHER

In January, 2008 the Company issued 680,636 warrants to purchase common stock at $0.39 per share in connection with consulting services provided during the previous quarter. The warrants were initially valued at $112,492 using the Black-Scholes pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 145%; (3) risk-free interest rate of 3.5%, and expected life of 10 years. These warrants are classified as a warrant derivative liability. The warrants were again valued at June 30, 2008 at fair value using the Black-Scholes pricing model resulting in a decrease in the fair value of the liability of $60,377 for the three months ended June 30, 2008 and a decrease in the fair value of the liability of $60,628 for the six months ended June 30, 2008, which was recorded through the results of operations as a debit to adjustments to fair value of derivatives. The assumptions used in the Black-Scholes model as of June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of 4.0%, and (4) expected life of 9.6 years.

11. WARRANT SUMMARY

Warrant Activity

A summary of warrant activity for the six months ended June 30, 2008 is presented below:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value
	Warrants			Price		Life (in years)			(000)
Outstanding, December 31, 2007		96,290,263		$	0.29		3.61	$	454
Granted		27,606,503		$	0.17
Exercised		-		$	-
Forfeited		(6,140,036	)	$	0.25
Outstanding, June 30, 2008		117,756,730		$	0.26		3.69	$	29

Vested and expected to vest at June 30, 2008		117,756,730		$	0.40		4.33	$	-

Exercisable, June 30, 2008		117,631,730		$	0.26		3.69	$	29

The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s common stock as of the reporting date.

A summary of the status of unvested warrants as of June 30, 2008 and changes during the period then ended, is presented below:

		Warrants Outstanding						Warrants Exercisable
				Weighted		Weighted				Weighted
				Average		Average				Average
Exercise		Number		Remaining		Exercise		Number		Exercise
Price		of Shares		Life (Years)		Price		of Shares		Price
$	0.05		950,000		0.48	$	0.05		950,000	$	0.05
	0.17		95,706,496		3.92		0.17		95,706,496		0.17
	0.32		4,575,521		1.13		0.32		4,575,521		0.32
	0.38 - 0.40		8,728,890		4.20		0.38		8,603,890		0.38
	0.85 - 0.96		5,869,831		2.43		0.95		5,869,831		0.95
	2.20		155,917		1.73		2.20		155,917		2.20
	2.48 - 2.54		1,770,075		1.46		2.54		1,770,075		2.54
			117,756,730						117,631,730

The following table summarizes information about warrants outstanding and exercisable at June 30, 2008.

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at January 1, 2008		375,000		$	0.46
Granted		30,606,503			0.11
Vested		(30,856,503	)		0.11
Forfeited		-			-
Unvested at June 30, 2008		125,000		$	0.08

12.	ADJUSTMENT TO FAIR VALUE OF DERIVATIVES

The following table summarizes the components of the adjustment to fair value of derivatives which were recorded as charges to results of operations for the three and six months ended June 30, 2008. The table summarizes by category of derivative liability the (increase) decrease in fair value from market changes during the three and six months ended June 30, 2008, the impact of additional investments and repricing and exercise of certain warrants.

June 30, 2008	Three Months Ended			Six Months Ended
Embedded Pipe derivatives - 9.05	$	79,309		$	168,857
Pipe Hybrid instrument – 9.06		280,948			695,790
Pipe Hybrid- FAS 155 – 8.07		(1,518,774	)		(1,301,276	)
Pipe Hybrid- February 2008		195,270			258,632
Pipe Hybrid- April 2008		141,105			141,105
Original warrants PIPE 2005 , excluding replacement warrants		141,407			156,014
Replacement Warrants		912,776			956,978
Warrants – PIPE 2006-investors		1,397,606			1,478,337
Warrants – PIPE 2007-investors		3,338,410			3,286,787
Warrants – PIPE 2008-investors		816,232			816,232
Other Warrant Derivatives- 2005 and 2006		1,173,275			1,296,746
Other Warrants Derivatives - 2007		249,341			272,974

	$	7,206,905		$	8,227,176

13.	STOCKHOLDERS’ EQUITY TRANSACTIONS

The Company is authorized to issue two classes of capital stock, to be designated, respectively, Preferred Stock and Common Stock. The total number of shares of Preferred Stock the Company is authorized to issue is 50,000,000 par value $0.001 per share. The total number of shares of Common Stock the Company is authorized to issue is 500,000,000, par value $0.001 per share. The Company had no Preferred Stock outstanding as of June 30, 2008 and had 174,828,360 shares of Common Stock outstanding as of June 30, 2008.

Effective as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior Vice President, General Counsel and Secretary, resigned from his positions with the Company and terminated his employment arrangement with the Company. Pursuant to the terms of an agreement between the Company and Mr. Atzen effective April 1, 2008, the Company agreed to (i) pay Mr. Atzen $48,333.33 in cash as a severance payment, (ii) issue a fully vested option to purchase an aggregate of 400,000 shares of common stock pursuant to the Company’s 2005 Stock Incentive Plan, as amended (the “2005 Plan”), (iii) issue an aggregate of 936,692 shares of the common stock pursuant to the 2005 Plan, (iv) provide for the vesting of all outstanding stock options held by Mr. Atzen and (v) provide Mr. Atzen and his family with full healthcare and dental coverage for a period of 6 months as was provided to Mr. Atzen during his employment.

Effective as of March 17, 2008, Ivan Wolkind, the Company's Senior Vice President—Finance, Administration & Chief Accounting Officer, resigned from all positions with the Company and voluntarily terminated his employment arrangement with the Company for personal reasons. On April 2, 2008, the Company entered into a Consulting Agreement with Mr. Wolkind. Pursuant to the Consulting Agreement, Mr. Wolkind agreed for a period of 90 days to provide up to 20 hours per week of financial consulting services to the Company including but not limited to (i) assisting with general accounting and investor diligence, (ii) commenting on the structure of proposed financial transactions, (iii) responding to queries regarding ACT's corporate structure, and (iv) reviewing strategic and financial documents as appropriate. As consideration for the services to be provided, the Company agreed to pay Mr. Wolkind an aggregate of $45,834 of which was paid on April 2, 2008. As additional consideration for the services to be provided, the Company agreed to issue to Mr. Wolkind 238,719 shares of common stock pursuant to the 2005 Plan. On May 2, 2008, the consulting contract was terminated with no future payments due.

14.	STOCK-BASED COMPENSATION

Stock Plans

On August 12, 2004, ACT’s Board of Directors approved the establishment of the 2004 Stock Option Plan (the “2004 Stock Plan”). Stockholder approval was received on December 13, 2004. The total number of common shares available for grant and issuance under the plan may not exceed 2,800,000 shares, subject to adjustment in the event of certain recapitalizations, reorganizations and similar transactions. Common stock purchase options may be exercisable by the payment of cash or by other means as authorized by the Board of Directors or a committee established by the Board of Directors. At June 30, 2008, ACT had granted 2,492,000 common share purchase options under the plan. At June 30, 2008, there were 308,000 options available for grant under this plan.

On December 13, 2004, ACT’s Board of Directors and stockholders approved the establishment of the 2004 Stock Option Plan II (the “2004 Stock Plan II”). The total number of common shares available for grant and issuance under the plan may not exceed 1,301,161 shares, subject to adjustment in the event of certain recapitalizations, reorganizations and similar transactions. Common stock purchase options may be exercisable by the payment of cash or by other means as authorized by the Board of Directors or a committee established by the Board of Directors. At June 30, 2008, ACT had granted 1,301,161 common share purchase options under the plan. At June 30, 2008, there were no options available for grant under this plan.

On January 31, 2005, the Company’s Board of Directors approved the establishment of the 2005 Stock Incentive Plan (the “2005 Plan”), subject to approval of our shareholders. The total number of common shares available for grant and issuance under the plan may not exceed 9 million shares, plus an annual increase on the first day of each of the Company’s fiscal years beginning in 2006 equal to 5% of the number of shares of our common stock outstanding on the last day of the immediately preceding fiscal year, subject to adjustment in the event of certain recapitalizations, reorganizations and similar transactions. On January 24, 2008, the Company’s shareholders approved an increase of 25,000,000 shares to the 2005 Plan. Common stock purchase options may be exercisable by the payment of cash or by other means as authorized by the Board of Directors or a committee established by the Board of Directors. At June 30, 2008, we had granted 19,958,707 (net of forfeitures) common stock purchase options and 4,964,010 shares of common stock under the plan. At June 30, 2008, there were 17,718,017 options available for grant under this plan.

Stock Option Activity

A summary of option activity for the six months ended June 30, 2008 is presented below:

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value
	Options			Price		Life (in years)			(000)
Outstanding, December 31, 2007		11,620,971		$	0.78		7.16	$	255
Granted		11,875,734		$	0.21
Exercised		(1,200,000	)	$	0.05
Forfeited		(7,910,681	)	$	0.52
Outstanding, June 30, 2008		14,386,024		$	0.51		8.18	$	28

Vested and expected to vest at June 30, 2008		13,444,547		$	0.28		9.39	$	-

Exercisable, June 30, 2008		7,143,896		$	0.75		6.94	$	28

The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s common stock as of the reporting date.

A summary of the status of unvested employee stock options as of June 30, 2008 and changes during the period then ended, is presented below:

				Weighted
				Average
				Grant Date
				Fair Value
	Shares			Per Share
Unvested at January 1, 2008		783,814		$	0.46
Granted		11,875,734		$	0.21
Vested		(1,278,168	)	$	0.40
Forfeited		(4,377,758	)	$	0.26
Unvested at June 30, 2008		7,003,622		$	0.26

As of June 30, 2008, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $2,294,000, which is expected to be recognized over a weighted average period of approximately 9.51 years.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2008.

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
Exercise	Number		Remaining		Exercise		Number		Exercise
Price	of Shares		Life (Years)		Price		of Shares		Price
0.05		922,000		6.12	$	0.05		922,000	$	0.05
0.21		7,440,000		9.61		0.21		757,414		0.21
0.25		1,301,161		6.45		0.25		1,301,161		0.25
0.35		65,000		8.04		0.35		31,146		0.35
0.75 - 0.76		20,000		8.33		0.75		8,337		0.75
0.85		3,455,446		6.56		0.85		3,075,445		0.85
1.35		235,000		7.81		1.35		195,323		1.35
2.04 - 2.11		295,000		7.49		2.07		229,271		2.07
2.20 - 2.48		652,417		7.15		2.34		623,799		2.34
		14,386,024						7,143,896

15.	COMMITMENTS AND CONTINGENCIES

The Company entered into a lease for office and laboratory space in Massachusetts commencing December 2004 and expiring April 2010, and for office space in Los Angeles, California commencing November 2005 and expiring May 2008. The Company’s rent at its Los Angeles, California site was on a month-to-month basis after May 2008. Annual minimum lease payments are as follows:

Year 1	$	236,304
Year 2		196,920
Total	$	433,224

Rent expense recorded in the financial statements for the three months ended June 30, 2008 and 2007 was approximately $310,000 and $324,000, respectively. Rent expense recorded in the financial statements for the six months ended June 30, 2008 and 2007 was approximately $721,000 and $652,000, respectively.

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

As stated in Note 13, effective as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior Vice President, General Counsel and Secretary, resigned from his positions with the Company and terminated his employment arrangement with the Company. Mr. Atzen had no disagreements with the Company, its Board of Directors or its management in any matter relating to the Company’s operations, policies or practices.

As stated in Note 13, effective as of March 17, 2008, Ivan Wolkind, the Company's Senior Vice President—Finance, Administration & Chief Accounting Officer, resigned from all positions with the Company and voluntarily terminated his employment arrangement with the Company for personal reasons. Mr. Wolkind had no disagreements with the Company, its Board of Directors or its management in any matter relating to the Company’s operations, policies or practices.

On May 26, 2008, Alan G. Walton, Ph., D.Sc. announced his resignation from the Board of Directors of the Company, effective immediately. Dr. Walton had no disagreements with the Company, its Board of Directors or its management in any matter relating to the Company’s operations, policies or practices.

On May 31, 2008, the Company settled a dispute as a subtenant to its Alameda, California office for nonpayment of rent to its sublandlord. The sublease expired on May 31, 2008. As of that date, $445,000 of base rent, additional rent, and equipment payments, plus late fees and costs due under the sublease for a grand total of approximately $475,000 remained unpaid during the period from January 1, 2008 through May 31, 2008. On the date of the lease expiration, the Company vacated the premises but failed to remove the equipment that belonged to the Company. Consequently, the Company has agreed to assign all rights to the equipment to the sublandlord in partial settlement of amounts owed. Further, the Company has agreed to assign the sublandlord 62.5% of the Company’s right, title, and interest in all royalties and 65% of subtenant’s right, title, and interest in all other consideration payable to the Company under a license agreement with Embryome Sciences, Inc., dated July 10, 2008, until such time as the sublandlord has received royalty and other payments equal to $475,000, including the value of the equipment assigned to the sublandlord. Accordingly, the Company has recorded accrued rents relating to this matter in the amount of $448,000, which is the $475,000 settlement amount net of the withheld deposit of $27,000, in the accompanying consolidated balance sheet at June 30, 2008.

The Company and its subsidiary Mytogen, Inc. are currently defending themselves against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a property vacated by the Company and Mytogen effective May 31, 2008. In that action, Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging that it has been unable to relet the premises and therefore seeking rent for the vacated premises since September 2008. Alexandria is also seeking certain clean-up and storage expenses. The Company is defending against the suit, claiming that ARE had breached the covenant of quiet enjoyment as of when Mytogen vacated, and that had ARE used reasonable diligence in its efforts to secure a new tenant, it would have been more successful. No trial date has been set. At this time, management cannot determine the amount of a potential settlement and thus no amount has been accrued in its financial statements.

16.	INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 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 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Due to the fact that the Company has substantial net operating loss carryforwards, adoption of FIN 48 had no impact on the Company’s beginning retained earnings, balance sheets, or statements of operations.

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

The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax expense. The Company did not have any unrecognized tax benefits as of June 30, 2008 and 2007. As a result, the Company did not recognize interest expense, and additionally, did not record any penalties during the three and six months ended June 30, 2008 and 2007. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

17.	SUBSEQUENT EVENTS

On July 10, 2008, the Company granted an exclusive license to Embryome Sciences, Inc., a wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate” embryonic stem cell technology and a bank of over 140 diverse progenitor cell lines derived using that technology. Under the agreement, the Company received an up-front payment of $470,000, and is eligible to receive an 8% royalty on sales of products, services, and processes that utilize the licensed technology. However, in connection with the rent judgment discussed in the following paragraph, in connection with unpaid rents settled with its landlord, the Company has assigned the landlord rights and interest to 62.5% of all royalties on this contract, and 65% of all other consideration payable under this license agreement until such time that the Company has repaid amounts owed to the landlord that total $475,000.

On August 6, 2008, the Company issued a moratorium on amortization of all outstanding debentures at June 30, 2008 and September 30, 2008. As of April 30, 2009, the moratorium remains in effect. See Notes 5, 6, 7, 8, and 9 for descriptions of these debentures. Under the terms of the debenture agreements, the moratorium constitutes an event of default and thus the debentures all incur default interest penalties. The debenture agreement requires in the event of default that the full principle amount of the debentures, together with other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder’s election, immediately due and payable in cash. The aggregate amount payable upon event of default shall be equal to the mandatory default amount. The mandatory default amount equals the sum of (i) the greater of: (A) 120% of the principle amount of the debentures to be repaid plus 100% of the accrued and unpaid interest, or (B) the principle amount of the debentures to be repaid, divided by the conversion price on (x) the date the mandatory default amount came due or (y) the date the mandatory default amount is paid in full, whichever is less, multiplied by the closing price on (x) the date the mandatory default amount is demanded or otherwise due or (y) the date the mandatory default amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect to the debentures. Commencing 5 days after the occurrence of any event of default that results in the eventual acceleration of the debentures, the interest rate on the debentures shall accrue at the rate of 18% per annum.

On September 19, 2008, the Company was delivered judgment with respect to the landlord of its Charlestown, Massachusetts site over unpaid lease amounts. The Company failed to make its monthly lease payments after December 2007, which constituted an event of default under the lease agreement. Accordingly, the Company settled with the landlord in total of $1,689,000 for unpaid rent expenses, attorney fees and damages for unpaid rent incurred through September 9, 2008. The Company settled a portion of amounts owed under the judgment by disposal of its fixed assets at this site through an assignment of all rights to these fixed assets, amounting to $228,000. The Company accrued the remaining $874,000 for the portion of damages incurred from January 1, 2008 through June 30, 2008 in accrued expenses its accompanying balance sheet at June 30, 2008. The Company has recorded the remaining $587,000 in the three months ended September 30, 2008 in accrued expenses in it accompanying balance sheet. As of April 30, 2009, the Company had paid the entire amount under the judgment and no longer has any obligations with respect to this judgment.

Between September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit Court of the Twelfth Judicial District Circuit for Sarasosa County, Florida to settle certain past due accounts payable. The Company settled the accounts payable by the issuance of shares of its common stock, based on a formula that divides the amount due in dollars by the settlement date stock price, and multiplied by a specified factor. In aggregate, the Company settled $1,108,673 in accounts payable through the issuance of 260,116,283 shares of its common stock.

On December 18, 2008, the Company entered into a license agreement with Transition for certain of its non-core technology. Under the agreement, Transition agreed to acquire a license to the technology for $3.5 million in cash. As of April 30, 2009, the Company has received the entire $3.5 million in cash under this agreement. The Company expects to apply the proceeds towards its retinal epithelium (“RPE”) cells program.

On March 1, 2009, the Company vacated a site in Los Angeles, California and moved to another site in Los Angeles. The lease term is through February 28, 2010. Monthly base rent is $2,170.

On March 5, 2009, the Company settled a lawsuit originally brought by Alpha Capital on February 11, 2009, who is an investor in the 2006, 2007, and 2008 debentures, and associated with the default on August 6, 2008 on all debentures. In settlement of the lawsuit, the Company agreed to reduce the conversion price on convertible debentures held by Alpha Capital to $0.02 per share, effective immediately, so long as the Company has a sufficient number of authorized shares to honor the request for conversion.

On March 11, 2009, the Company entered into a $5 million credit facility (“Facility”) with a life sciences fund. Under the agreement, the proceeds from the Facility must be used exclusively for the Company to file an investigational new drug (“IND”) for its RPE program, and will allow the Company to complete both Phase I and Phase II studies in humans. An IND is required to commence clinical trials. Under the terms of the agreement, the Company may draw down funds, as needed for clinical development of the RPE program, from the investor through the issuance of Series A-1 convertible preferred stock. The preferred stock pays dividends, in kind of preferred stock, at an annual rate of 10%, matures in four years from the drawdown date, and is convertible into common stock at $0.75 per share. As of April 30, 2009, the Company has not drawn down any money on this credit facility.

CHA Bio & Diostech Co., Ltd.

On December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”), a leading Korean-based biotechnology company focused on the development of stem cell technologies, formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International, will develop human blood cells and other clinical therapies based on certain of the Company’s core cell technology. Under the terms of the agreement, the Company has exclusively licensed to the joint venture, which is majority owned by CHA, core stem cell technology. The Company has also contributed certain of its own research and science personnel to the joint venture. Additionally, the Company has agreed to collaborate with the joint venture in securing grants to further research and development of its technology. In return, CHA has agreed to contribute $500,000 in working capital for the venture as well as paying the Company a license fee of $500,000. As of April 30, 2009, CHA has paid the Company the entire $500,000 towards payment of the license fee.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the materials incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue” and variations thereof, and other statements contained in quarterly report, and the exhibits hereto, regarding matters that are not historical facts and are forward-looking statements. Because these statements involve risks and uncertainties, as well as certain assumptions, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to risks inherent in: our early stage of development, including a lack of operating history, lack of profitable operations and the need for additional capital; the development and commercialization of largely novel and unproven technologies and products; our ability to protect, maintain and defend our intellectual property rights; uncertainties regarding our ability to obtain the capital resources needed to continue research and development operations and to conduct research, preclinical development and clinical trials necessary for regulatory approvals; uncertainty regarding the outcome of clinical trials and our overall ability to compete effectively in a highly complex, rapidly developing, capital intensive and competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth on page 17 herein for a more complete discussion of these factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Explanatory Note

As previously disclosed in its Form 8-K filed on March 27, 2008, as amended on April 7, 2008, Advanced Cell Technology, Inc. (the “Company”) determined that it is required to amend and restate its previously issued audited consolidated financial statements and other financial information for the year ended December 31, 2006, and the unaudited consolidated financial statements for the quarters ended September 30, 2006, March 31, 2007, June 30, 2007, and September 30, 2007 (the “First Restatement Periods”) as a result of errors associated with the Company’s valuation of certain warrants.

As previously disclosed in its Form 8-K filed on June 30, 2008, in mid-May 2008 the Company discovered that the Discounts and Deferred Issuance costs related to its outstanding debentures had been amortized over a period longer than the weighted average life of the instruments, with the result that the discounts and debt issuance costs should have been charged to interest expense on a faster basis than previously reported. Upon learning of the error the Company has recalculated the amortization and resulting interest expense. The Company also discovered that its calculation of the weighted average shares used in calculating basic and diluted earnings per share for the three month period ended March 31, 2007 was in error, with the actual weighted average shares being approximately 6.2 million higher than reported. On June 24, 2008, the Company’s management and the Audit Committee of its Board of Directors determined that the Company is required to amend and restate its previously issued audited consolidated financial statements and other financial information for the year ended December 31, 2007, and the unaudited consolidated financial statements for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007 (the “Second Restatement Periods” together with the First Restatement Periods, the “Relevant Periods”).

These restatements are outlined in Note 2 to the Consolidated Financial Statements. The reader should not rely on the prior annual and quarterly filings for the Relevant Periods with the exception of the Company’s Annual Report on Form 10-KSB originally filed on April 18, 2008 and amended on June 30, 2008. This Quarterly Report on Form 10-Q corrects these errors for the periods reported herein.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue” and variations thereof, and other statements contained in quarterly report, and the exhibits hereto, regarding matters that are not historical facts and are forward-looking statements. Because these statements involve risks and uncertainties, as well as certain assumptions, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to risks inherent in: our early stage of development, including a lack of operating history, lack of profitable operations and the need for additional capital; the development and commercialization of largely novel and unproven technologies and products; our ability to protect, maintain, and defend our intellectual property rights: uncertainties regarding our ability to obtain the capital resources needed to continue research and development operations and to conduct research, preclinical development and clinical trials necessary for regulatory approvals; uncertainty regarding the outcome of clinical trials and our overall ability to compete effectively in a highly complex, rapidly developing, capital intensive and competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth below on page 17 for a more complete discussion of these factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

CRITICAL ACCOUNTING POLICIES

Deferred Issuance Cost— Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures. The weighted average amortization period for deferred debt issuance costs is 36 months.

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

FAS 133, “Accounting for Derivative Instruments and Hedging Activities” requires bifurcation of embedded derivative instruments and measurement of fair value for accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid Financial Instruments” requires measurement of fair values of hybrid financial instruments for accounting purposes. We applied the accounting prescribed in FAS 133 to account for its 2005 Convertible Debenture as described in Note 9 of the Financial Statements. We applied the accounting prescribed in FAS 155 to account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures as described in Notes 5, 6, 7, and 8 of the Financial Statements. In determining the appropriate fair value, we used Level 2 inputs for our valuation methodology including Black-Scholes models, Binomial Option Pricing models, Standard Put Option Binomial models and the net present value of certain penalty amounts. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.

At June 30, 2008, we identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

	Fair Value		Fair Value Measurements at June 30, 2008
	As of		Using Fair Value Hierarchy
Derivative Liabilities	June 30, 2008		Level 1		Level 2		Level 3
Conversion feature - 2005 debenture	$	5		-	$	5		-
Anti-dilution provision - 2005 debenture		20,021		-		20,021		-
Default provisions - 2005 debenture		1,426		-		1,426		-
2006 Convertible debenture and embeded derivatives		2,445,797		-		2,445,797		-
2007 Convertible debenture and embedded derivatives		8,042,647		-		8,042,647		-
February 2008 Convertible debentures and embedded derivatives		1,146,941		-		1,146,941		-
April 2008 Convertible debenture and embedded derivatives		4,429,544		-		4,429,544		-
Warrant and option derivatives		7,504,525		-		7,504,525		-
	$	23,590,906		-	$	23,590,906		-

For the three months ended June 30, 2008 and 2007, we recognized a gain of $7,206,905 and $23,247,555, respectively, for the changes in the valuation of the aforementioned liabilities. For the six months ended June 30, 2008 and 2007, we recognized a gain of $8,227,176 and $11,614,037, respectively, for the changes in the valuation of the aforementioned liabilities.

We did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with FAS 157.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We adopted FAS 159 on January 1, 2008. We chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

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

Stock Based Compensation— Effective January 1, 2006, we adopted the fair value recognition provisions of FAS 123(R), using the modified-prospective transition method. Under this method, stock-based compensation expense is recognized in the consolidated financial statements for stock options granted, modified or settled after the adoption date. In accordance with FAS 123(R), the unamortized portion of options granted prior to the adoption date is recognized into earnings after adoption. Results for prior periods have not been restated, as provided for under the modified-prospective method.

Under FAS 123(R), stock-based compensation expense recognized is based on the value of the portion of share-based payment awards that are ultimately expected to vest during the period. Based on this, our stock-based compensation is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Expected life in years		4.0
Volatility		148	%
Risk free interest rate		2.50	%
Expected dividends	None
Expected forfeitures		13	%

Recent Accounting Pronouncements

In September 2006, the FASB issued FAS 157 “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. We have adopted FAS 157 beginning January 1, 2008 and do not believe the adoption had a material impact on our financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” FAS No. 141 (Revised 2007) changes how a reporting enterprise accounts for the acquisition of a business. FAS No. 141 (Revised 2007) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. FAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. We believe adopting FAS No. 141R will significantly impact our financial statements for any business combination completed after December 31, 2008.

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, we do not expect the adoption of FAS 160 to have a significant impact on our results of operations or financial position.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted FAS No. 159 on January 1, 2008. We chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“FAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the FAS 133 paragraph 11(a) scope exception. We believe adopting this statement will not have a material impact on the financial statements.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the useful life of Intangible Assets”, (“FSP FAS 142-3”) which amends the factors a company should consider when developing renewal assumptions used to determine the useful life of an intangible asset under FAS 142. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FAS 142 requires companies to consider whether renewal can be completed without substantial cost or material modification of the existing terms and conditions associated with the asset. FSP 142-3 replaces the previous useful life criteria with a new requirement—that an entity consider its own historical experience in renewing similar arrangements. If historical experience does not exist then the Company would consider market participant assumptions regarding renewal including 1) highest and best use of the asset by a market participant, and 2) adjustments for other entity-specific factors included in FAS 142. We are currently evaluating the impact that adopting FSP FAS 142-3 will have on the financial statements

In May 2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). We are currently evaluating the impact that adopting FAS No. 162 will have on the financial statements.

In May 2008, the FASB issued FAS 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have an impact on our financial statements.

In June 2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5”. The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. We are currently evaluating the impact that adopting EITF 08-4 will have on the financial statements.

On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption will not have a material impact on the Company’s financial position or results for the year ended December 31, 2008.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 will not have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS

Comparison of Three Months Ended June 30, 2008 and 2007

	Three months ended June 30,						Three months ended June 30,
	2008						2007
	Amount			% of Revenue			Amount		% of Revenue
REVENUE	$	174,388			100.0	%	$	274,326		100.0	%

COST OF REVENUE		120,186			68.9	%		110,318		63.3	%

GROSS PROFIT		54,202			31.1	%		164,008		94.0	%

RESEARCH AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS		2,786,870			1598.1	%		2,819,245		1616.7	%

GENERAL AND ADMINSTRATIVE EXPENSES		1,840,116			1055.2	%		1,246,180		714.6	%

OTHER INCOME (EXPENSE)		(1,016,633	)		-583.0	%		17,103,923		9808.0	%

NET INCOME (LOSS)	$	(5,589,417	)		-3205.2	%	$	13,202,506		7570.8	%

Revenues

Revenues for the three months ended June 30, 2008 and 2007 were $174,388 and $274,326, respectively. These amounts relate primarily to license fees and royalties collected that are being amortized over the period of the license granted, and are therefore typically consistent between periods. The decrease in revenue during the three months ended June 30, 2008 was due to fewer new licenses being granted as compared to the three months ended June 30, 2007.

Research and Development Expenses and Grant Reimbursements

Research and development expenses (“R&D”) for the three months ended June 30, 2008 and 2007 were $2,786,870 and $2,828,842 respectively, a decrease of $41,972. R&D consists mainly of facility costs, payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants, and for scientific research. The minor decline in R&D expenditures during the three months ended June 30, 2008 as compared to the same period in 2007 is primarily due to the fact that we closed our Charlestown, Massachusetts and Alameda, California facilities at the end of May 2008.

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

We do not segregate research and development costs by project because our research is focused exclusively on human stem cell therapies as a unitary field of study. Although we have three principal areas of focus for our research, these areas are completely intertwined and have not yet matured to the point where they are separate and distinct projects. The intellectual property, scientists and other resources dedicated to these efforts are not separately allocated to individual projects, but rather are conducting our research on an integrated basis.

We expect that research and development expenses will continue to increase in the foreseeable future as we add personnel, expand our pre-clinical research, begin clinical trial activities, and increase our regulatory compliance capabilities. The amount of these increases is difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, and initiation of clinical trials. In addition, the results from our basic research and pre-clinical trials, as well as the results of trials of similar therapeutics under development by others, will influence the number, size and duration of planned and unplanned trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with others in the biotechnology or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.

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

Grant reimbursements for the three months ended June 30, 2008 and 2007 were $0 and $9,597, respectively. The grant reimbursement received during the three months ended June 30, 2007 was from the Small Business Technology Transfer Program. We did not receive grant reimbursements during the three months ended June 30, 2008.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2008 and 2007 were $1,840,116 and $1,246,180 respectively, an increase of $593,936. This expense increase was primarily a result of an increase in legal, accounting, investor relations services and other professional costs incurred during the three months ended June 30, 2008.

Other Income (Expense)

Other income (expense), net, for the three months ended June 30, 2008 and 2007 were ($1,016,633) and $17,103,923 respectively. The change in net other income (expense) in the three months ended June 30, 2008, compared to that of the earlier period, relates primarily to adjustments to fair value of derivatives related to the Convertible Debenture financings and the charges related to issuance and repricing of Convertible Debentures. Interest income in the three months ended June 30, 2008 was lower than in the three months ended June 30, 2007 due to the lower cash balances held in interest-bearing deposits during the periods. The increase in interest expense in the three months ended June 30, 2008, compared to the earlier period relates primarily to interest recorded in connection with the convertible debentures, which decreased as principal balances declined.

Net Income (Loss)

Net income (loss) for the three months periods ended June 30, 2008 and 2007 was ($5,589,417) and $13,202,506, respectively. The change in net income (loss) in the current period is the result of changes to the fair value of derivatives, charges related to issuance of Convertible Debentures along with increased general and administrative and research and development expenses, as well as decreased grant reimbursements.

Comparison of Six Months Ended June 30, 2008 and 2007

	Six months ended June 30,						Six months ended June 30,
	2008						2007
				% of						% of
	Amount			Revenue			Amount			Revenue
REVENUE	$	298,731			100.0	%	$	398,669			100.0	%

COST OF REVENUE		310,914			178.3	%		171,754			98.5	%

GROSS PROFIT		(12,183	)		-7.0	%		226,915			130.1	%

RESEARCH AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS		6,649,253			3812.9	%		6,410,751			3676.1	%

GENERAL AND ADMINSTRATIVE EXPENSES		3,565,938			2044.8	%		2,987,284			1713.0	%

OTHER INCOME (EXPENSE)		(4,881,702	)		-2799.3	%		(2,367,375	)		-1357.5	%

NET LOSS	$	(15,109,076	)		-8664.1	%	$	(11,538,495	)		-6616.6	%

Revenues

Revenues for the six months ended June 30, 2008 and 2007 were $298,731 and $398,669, respectively. These amounts relate primarily to license fees and royalties collected that are being amortized over the period of the license granted, and are therefore typically consistent between periods. The decrease in revenue during the six months ended June 30, 2008 was due to fewer new licenses being granted as compared to the six months ended June 30, 2007.

Research and Development Expenses and Grant Reimbursements

Research and development expenses (“R&D”) for the six months ended June 30, 2008 and 2007 were $6,754,422 and $6,477,930 respectively, an increase of $276,492. R&D consists mainly of facility costs, payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants, and for scientific research. The increase in expenses in the current period relates largely to the Company’s Mytogen subsidiary.

Grant reimbursements for the six months ended June 30, 2008 and 2007 were $105,169 and $67,179, respectively, from the Small Business Technology Transfer Program.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2008 and 2007 were $3,565,938 and $2,987,284, respectively, a decrease of $578,654. This expense increase was primarily a result of an increase in legal, accounting, investor relations services, and other professional costs incurred during the six months ended June 30, 2008.

Other Income (Expense)

Other income (expense), net, for the six months ended June 30, 2008 and 2007 was ($4,881,702) and ($2,367,375), respectively. The change in net other income (expense) in the six months ended June 30, 2008, compared to that of the earlier period, relates primarily to interest expense related to the Convertible Debenture financings and the Charges related to issuance and repricing of Convertible Debentures. Interest income in the six months ended June 30, 2008 was lower than in the six months ended June 30, 2007 due to the lower cash balances held in interest-bearing deposits during the periods. The decrease in interest expense in the six months ended June 30, 2008, compared to the earlier period relates primarily to interest recorded in connection with the convertible debentures, which decreased as principal balances declined.

Net Loss

Net loss for the six months periods ended June 30, 2008 and 2007 was $15,109,076 and $11,538,495, respectively. The change in loss in the current period is the result of changes to the fair value of derivatives, interest charges related to convertible debentures and charges related to issuance of Convertible Debentures along with increased general and administrative and research and development expenses, as well as decreased grant reimbursements.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated below:

	Six months ended June 30,
	2008			2007
Net cash used in operating activities	$	(3,754,418	)	$	(7,522,258	)
Net cash used in investing activities		(168,549	)		(49,139	)
Net cash provided by (used in) financing activities		2,790,122			(348,352	)
Net decrease in cash and cash equivalents		(1,132,845	)		(7,919,749	)
Cash and cash equivalents at the end of the period	$	33,271		$	769,587

Operating Activities

Our net cash used in operating activities during the six months ended June 30, 2008 and 2007 was $3,754,418 and $7,522,258, respectively. Cash used operating activities decreased during the current period primarily due to a decrease in cash and cash equivalents available for use during the period.

Cash Flows from Investing and Financing Activities

Cash used in investing activities during the six months ended June 30, 2008 and 2007 was $168,549 and $49,139, respectively. Our cash used in investing activities during each of the two respective periods are primarily attributed to purchases of property and equipment. Cash flows provided by financing activities during the six months ended June 30, 2008 consisted of proceeds of $2,812,432 from the issuance of convertible debentures. During the six months ended June 30, 2007, we made payments of $139,123 on convertible debentures and also made a settlement payment of $170,249.

We are financing our operations primarily from the following activities:

On April 4, 2008, we released closing escrow on the issuance of $4,038,880 of its amortizing senior secured convertible debentures and associated warrants. The net cash and cash in-kind received by the Company related to this financing was $2,332,431.

On April 30, 2008 we received a one time payment of $300,000 from Terumo International which extended their ability to commence a Phase I Clinical Trial in Japan by one year.

On June 17, 2008, the Company drew down $60,000 and received $50,000 (reflecting a 16.66% original issue discount) under Note B described in Note 6 to the financial statements.

On July 10, 2008, we granted an exclusive license to Embryome Sciences, Inc., a wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate” embryonic stem cell technology and a bank of over 140 diverse progenitor cell lines derived using that technology. Under the agreement, we received an up-front payment of $470,000, and are eligible to receive an 8% royalty on sales of products, services, and processes that utilize the licensed technology.

Between September 29, 2008 and January 20, 2009, we settled certain past due accounts payable by the issuance of shares of its common stock. In aggregate, we settled $1,108,673 in accounts payable through the issuance of 260,116,283 shares of our common stock.

On December 1, 2008, we formed an international joint venture with CHA Bio & Diostech Co., Ltd. (“CHA”), a leading Korean-based biotechnology company focused on the development of stem cell technologies. CHA has agreed to contribute $500,000 in working capital for the venture as well as paying the Company a license fee of $500,000. As of April 30, 2009, CHA has paid the Company the entire $500,000 towards payment of the license fee.

On December 18, 2008, we entered into a license agreement with an Ireland-based investor, Transition Holdings Inc. (“Transition”), for certain of our non-core technology. Under the agreement, Transition agreed to acquire a license to the technology for $3.5 million in cash. As of April 30, 2009, we have received the entire $3.5 million in cash under this agreement. We expect to apply the proceeds towards its retinal epithelium (“RPE”) cells program.

On March 30, 2009, we entered into a second license agreement with CHA under which we will license our RPE technology, for the treatment of diseases of the eye, to CHA for development and commercialization exclusively in Korea. We are eligible to receive up to a total of $1.9 million in fees based upon the parties achieving certain milestones, including us making an IND submission to the US FDA to commence clinical trials in humans using the technology. We received an up-front fee under the license in the amount of $750,000. Under the agreement, CHA will incur all of the cost associated with the RPA clinical trials in Korea. The agreement is part of the joint venture between the two companies.

To a substantially lesser degree, financing of our operations is provided through grant funding, payments received under license agreements, and interest earned on cash and cash equivalents.

With the exception of 2002, when we sold certain assets of a subsidiary resulting in a gain for the year, we have incurred substantial net losses each year since inception as a result of research and development and general and administrative expenses in support of our operations. We anticipate incurring substantial net losses in the future.

Our cash and cash equivalents are limited. In the short term, we will require substantial additional funding prior to July 31, 2008 in order to maintain our current level of operations. If we are unable to raise additional funding, we will be forced to either substantially scale back our business operations or curtail our business operations entirely.

On a longer term basis, we have no expectation of generating any meaningful revenues from our product candidates for a substantial period of time and will rely on raising funds in capital transactions to finance our research and development programs. Our future cash requirements will depend on many factors, including the pace and scope of our research and development programs, the costs involved in filing, prosecuting and enforcing patents, and other costs associated with commercializing our potential products. We intend to seek additional funding primarily through public or private financing transactions, and, to a lesser degree, new licensing or scientific collaborations, grants from governmental or other institutions, and other related transactions. If we are unable to raise additional funds, we will be forced to either scale back or business efforts or curtail our business activities entirely. We anticipate that our available cash and expected income will be sufficient to finance most of our current activities for at least four months from the date we file these financial statements, although certain of these activities and related personnel may need to be reduced. We cannot assure you that public or private financing or grants will be available on acceptable terms, if at all. Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our Common Stock.

RISK FACTORS THAT MAY AFFECT OUR BUSINESS

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

Risks Relating to Our Early Stage of Development

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

we have fewer resources than an established company,

our management may be more likely to make mistakes at such an early stage, and

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

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

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

Although we have revenues from license fees and royalties, we have no commercially marketable products and no immediate ability to generate revenue from commercial products, nor any assurance of being able to develop our technologies for commercial applications. As a result, we may never be able to operate profitably. We are just beginning to identify products available for pre-clinical trials and may not receive significant revenues from commercial sales of our products for the next several years, if at all, although we do generate revenues from licensing activities. We have marketed only a limited amount of services based on our technologies and have little experience in doing so. Our technologies and any potential products or services that we may develop will require significant additional effort and investment prior to material commercialization and, in the case of any biomedical products, pre-clinical and clinical testing and regulatory approvals. We cannot assure you that we will be able to develop any such technologies or any products or services, or that such technologies, products or services will prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully marketed. For that reason, we may not be able to generate revenues from commercial production or operate profitably. The December 31, 2007 audit opinion included a going concern paragraph.

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

We will require substantial additional funds to continue operating which may not be available on acceptable terms, if at all. We have losses from operations, negative cash flows from operations and a substantial stockholders’ deficit that raise substantial doubt about our ability to continue as a going concern. We do not believe that our cash from all sources, including cash, cash equivalents and anticipated revenue stream from licensing fees and sponsored research contracts is sufficient for us to continue operations through the next 12 months without raising additional funds.

Management continues to evaluate alternatives and sources for additional funding, which may include public or private investors, strategic partners, and grant programs available through specific states or foundations, although there is no assurance that such sources will result in raising additional capital. Lack of necessary funds may require us to delay, scale back or eliminate some or all of our research and product development programs and/or our capital expenditures, to license our potential products or technologies to third parties, to consider business combinations related to ongoing business operations, or shut down some, or all, of our operations.

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

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

Risks Relating to Competition

Our competition includes both public and private organizations and collaborations among academic institutions and large pharmaceutical companies, most of which have significantly greater experience and financial resources than we do. The biotechnology and pharmaceutical industries are characterized by intense competition. We compete against numerous companies, both domestic and foreign, many of which have substantially greater experience and financial and other resources than we have. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases targeted by us. Companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, many of which have substantially greater resources and experience in our fields than we do, are well situated to effectively compete with us. Any of the world’s largest pharmaceutical companies represents a significant actual or potential competitor with vastly greater resources than ours.

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

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

In addition, many of our competitors have significantly greater experience than we have in the development, pre-clinical testing and human clinical trials of biotechnology and pharmaceutical products, in obtaining FDA and other regulatory approvals of such products and in manufacturing and marketing such products. Accordingly our competitors may succeed in obtaining FDA approval for products more rapidly or effectively than we can. Our competitors may also be the first to discover and obtain a valid patent to a particular stem cell technology which may effectively block all others from doing so. It will be important for us or our collaborators to be the first to discover any stem cell technology that we are seeking to discover. Failure to be the first could prevent us from commercializing all of our research and development affected by that discovery. Additionally, if we commence commercial sales of any products, we will also be competing with respect to manufacturing efficiency and sales and marketing capabilities, areas in which we have no experience.

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

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

Risks Relating to Our Technology

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Product Development

Limited experience in conducting and managing preclinical development activities, clinical trials and the application process necessary to obtain regulatory approvals. Our limited experience in conducting and managing preclinical development activities, clinical trials and the application process necessary to obtain regulatory approvals might prevent us from successfully designing or implementing a preclinical study or clinical trial. If we do not succeed in conducting and managing our preclinical development activities or clinical trials, or in obtaining regulatory approvals, we might not be able to commercialize our product candidates, or might be significantly delayed in doing so, which will materially harm our business.

None of the products that we are currently developing has been approved by the FDA or any similar regulatory authority in any foreign country. Our ability to generate revenues from any of our product candidates will depend on a number of factors, including our ability to successfully complete clinical trials, obtain necessary regulatory approvals and implement our commercialization strategy. In addition, even if we are successful in obtaining necessary regulatory approvals and bringing one or more product candidates to market, we will be subject to the risk that the marketplace will not accept those products. We may, and anticipate that we will need to, transition from a company with a research and development focus to a company capable of supporting commercial activities and we may not succeed in such a transition.

Because of the numerous risks and uncertainties associated with our product development and commercialization efforts, we are unable to predict the extent of our future losses or when or if we will become profitable. Our failure to successfully commercialize our product candidates or to become and remain profitable could depress the market price of our common stock and impair our ability to raise capital, expand our business, diversify our product offerings and continue our operations.

Our approach of using cell-based therapy for the treatment of heart damage is risky and unproven and no products using this approach have received regulatory approval in the United States or Europe. We believe that no company has yet been successful in its efforts to obtain regulatory approval in the United States or Europe of a cell-based therapy product for the treatment of heart disease in humans. Cell-based therapy products, in general, may be susceptible to various risks, including undesirable and unintended side effects, unintended immune system responses, inadequate therapeutic efficacy or other characteristics that may prevent or limit their approval by regulators or commercial use. Many companies in the industry have suffered significant setbacks in advanced clinical trials, despite promising results in earlier trials.

If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, we will not receive regulatory approval for or be able to commercialize our product candidates. Our lead product candidate, our myoblast program, is still in clinical testing and has not yet received approval from the FDA or any similar foreign regulatory authority for any indication. Although this product candidate has received positive results in Phase I and Ib clinical trials, it may never receive regulatory approval or be commercialized in the United States or other countries.

We cannot market any product candidate until regulatory agencies grant approval or licensure. In order to obtain regulatory approval for the sale of any product candidate, we must, among other requirements, provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate to the satisfaction of regulatory authorities that our product candidates are safe and effective for each indication under the applicable standards relating to such product candidate. The preclinical studies and clinical trials of any product candidates must comply with the regulations of the FDA and other governmental authorities in the United States and similar agencies in other countries.

Even though we have achieved positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. For example, our myoblast program has been studied in a limited number of patients to date. Even though our early data has been promising, we have not yet completed any large-scale pivotal trials to establish the safety and efficacy of this therapy. There is a risk that safety concerns relating to our product candidates or cell-based therapies in general will result in the suspension or termination of our clinical trials.

We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent regulatory approval and/or commercialization of our product candidates, including the following:

the FDA or similar foreign regulatory authorities may find that our product candidates are not sufficiently safe or effective or may find our cell culturing processes or facilities unsatisfactory,

officials at the FDA or similar foreign regulatory authorities may interpret data from preclinical studies and clinical trials differently than we do,

our clinical trials may produce negative or inconclusive results or may not meet the level of statistical significance required by the FDA or other regulatory authorities, and we may decide, or regulators may require us, to conduct additional preclinical studies and/or clinical trials or to abandon one or more of our development programs,

the FDA or similar foreign regulatory authorities may change their approval policies or adopt new regulations,

there may be delays or failure in obtaining approval of our clinical trial protocols from the FDA or other regulatory authorities or obtaining institutional review board approvals or government approvals to conduct clinical trials at prospective sites,

we, or regulators, may suspend or terminate our clinical trials because the participating patients are being exposed to unacceptable health risks or undesirable side effects,

we may experience difficulties in managing multiple clinical sites,

enrollment in our clinical trials for our product candidates may occur more slowly than we anticipate, or we may experience high drop-out rates of subjects in our clinical trials, resulting in significant delays,

we may be unable to manufacture or obtain from third party manufacturers sufficient quantities of our product candidates for use in clinical trials, and

our product candidates may be deemed unsafe or ineffective, or may be perceived as being unsafe or ineffective, by healthcare providers for a particular indication.

We depend on third parties to assist us in the conduct of our preclinical studies and clinical trials, and any failure of those parties to fulfill their obligations could result in costs and delays and prevent us from obtaining regulatory approval or successfully commercializing our product candidates on a timely basis, if at all. We engage consultants and contract research organizations to help design, and to assist us in conducting, our preclinical studies and clinical trials and to collect and analyze data from those studies and trials. The consultants and contract research organizations we engage interact with clinical investigators to enroll patients in our clinical trials. As a result, we depend on these consultants and contract research organizations to perform the studies and trials in accordance with the investigational plan and protocol for each product candidate and in compliance with regulations and standards, commonly referred to as “good clinical practice”, for conducting, recording and reporting results of clinical trials to assure that the data and results are credible and accurate and the trial participants are adequately protected, as required by the FDA and foreign regulatory agencies. We may face delays in our regulatory approval process if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers.

We must comply with extensive government regulations in order to obtain and maintain marketing approval for our products in the United States and abroad. If we do not obtain regulatory approval for our product candidates, we may be forced to cease our operations. Our product candidates are subject to extensive regulation in the United States and in every other country where they will be tested or used. These regulations are wide-ranging and govern, among other things:

product design, development, manufacture and testing,

product safety and efficacy,

product labeling,

product storage and shipping,

record keeping,

pre-market clearance or approval,

advertising and promotion, and

product sales and distribution.

We cannot market our product candidates until we receive regulatory approval. The process of obtaining regulatory approval is lengthy, expensive and uncertain. Any difficulties that we encounter in obtaining regulatory approval may have a substantial adverse impact on our business and cause our stock price to significantly decline.

In the United States, the FDA imposes substantial requirements on the introduction of biological products and many medical devices through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements typically takes several years and the time required to do so may vary substantially based upon the type and complexity of the biological product or medical device.

In addition, product candidates that we believe should be classified as medical devices for purposes of the FDA regulatory pathway may be determined by the FDA to be biologic products subject to the satisfaction of significantly more stringent requirements for FDA approval.

The requirements governing the conduct of clinical trials and cell culturing and marketing of our product candidates outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional testing and different clinical trial designs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval processes. Some foreign regulatory agencies also must approve prices of the products. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We may not be able to file for regulatory approvals and may not receive necessary approvals to market our product candidates in any foreign country. If we fail to comply with these regulatory requirements or fail to obtain and maintain required approvals in any foreign country, we will not be able to sell our product candidates in that country and our ability to generate revenue will be adversely affected.

We cannot assure you that we will obtain FDA or foreign regulatory approval to market any of our product candidates for any indication in a timely manner or at all. If we fail to obtain regulatory approval of any of our product candidates for at least one indication, we will not be permitted to market our product candidates and may be forced to cease our operations.

Even if some of our product candidates receive regulatory approval, these approvals may be subject to conditions, and we and our third party manufacturers will in any event be subject to significant ongoing regulatory obligations and oversight. Even if any of our product candidates receives regulatory approval, the manufacturing, marketing and sale of our product candidates will be subject to stringent and ongoing government regulation. Conditions of approval, such as limiting the category of patients who can use the product, may significantly impact our ability to commercialize the product and may make it difficult or impossible for us to market a product profitably. Changes we may desire to make to an approved product, such as cell culturing changes or revised labeling, may require further regulatory review and approval, which could prevent us from updating or otherwise changing an approved product. If our product candidates are approved by the FDA or other regulatory authorities for the treatment of any indications, regulatory labeling may specify that our product candidates be used in conjunction with other therapies.

Once obtained, regulatory approvals may be withdrawn for a number of reasons, including the later discovery of previously unknown problems with the product. Regulatory approval may also require costly post-marketing follow-up studies, and failure of our product candidates to demonstrate sufficient efficacy and safety in these studies may result in either withdrawal of marketing approval or severe limitations on permitted product usage. In addition, numerous additional regulatory requirements relating to, among other processes, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping will also apply. Furthermore, regulatory agencies subject a marketed product, its manufacturer and the manufacturer’s facilities to continual review and periodic inspections. Compliance with these regulatory requirements are time consuming and require the expenditure of substantial resources.

If any of our product candidates is approved, we will be required to report certain adverse events involving our products to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning the advertisement and promotional labeling of our products. As a result, even if we obtain necessary regulatory approvals to market our product candidates for any indication, any adverse results, circumstances or events that are subsequently discovered, could require that we cease marketing the product for that indication or expend money, time and effort to ensure full compliance, which could have a material adverse effect on our business.

Any failure by us, or by any third parties that may manufacture or market our products, to comply with the law, including statutes and regulations administered by the FDA or other U.S. or foreign regulatory authorities, could result in, among other things, warning letters, fines and other civil penalties, suspension of regulatory approvals and the resulting requirement that we suspend sales of our products, refusal to approve pending applications or supplements to approved applications, export or import restrictions, interruption of production, operating restrictions, closure of the facilities used by us or third parties to manufacture our product candidates, injunctions or criminal prosecution. Any of the foregoing actions could have a material adverse effect on our business.

The healthcare community has relatively little experience with therapies based on cellular medicine and, accordingly, if our product candidates do not become widely accepted by physicians, patients, third party payors or the healthcare community, we may be unable to generate significant revenue, if any.

We are developing cell-based therapy product candidates for the treatment of heart damage that represent novel and unproven treatments and, if approved, will compete with a number of more conventional products and therapies manufactured and marketed by others, including major pharmaceutical companies. We cannot predict or guarantee that physicians, patients, healthcare insurers, third party payors or health maintenance organizations, or the healthcare community in general, will accept or utilize any of our product candidates. We anticipate that, if approved, we will market our myoblast product primarily to interventional cardiologists, who are generally not the primary care physicians for patients who may be eligible for treatment with MyoCell. Accordingly, our commercial success may be dependent on third party physicians referring their patients to interventional cardiologists for MyoCell treatment.

If we are successful in obtaining regulatory approval for any of our product candidates, the degree of market acceptance of those products will depend on many factors, including:

our ability to provide acceptable evidence and the perception of patients and the healthcare community, including third party payors, of the positive characteristics of our product candidates relative to existing treatment methods, including their safety, efficacy, cost effectiveness and/or other potential advantages,

the incidence and severity of any adverse side effects of our product candidates,

the availability of alternative treatments,

the labeling requirements imposed by the FDA and foreign regulatory agencies, including the scope of approved indications and any safety warnings,

our ability to obtain sufficient third party insurance coverage or reimbursement for our products candidates,

the inclusion of our products on insurance company coverage policies,

the willingness and ability of patients and the healthcare community to adopt new technologies,

the procedure time associated with the use of our product candidates,

our ability to manufacture or obtain from third party manufacturers sufficient quantities of our product candidates with acceptable quality and at an acceptable cost to meet demand, and

marketing and distribution support for our products.

Failure to achieve market acceptance would limit our ability to generate revenue and would have a material adverse effect on our business. In addition, if any of our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if competing products or technologies are introduced that are received more favorably or are more cost-effective.

Risks Relating to the September 2005, September 2006, August 2007, February 2008, and April 2008 Financings

If we are required for any reason to repay our outstanding debentures we would be required to deplete our working capital, if available, or raise additional funds. Our failure to repay the convertible debentures, if required, could result in legal action against us, which could require the sale of substantial assets. We have outstanding, as of April 30, 2009, $13,616,520 aggregate original principal amount of convertible debentures with an original issue discount of 20.3187% with $4,038,880 in April 2008 Debentures, $720,000 in February 2008 Debentures, $6,860,531 in 2007 Debentures, $1,907,168 in 2006 Debentures, and $89,941 in 2005 Debentures. We are required to redeem on a monthly basis, by payment, at our option, with cash or with shares of our common stock, 1/30th of the aggregate original principal amount of the debentures.

Unless sooner converted into shares of our common stock the 2005 Debentures were due and payable on September 14, 2008, the 2006 Debentures are due and payable on September 6, 2009, the 2007 Debentures are due and payable on August 31, 2010, the February 2008 Debentures are due and payable February 15, 2010, and the April 2008 Debentures are due and payable April 4, 2009. Any event of default could require the early repayment of the convertible debentures, including the accruing of interest on the outstanding principal balance of the debentures if the default is not cured with the specified grace period. We anticipate that the full amount of the convertible debentures will be converted into shares of our common stock, in accordance with the terms of the convertible debentures; however no assurance can be provided that any amount of debentures will be converted. If, prior to the maturity date, we are required to repay the convertible debentures in full, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the debenture holders could commence legal action against us to recover the amounts due. Any such action could require us to curtail or cease operations.

There are a large number of shares underlying our convertible debentures and warrants, and the sale of these shares may depress the market price of our common stock. There are a substantial number of shares underlying convertible debentures issued by the Company in connection with the 2005, 2006, 2007 and 2008 financings. When shares underlying our convertible debentures and warrants are eligible for resale under Rule 144 of the Securities Act, the trading of such shares in the public market could adversely affect the market price of our common stock and make it difficult for you to sell shares of our common stock at times and prices that you feel are appropriate.

The issuance of shares upon conversion of the convertible debentures and exercise of outstanding warrants will cause immediate and substantial dilution to our existing stockholders. The issuance of shares upon conversion of the convertible debentures and exercise of warrants, including the replacement warrants, will result in substantial dilution to the interests of other stockholders since the selling security holders may ultimately convert and sell the full amount issuable on conversion. Although no single selling security holder may convert its convertible debentures and/or exercise its warrants if such conversion or exercise would cause it to own more than 4.99% of our outstanding common stock, this restriction does not prevent each selling security holder from converting and/or exercising some of its holdings and then converting the rest of its holdings. In this way, each selling security holder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock. In addition, the issuance of the 2008 Debentures and the 2008 Warrants triggered certain anti-dilution rights for certain third parties currently holding our securities resulting in substantial dilution to the interests of other stockholders.

Payment of mandatory monthly redemptions in shares of common stock will result in substantial dilution. We expect to satisfy all or a significant portion of our obligation to redeem 1/30th of the aggregate original principal amount of debentures per month through issuance of additional shares of our common stock. This approach will result in substantial dilution to the interests of other stockholders.

Our outstanding indebtedness on our 2005, 2006, 2007 and 2008 Debentures imposes certain restrictions on how we conduct our business. In addition, all of our assets, including our intellectual property, are pledged to secure this indebtedness. If we fail to meet our obligations under the Debentures, our payment obligations may be accelerated and the collateral securing the debt may be sold to satisfy these obligations.

The Debentures and related agreements contain various provisions that restrict our operating flexibility. Pursuant to the agreement, we may not, among other things:

except for certain permitted indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom,

except for certain permitted liens, enter into, create, incur, assume or suffer to exist any liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom,

amend our certificate of incorporation, bylaws or other charter documents so as to materially and adversely affect any rights of holders of the Debentures and Warrants,

repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of our common stock or common stock equivalents,

enter into any transaction with any of our affiliates, which would be required to be disclosed in any public filing with the Securities and Exchange Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of our disinterested directors (even if less than a quorum otherwise required for board approval),

pay cash dividends or distributions on any of our equity securities,

grant certain registration rights,

enter into any agreement with respect to any of the foregoing, or

make cash expenditures in excess of $1,000,000 per calendar month, subject to certain specified exceptions.

These provisions could have important consequences for us, including (i) making it more difficult for us to obtain additional debt financing from another lender, or obtain new debt financing on terms favorable to us, (ii) causing us to use a portion of our available cash for debt repayment and service rather than other perceived needs and/or (iii) impacting our ability to take advantage of significant, perceived business opportunities.

Our obligations under the Securities Purchase Agreement are secured by substantially all of our assets. Our obligations under certain security agreements, executed in connection with both the 2007 Financing and 2008 Financing, with the holders of the debentures and warrants are secured by substantially all of our assets. As a result, if we default under the terms of the security agreement, such holders could foreclose on their security interest and liquidate all of our assets. This would cause operations to cease.

Risks Relating to Government Regulation

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

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

Restrictions on the use of 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. Some of our most important programs involve the use of stem cells that are derived from human embryos. The use of human embryonic stem cells gives rise to ethical, legal and social issues regarding the appropriate use of these cells. In the event that our research related to human embryonic stem cells becomes the subject of adverse commentary or publicity, the market price for our common stock could be significantly harmed. Some political and religious groups have voiced opposition to our technology and practices. We use stem cells derived from human embryos that have been created for in vitro fertilization procedures but are no longer desired or suitable for that use and are donated with appropriate informed consent for research use. Many research institutions, including some of our scientific collaborators, have adopted policies regarding the ethical use of human embryonic tissue. These policies may have the effect of limiting the scope of research conducted using human embryonic stem cells, thereby impairing our ability to conduct research in this field.

Potential and actual legislation and regulation at the federal or state level related to our technology could limit our activities and ability to develop products for commercial sales, depriving us of our anticipated source of future revenues. Legislative bills could be introduced in the future aiming to prohibit the use or commercialization of somatic cell nuclear transfer technology or of any products resulting from it, including those related to human therapeutic cloning and regenerative medicine. Such legislation could have a significant influence on our ability to pursue our research, development and commercialization plans in the United States.

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

harming our ability to establish critical partnerships and collaborations,

delaying or preventing progress in our research and development,

limiting or preventing the development, sale or use of our products, and

causing a decrease in the price of our stock.

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

If, and to the extent that, we are unable to comply with these regulations, our ability to earn revenues will be materially and negatively impacted. The regulatory process, particularly in the biotechnology field, is uncertain, can take many years and requires the expenditure of substantial resources. Biological drugs and non-biological drugs are rigorously regulated. In particular, proposed human pharmaceutical therapeutic product candidates are subject to rigorous preclinical and clinical testing and other requirements by the FDA in the United States and similar health authorities in other countries in order to demonstrate safety and efficacy. We may never obtain regulatory approval to market our proposed products. For additional information about governmental regulations that will affect our planned and intended business operations, see “DESCRIPTION OF BUSINESS—Government Regulation” set forth in the Company’s Annual report on Form 10-KSB for the period ended December 31, 2007.

Our products may not receive FDA approval, which would prevent us from commercially marketing our products and producing revenues. The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. We cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue. For additional information about governmental regulations that will affect our planned and intended business operations, see “DESCRIPTION OF BUSINESS—Government Regulation” set forth in the Company’s Annual report on Form 10-KSB for the period ended December 31, 2007.

For-profit entities may be prohibited from benefiting from grant funding. There has been much publicity about grant resources for stem cell research, including Proposition 71 in California, which is described more fully under the heading “DESCRIPTION OF BUSINESS—California Proposition 71” set forth in the Company’s Annual report on Form 10-KSB for the period ended December 31, 2007. Rules and regulations related to any funding that may ultimately be provided, the type of entity that will be eligible for funding, the science to be funded, and funding details have not been finalized. As a result of these uncertainties regarding Proposition 71, we cannot assure you that funding, if any, will be available to us, or any for-profit entity.

The government maintains certain rights in technology that we develop using government 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. Certain of our and our licensors’ research has been or is being funded in part by government grants. In connection with certain grants, the U.S. government retains rights in the technology developed with the grant. These rights could restrict our ability to fully capitalize upon the value of this research.

Risks Relating to Our Reliance on Third Parties

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. Our strategy for the development, clinical testing and commercialization of our proposed products requires that we enter into collaborations with corporate partners, licensors, licensees and others. We are dependent upon the subsequent success of these other parties in performing their respective responsibilities and the continued cooperation of our partners. Our collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to our research and development activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us.

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

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.

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

Our reliance on the activities of 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 rely extensively upon and have relationships with scientific consultants at academic and other institutions, some of whom conduct research at our request, and other consultants with expertise in clinical development strategy or other matters. These consultants are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of these consultants and, except as otherwise required by our collaboration and consulting agreements to the extent they exist, can expect only limited amounts of their time to be dedicated to our activities.

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

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

General Risks Relating to Our Business

We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome. Our business may bring us into conflict with our licensees, licensors, or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business. See “LEGAL PROCEEDINGS” set forth in Part II, Item 1 of this Quarterly Report for a more complete discussion of currently pending litigation against the Company.

We may not be able to obtain third-party patient reimbursement or favorable product pricing, which would reduce our ability to operate profitably. Our ability to successfully commercialize certain of our proposed products in the human therapeutic field may depend to a significant degree on patient reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations. We cannot assure you that reimbursement in the United States or foreign countries will be available for any products we may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, our products with a consequent harm to our business. We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional regulations are overly onerous or expensive, or if health care related legislation makes our business more expensive or burdensome than originally anticipated, we may be forced to significantly downsize our business plans or completely abandon our business model.

Our products are likely to be expensive to manufacture, and they may not be profitable if we are unable to control the costs to manufacture them. Our products are likely to be significantly more expensive to manufacture than most other drugs currently on the market today. Our present manufacturing processes produce modest quantities of product intended for use in our ongoing research activities, and we have not developed processes, procedures and capability to produce commercial volumes of product. We hope to substantially reduce manufacturing costs through process improvements, development of new science, increases in manufacturing scale and outsourcing to experienced manufacturers. If we are not able to make these or other improvements, and depending on the pricing of the product, our profit margins may be significantly less than that of most drugs on the market today. In addition, we may not be able to charge a high enough price for any cell therapy product we develop, even if they are safe and effective, to make a profit. If we are unable to realize significant profits from our potential product candidates, our business would be materially harmed.

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 proposed products and those developed by our collaborative partners, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community in general may decide not to accept and utilize these products. The products that we are attempting to develop represent substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of our developed products will depend on a number of factors, including:

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.

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

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

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

Our credibility as a business operating in the field of human embryonic stem cells is largely dependent upon the support of our Ethics Advisory Board. Because the use of human embryonic stem cells gives rise to ethical, legal and social issues, we have instituted an Ethics Advisory Board. Our Ethics Advisory Board is made up of highly qualified individuals with expertise in the field of human embryonic stem cells. We cannot assure you that these members will continue to serve on our Ethics Advisory Board, and the loss of any such member may affect the credibility and effectiveness of the Board. As a result, our business may be materially harmed in the event of any such loss.

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

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

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

We presently have members of management and other key employees located in various locations throughout the country which adds complexities to the operation of the business. Presently, we have members of management and other key employees located in both California and Massachusetts, which adds complexities to the operation of our business. We intend to maintain our research facilities in Massachusetts and we currently maintain a small corporate office in Los Angeles, California.

We face risks related to compliance with corporate governance laws and financial reporting standards. The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, referred to as Section 404, have materially increased our legal and financial compliance costs and made some activities more time-consuming and more burdensome. Section 404 requires that our management assess our internal control over financial reporting annually and, commencing with the filing of the Annual Report for the year ended December 31, 2007, include a report on its assessment. In 2009 our independent registered public accounting firm may be required to audit both the design and operating effectiveness of our internal controls and management’s assessment of the design and the operating effectiveness of our internal control over financial reporting.

Risks Relating to Our Common Stock

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

clinical trial results,

the amount of cash resources and ability to obtain additional funding,

announcements of research activities, business developments, technological innovations or new products by companies or their competitors,

entering into or terminating strategic relationships,

changes in government regulation,

disputes concerning patents or proprietary rights,

changes in revenues or expense levels,

public concern regarding the safety, efficacy or other aspects of the products or methodologies being developed,

reports by securities analysts,

activities of various interest groups or organizations,

media coverage, and

status of the investment markets.

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

A significant number of shares of our common stock have become available for sale and their sale could depress the price of our common stock. On March 1, 2008, a significant number of our outstanding securities (including the 2007 Debentures and the 2007 Warrants and the shares of common stock underlying such securities) that were previously restricted became eligible for sale under Rule 144 of the Securities Act, and their sale will not be subject to any volume limitations.

Not including the shares of common stock underlying the Debentures and Warrants issued in connection with the 2005, 2006, 2007, and 2008 financings, as of May 15, 2008, there are presently approximately 22,103,785 outstanding options, warrants and other securities convertible or exercisable into shares of our common stock.

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

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

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

Our securities are quoted on the OTC Bulletin Board, which may limit the liquidity and price of our securities more than if our securities were quoted or listed on the Nasdaq Stock Market or a national exchange. Our securities are currently quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Market. Quotation of our securities on the OTC Bulletin Board may limit the liquidity and price of our securities more than if our securities were quoted or listed on The Nasdaq Stock Market or a national exchange. Some investors may perceive our securities to be less attractive because they are traded in the over-the-counter market. In addition, as an OTC Bulletin Board listed company, we do not attract the extensive analyst coverage that accompanies companies listed on Nasdaq or any other regional or national exchange. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded in the over-the-counter market. These factors may have an adverse impact on the trading and price of our securities.

Our common stock is subject to “penny stock” regulations and restrictions on initial and secondary broker-dealer sales. The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Penny stocks are subject to certain additional oversight and regulatory requirements. Brokers and dealers affecting transactions in our common stock in many circumstances must obtain the written consent of a customer prior to purchasing our common stock, must obtain information from the customer and must provide disclosures to the customer. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to sell your shares of our common stock in the secondary market.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer (“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our CEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. We have determined that the loss of certain personnel in our legal, accounting and finance departments, when considered collectively in light of the number and complexity of accounting matters requiring consideration, created a possibility that a material misstatement of our financial statements could occur and may not be prevented or detected. In addition, we have identified material weaknesses in internal control over financial reporting as discussed in our most recent annual report filed on Form 10-KSB. As a result, our disclosure controls and procedures were not effective as of June 30, 2008. To address these material weaknesses, we have retained an outside accounting consulting firm to assist the Company in preparing and reviewing the restatements and preparing this Quarterly Report on Form 10-Q. We are also initiating an employment search process to fill open positions.

Nothwithstanding any material weaknesses identified above, we believe our financial statements fairly present in all material respects the financial position, results of operations and cash flows for the interim periods presented in our quarterly report on Form 10-Q.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2008, both our principal financial/accounting officer and our general counsel resigned from their positions with the company. Our Chief Executive Officer has assumed the duties of our principal financial/accounting officer and will continue to do so until a replacement is hired.

Except as noted above, there have been no other significant changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Gary D. Aronson v. Advanced Cell Technology, Inc., Superior Court of California, County of Alameda, Case No. RG07348990. John S. Gorton v. Advanced Cell Technology, Inc, Superior Court of California, County of Alameda Case No. RG07350437. On October 1, 2007 Gary D. Aronson brought suit against the Company with respect to a dispute over the interpretation of the anti-dilution provisions of the Company’s warrants issued to Mr. Aronson on or about September 14, 2005. John S. Gorton initiated a similar suit on October 10, 2007. The two cases have been consolidated. The plaintiffs allege that the Company breached warrants to purchase securities issued by the Company to these individuals by not timely issuing stock after the warrants were exercised, failing to issue additional shares of stock in accordance with the terms of the warrants and failing to provide proper notice of certain events allegedly triggering Plaintiffs' purported rights to additional shares. Plaintiffs assert monetary damages in excess of $14 million. Plaintiffs may alternatively seek additional shares in the Company with a value potentially in excess of $14 million, or may seek a combination of monetary damages and shares in the Company. Plaintiffs also seek prejudgment interest and attorney fees. Discovery is not complete and no conclusions have been reached as to the potential exposure to the Company or whether the Company has liability.

Alexandria Real Estate-79/96 Charlestown Navy Yard v. Advanced Cell Technology, Inc. and Mytogen, Inc. (Suffolk County, Massachusetts): The Company and its subsidiary Mytogen, Inc. are currently defending themselves against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a property vacated by the Company and Mytogen effective May 31, 2008. In that action, Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging that it has been unable to relet the premises and therefore seeking rent for the vacated premises since September 2008. Alexandria is also seeking certain clean-up and storage expenses. The Company is defending against the suit, claiming that ARE had breached the covenant of quiet enjoyment as of when Mytogen vacated, and that had ARE used reasonable diligence in its efforts to secure a new tenant, it would have been more successful. No trial date has been set.

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

The issuances of the equity securities described below were made in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, relating to sales by an issuer not involving a public offering, and/or pursuant to the requirements of one or more of the safe harbors provided in Regulation D under the Securities Act.

We issued and sold a $600,000 unsecured convertible note dated as of February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of $500,000 (reflecting a 16.66% original issue discount) in a private placement. Note A bears interest at the rate of 12% per annum, and is due by February 15, 2010. At any time after the 180th day following the effective date of Note A, the holder may at its election convert all or part of Note A plus accrued interest into shares of our common stock at the conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest trade prices in the 20 trading days prior to the conversion. Pursuant to the Use of Proceeds Agreement entered into in connection with the issuance of Note A, we are required to use the proceeds from Note A solely for research and development dedicated to adult stem cell research.

Effective February 15, 2008, in exchange for $1,000,000 in the form of a Secured & Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the Company, we issued and sold an unsecured convertible note (“Note B”) to JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may be paid towards the balance of the JMJ Note. Note B bears interest at the rate of 10% per annum, and is due by February 15, 2010. At any time following the effective date of Note B, the holder may at its election convert all or part of Note B plus accrued interest into shares of our common stock at the conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest trade prices in the 20 trading days prior to the conversion. In connection with the issuance of Note B, we entered into a Collateral and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant to which we granted JMJ Financial a security interest in certain of our assets securing the JMJ Note. As of June 30, 2008, we had drawn down and received the following amounts under Note B:

· On March 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue discount).

· On June 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue discount).

Pursuant to the Use of Proceeds Agreement entered into in connection with the issuance of Note B, we are required to use the proceeds from Note B solely for research and development dedicated to adult stem cell research.

As described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2008, as amended on April 9, 2008, we issued senior secured convertible debentures dated March 31, 2008 in the aggregate principal amount of $4,038,880 with an original issue discount of 20.3187%. The closing escrow established in connection with the transaction was released April 4, 2008. In connection with the closing of the issuance and sale of convertible debentures, we received gross proceeds of $2,332,431, excluding refinancing of bridge debt and in-kind payments incurred in anticipation of the financing. The convertible debentures are due and payable one year from the date of issuance, unless sooner converted into shares of our common stock. At any time from the closing date until the maturity date of the debentures, the Purchasers have the right to convert the debentures, in whole or in part, into common stock of the Company at the then effective conversion price. The debentures are initially convertible into 26,925,867 shares of common stock at a price of $0.15 per share. In connection with the closing of the 2008 financing, we also issued to the investors warrants to purchase an aggregate of 26,925,867 shares of our common stock. The term of the warrants is five years and the exercise price is $0.165 per share, subject to anti-dilution and other customary adjustments.

In connection with the closing of the 2008 financing described above, we issued (i) warrants to purchase an aggregate of 6,399,806 shares of common stock of the Company at an exercise price of $0.165 to T.R. Winston & Company, LLC as consideration for placement agent services provided in connection with the 2008 financing, (ii) a debenture in the principal amount of $250,000 to T.R. Winston & Company, LLC in order to satisfy certain outstanding payables owed by the Company, (iii) a debenture in the principal amount of $250,000 to Pierce Atwood LLP in order to satisfy certain outstanding payables owed by the Company, and (iv) a debenture in the principal amount of $61,000 to PDPI, LLC in order to satisfy certain outstanding payables owed by the Company to one of their partners (Green Mountain Finance LLC). The debentures and warrants described above contained the same terms and conditions as those issued to the investors in the 2008 financing.

On March 21, 2008, we issued and sold an aggregate of $130,000 in unsecured convertible notes (the “Bridge Notes”) to PDPI LLC and The Shapiro Family Trust. Dr. Shapiro, one of the Company’s directors, may be deemed the beneficial owner of the securities owned by The Shapiro Family Trust. The net outstanding amount of principal plus interest of the Notes was converted into common stock of the Company in connection with the 2008 Financing described above.

Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures. The weighted average amortization period for deferred debt issuance costs is 36 months.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Description

31.1		Section 302 Certification of Chief Executive Officer and Principal Financial Officer.*

32.1		Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*

*	Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ADVANCED CELL TECHNOLOGY, INC.

	By:	/s/ William M. Caldwell, IV
		William M. Caldwell, IV
		Chief Executive Officer and Principle Financial Officer
Dated: May 8, 2009

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Ocata Therapeutics (OCAT) Inactive 10-Q2008 Q2 Quarterly report

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