10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-QSB

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

FOR THE PERIOD ENDED SEPTEMBER 30, 2006

OR

oTRANSITION 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 SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

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

1201 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

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

Indicate by check mark whether the small business issuer (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 small business issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes xNo o

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 September 30, 2006:
Common Stock, $0.001 par value per share	33,414,516 shares

Transitional Small Business Disclosure format (check one)

Yes oNo x

ADVANCED CELL TECHNOLOGY, INC.

INDEX

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-QSB 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 26 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.

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PART I. FINANCIAL INFORMATION

ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,121,623		$	13,857,901
Accounts receivable, net of allowance for doubtful accounts of $636,399 (unaudited) and $636,399	82,218			134,876
Prepaid expenses	93,655			173,040
Deferred royalty fees, current portion	236,724			119,763
Total current assets	13,534,220			14,285,580
Property and equipment, net	1,156,016			807,411
Deferred royalty fees, less current portion	1,118,989			598,811
Deposits	135,841			105,192
Deferred issuance costs, net of amortization of $928,350 (unaudited) and $207,029	5,948,255			2,277,322
Total assets	$	21,893,321		$	18,074,316
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,470,803		$	2,113,983
Accrued expenses	4,199,102			1,251,946
Deferred revenue, current portion	432,509			332,508
Interest payable	75,146			87,083
Advances payable - other	130,000			130,000
2005 Convertible debenture and embedded derivatives, net of discounts of $4,173,881 (unaudited) and $5,312,858	7,253,508			5,144,896
2006 Convertible debenture, (fair value of $8,070,781) (unaudited)	5,749,089			—
Warrant derivatives - current portion	650,711			—
Capital leases - current portion	77,594			—
Notes payable - other, net of discounts of $0 (unaudited) and $314,456	638,674			858,103
Total current liabilities	20,677,136			9,918,519
2005 Convertible debenture and embedded derivatives, less current portion and net of discounts of $2,812,600 (unaudited) and $9,297,501	4,887,829			9,003,569
2006 Convertible debenture, less current portion (fair value of $12,106,172) (unaudited)	8,623,634			—
Warrant derivatives, less current portion	18,648,122			30,994,491
Capital leases, less current portion	51,461			109,924
Deferred revenue, net of current portion	1,804,827			1,662,542
Total liabilities	54,693,009			51,689,045
Commitments and contingencies	—			—
Stockholders’ deficit:
Common stock, $0.001 par value; 100,000,000 shares authorized, 33,414,516 (unaudited) and 23,440,695 issued and outstanding	33,414			23,441
Additional paid-in capital	6,848,287			(10,463,008		)
Deferred compensation	(21,585		)	(21,585		)
Accumulated deficit	(39,659,804		)	(23,153,577		)
Total stockholders’ deficit	(32,799,688		)	(33,614,729		)
Total liabilities and stockholders’ deficit	$	21,893,321		$	18,074,316

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

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ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Revenue:
License fees and royalties	$	128,960		$	83,127		$	332,714		$	311,880
Cost of revenue	67,617			41,189			221,424			145,131
Gross profit	61,343			41,938			111,290			166,749
Operating expenses:
Research and development	2,586,482			734,065			7,012,255			1,667,684
Grant reimbursements	(5,879		)	(171,980		)	(369,446		)	(597,198		)
General and administrative	1,336,939			2,330,767			5,845,061			5,572,267
Total operating expenses	3,917,542			2,892,852			12,487,870			6,642,753
Loss from operations	(3,856,199		)	(2,850,914		)	(12,376,580		)	(6,476,004		)
Other income (expense):
Interest income	90,105			6,083			289,953			32,042
Gain on sale of asset	—			—			767,040			—
Loss on extinguishment of debt	(263,464		)	—			(263,464		)	—
Gain on settlement of debt	—			966,301			—			1,052,814
Interest expense and late fees	(2,839,572		)	(432,077		)	(8,436,878		)	(500,806		)
Charges related to issuance of Convertible Debentures	(11,168,629		)	—			(11,168,629		)	—
Charges related to repricing and issuance of warrants	(7,501,060		)	—			(7,501,060		)	—
Interest expense - stockholder	—			—			—			(60,000		)
Adjustments to fair value of derivatives	(5,075,387		)	—			22,183,391			—
Total other income (expense)	(26,758,007		)	540,307			(4,129,647		)	524,050
Net profit / (loss)	$	(30,614,206	)	$	(2,310,607	)	$	(16,506,227	)	$	(5,951,954	)
Basic net loss per share	$	(1.08	)	$	(0.10	)	$	(0.63	)	$	(0.26	)
Basic weighted average shares used in computation of net loss per share	28,257,749			23,191,111			26,209,324			23,209,742

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

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ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)

	Nine Months Ended September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,506,227	)	$	(5,951,954	)
Adjustments to reconcile net profit / (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	175,793			73,221
Bad debt	—			32,715
Amortization of deferred charges	80,770			89,821
Amortization of deferred revenue	(295,214		)	(249,379		)
Amortization of deferred offering costs	721,321			—
Gain on settlement of accounts payable	—			(1,052,814		)
Shares issued for services	—			15,000
Warrants issued for services	331,827			—
Amortization of deferred compensation	—			316,117
Amortization of discounts	7,674,870			413,952
Loss on extinguishment of debt	263,464			—
Changes in warrant and derivative liability	(22,183,391		)	—
Increase and repricing of warrants	7,501,060			—
Issuance of convertible debentures	11,168,629			—
Non-cash compensation charge	506,648			—
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable	52,660			(413		)
Prepaid expenses	79,385			(116,614		)
Deferred charges	—			(11,250		)
Deposits	(30,649		)	(65,000		)
Increase (decrease) in:
Accounts payable and accrued expenses	156,793			568,013
Interest payable	(11,937		)	101,394
Advances to stockholder	—			(327,235		)
Deferred revenue	537,500			—
Net cash used in operating activities	(9,776,698		)	(6,164,426		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition	—			10,000
Purchases of property and equipment	(540,193		)	(317,826		)
Net cash used in investing activities	(540,193		)	(307,826		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred unit subscriptions, net of cost	—			3,735,201
Proceeds from exercise of warrants	4,320,687			—
Payments of convertible debentures	(2,047,735		)	—
Proceeds from notes, net of offering costs	7,966,125			16,128,042
Payments on notes and leases	(658,464		)	(250,000		)
Settlement payment	—			(332,524		)
Cash overdraft	—			(1,409		)
Net cash provided by (used in) financing activities	9,580,613			19,279,310
Net increase / (decrease) in cash	(736,278		)	12,807,058
Cash and cash equivalents, beginning of period	13,857,901			3,676,000
Cash and cash equivalents, end of period	$	13,121,623		$	16,483,058
Cash paid for:
Interest	$	7,532		$	—
Income taxes	$	—		$	—

Supplemental schedule of non-cash financing activities:

During the nine months ended September 30, 2006:

The Company issued approximately 3,582,000 shares of common stock in redemption of convertible debentures with a face value of approximately $3,129,000.

The Company issued approximately 773,000 shares of common stock in conversion of convertible debentures with a face value of approximately $2,496,000.

The Company issued approximately 163,000 shares of common stock in payment of license fees valued at approximately $239,000.

The Company issued approximately 780,000 shares of common stock to employees as compensation of approximately $218,000.

The Company issued approximately 44,000 shares of common stock in payment of board fees of approximately $19,000.

The Company eliminated a derivative liability of $6,629,884 upon exercise of warrants.

During the nine months ended September 30, 2005:

105,177 Preferred Units, valued at $89,400, were issued in partial settlement of accounts payable.

616,124 shares of common stock, and 306,062 common stock purchase warrants were issued upon conversion of $500,000 of notes payable and $23,708 of accrued interest.

469,247 shares of common stock, and 234,629 common stock purchase warrants, valued at an aggregate of $398,860, were issued in consideration of services related to the Preferred Unit Offering.

A note for $150,000 was issued as a part of a settlement of a note payable of $339,000 and related accrued interest of $53,675.

9,411,778 shares of preferred stock converted to 9,411,778 shares of common stock in the Merger.

Approximately 350,000 shares of common stock were retired, and net intercompany amounts of approximately $600,000 due to ACT Group, Inc were extinguished, in final settlement of litigation between ACT Group, Inc were extinguished, in final settlement of litigation between ACT Group, Inc. and third parties.

Approximately 195,000 shares of common stock were issued in settlement of accounts payable of approximately $1,428,000.

Approximately 260,000 warrants to purchase shares of common stock were issued to consultants as partial compensation for consulting services.

In connection with the issuance of convertible debentures, $5,747,297 was allocated to the fair value of warrants issued, and $9,305,014 was allocated to the beneficial conversion feature embedded in the debentures.

In connection with issuance of notes payable related to the ACT Group settlement, $21,818 was allocated to the beneficial conversion feature embedded in the notes.

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

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ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 (UNAUDITED)

				Additional									Total
	Common Stock			Paid-In			Deferred			Accumulated			Stockholders’
	Shares	Amount		Capital			Compensation			Deficit			Deficit
Balance at December 31, 2005	23,440,695	$	23,441	$	(10,463,008	)	$	(21,585	)	$	(23,153,577	)	$	(33,614,729	)
Cashless exercise of warrant	63,208	63		(63		)							—
Stock option exercises	26,000	26		6,074									6,100
Convertible debenture redemption	3,582,283	3,582		3,125,553									3,129,135
Issued to employees	780,000	780		217,620									218,400
Exercise of warrrants	4,541,672	4,542		4,310,045									4,314,587
Elimination of derivative liability on exercise of warrants	—	—		6,629,884									6,629,884
Convertible debenture conversion	773,043	773		2,495,578									2,496,351
Issuance of stock in payment of board fees	44,216	44		19,706									19,750
Option compensation charges				268,498									268,498
Issuance of stock in payment of license fees	163,399	163		238,400									238,563
Net loss for the nine months ended September 30, 2006										(16,506,227		)	(16,506,227		)
Balance at September 30, 2006	33,414,516	$	33,414	$	6,848,287		$	(21,585	)	$	(39,659,804	)	$	(32,799,688	)

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

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ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(UNAUDITED)

1.ORGANIZATIONAL MATTERS

Organization

On January 31, 2005, Advanced Cell Technology, Inc. (formerly known as A.C.T. Holdings, Inc.) (the “Company”) completed 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 stem cell technology in the emerging fields of regenerative medicine and stem cell therapy. 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. These matters raise substantial doubt about the Company’s ability to continue as a going concern and fund cash requirements for operations through September 30, 2007. Subsequent to filing the Form 10-KSB for the year ended December 31, 2005, the Company obtained new information which negatively impacted cash flows forecasted through March 31, 2007. The Company’s Board of Directors met and approved an operating plan at current spending levels, assuming additional capital would be raised during the current year. In addition, the Company began experiencing increased cash redemptions related to 2005 Convertible Debentures described more fully in Note 4 Convertible Debentures – 2005 which continue as described in Note 13 – Subsequent Events.  As more fully described in Note 3 – Convertible Debentures – 2006 and Note 5 – Warrant Derivatives, the Company was able to raise cash in the quarter ended September 30, 2006.  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 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

7

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.

In the first nine months of 2006, management has taken or has made plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence:

·As described more fully in Note 3 – Convertible Debentures – 2006, the Company was able to raise cash during the quarter from an additional investment by 2005 convertible debenture holders.

·As described more fully in Note 4 – Warrant Derivatives, the Company raised cash during the quarter from the repricing and exercise of warrants issued to 2005 convertible debenture holders.

·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 of products which will ultimately generate revenues. While the amount or timing of such revenues can not be determined, Management believes that focused development will ultimately provide a quicker path to revenues, and an increased likelihood of raising additional financing.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements as of September 30, 2006 and for the three and nine month periods ended September 30, 2006 and 2005 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including Form 10-QSB and Regulation S-B and in accordance with generally accepted accounting principles for interim financial information. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2005 as disclosed in the Company’s annual report on Form 10-KSB for that year as filed with the SEC. Interim results of operations are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

2.SIGNIFICANT ACCOUNTING POLICIES

Stock-Based Compensation — At September 30, 2006, the Company has two stock-based employee compensation plans, which are described more fully in Note 8 – Options Outstanding. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Operations for the years ended December 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

As more fully discussed in Note 8, effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the three and nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

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Earnings per Share

The Company calculates basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic loss per share is computed by dividing net income by the weighted average number of common shares outstanding.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements , or SFAS 157, which provides guidance on how to measure assets and liabilities that use fair value. This Statement clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 will apply whenever another generally accepted accounting principle requires, or permits, assets or liabilities to be measure at fair value but does not expand the use of fair value to any new circumstances. This statement will also require additional disclosures in both annual and quarterly reports. SFAS 157 is effective for fiscal years beginning after November 2007, and will be adopted by us beginning January 1, 2008. We are currently evaluating the potential impact this statement may have on our financial statements, but do not believe the impact of adoption will be material.

In September 2006, the SEC staff issued Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108 . SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006. We have evaluated the potential impact that SAB 108 may have on our financial statements and do not believe the impact of the application of this guidance will be material.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, or SFAS 158. This Statement requires companies to recognize in their statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to measure a plan’s assets and its obligations that determine its funded status as of the end of the company’s fiscal year. Additionally, SFAS 158 requires companies to recognize changes in the funded status of a defined benefit postretirement plan in the year that the changes occur and those changes will be reported in comprehensive income. The provisions of SFAS 158 are effective as of the end of fiscal year 2006 and we are currently in the process of quantifying the impact to the financial statements.

3.CONVERTIBLE DEBENTURES – 2006

On September 6, 2006, we 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, we received gross proceeds of $8,750,000. These convertible debentures were issued in connection with certain additional investment rights granted in connection with the convertible debentures issued in 2005, and described more fully in Note 4 – Convertible Debentures – 2005. 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. In connection with the Securities Purchase Agreement, we also issued warrants to purchase an aggregate of 19,064,670 shares of our Common Stock. The term of the warrants is five years and the exercise price is $0.3168 per share, subject to anti-dilution and other customary adjustments. The investors have contractually agreed to restrict their ability to convert the convertible debentures, exercise the warrants and receive shares of our Common Stock such that the number of shares of our Common Stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of our then issued and outstanding shares of our Common Stock.

                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 covering the shares issuable under the debentures and the warrants, 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 cash, or convert the amount due into common stock at the lesser of $0.288 per share or 85% of the prior ten days' 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 applied the provisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”, to record the fair value of the convertible debentures, and related derivatives, as of September 6, 2006.   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 approximately $22,200,000. The excess of this value over the transaction price of the Convertible Debentures was recorded through the results of operations as a debit to Charges Related to Issuance of Convertible Debentures.

The 2006 convertible debentures and related derivatives outstanding at September 30, 2006 were again valued at fair value using a combination of Binomial and Black Scholes models, resulting in a decrease in the fair value of the liability of approximately $2,000,000, primarily as a result of a decline in the Company’s stock price, which was recorded through the results of operations as a credit to Adjustments to Fair Value of Derivatives.

                In connection with this financing, we 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. The initial fair value of the warrant was estimated at approximately $3,600,000 using the Black Scholes pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%, (2) expected volatility of 176%, (3) risk-free interest rate of 4.81%, and (4) expected life of 5 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 using the effective interest rate method.

The following table summarizes the 2006 Convertible Debentures and discounts outstanding at September 30, 2006:

Convertible debentures at fair value	$	20,176,953
Warrant derivative discount	(3,572,980		)
Original issue discount	(2,231,250		)
Net convertible debentures	14,372,723
Less current portion	(5,749,089		)
Convertible debentures and embedded derivatives-long term	$	8,623,634

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4.CONVERTIBLE DEBENTURES - 2005

On September 15, 2005, we 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, we 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 December 31, 2005 and September 30, 2006, followed by a description of the valuation methodology utilized to determine fair values:

	Fair value			Fair value
Embedded Derivative Liability (Asset)	December 31, 2005			September 30, 2006
				(unaudited)
Conversion feature	$	6,057,088		$2,211,158
Anti-dilution protection	1,755,878			2,467,186
Default provisions	94,886			54,567
Right to provide future financing	185,968			—
Company right to force conversion	(1,226,746		)	(519,998	)
	$	6,867,074		$4,212,913

The fair value 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 of $0.69 at September 30, 2006, (2) exercise price equal to the $2.30 conversion price, (3) volatility based upon the Company’s stock trading of 173%, (4) Treasury note rates with terms commensurate with the remaining term of the Notes of 4.71%, and (5) duration of the note as an amortizing debenture of approximately 0.80 years, based upon present values.

The fair value 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 of $0.69, (2) exercise price equal to the $2.30 and $0.95 conversion price, (3) volatility based upon the Company’s stock trading of 173%, (4) Treasury note rates with terms commensurate with the remaining term of the Notes of 4.71%, and (5) duration of the note as an amortizing debenture of approximately 0.80 years based upon present values.

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 $.95. As a result of certain anti-dilution protection 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 their warrant for $2.53 to $0.95 and did not exercise all of their warrants. Their 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 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.

The fair value 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 of the derivative for the investors’ option to provide future financing was determined using a Black Scholes Option Pricing Model with the following inputs: (1) The stock and exercise price was based on the maximum amount of additional investment of $125,000. (2) Volatility of 2% was based on the historical volatility of government and high yield bond indices. (3) Risk-free rate of 4.71% was based on Treasury notes. (4) Time to maturity was based upon the six month option period. The value of this option at the year end was found to approximate to zero.

The fair value 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 of $0.69, (2) exercise price of $4.60 per share which is required for the forced conversion, (3) volatility based upon the Company’s stock trading of 173%, (4) Treasury note rate with terms commensurate with the remaining term of the Notes of 4.71%, and (5) duration of the note as an amortizing debenture of approximately 0.80 years based upon present values.

During the three and nine months ended September 30, 2006, an increase in the fair value of the embedded derivative amounts of approximately $1,500,000 and a decrease of $2,000,000 respectively were recorded through results of operations as Adjustment to Fair Value of Derivatives.

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During the three and nine months ended September 30, 2006, the Company recorded approximately $2,500,000 and $7,200,000 respectively as Interest Expense for amortization of discounts for original issue discount, discount for warrant derivative, and other embedded derivatives identified above.

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 initial fair value of the warrant was estimated at approximately $1,379,000 using the Black Scholes pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 64%, (3) risk-free interest rate of 3.99%, and (4) expected life of 5 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 under the effective interest rate method. Interest expense for the three months ended September 30, 2006 was approximately $207,000.

The following table summarizes the 2005 Convertible Debentures and embedded derivatives outstanding at September 30, 2006:

Convertible debentures at $2.30 at face	$11,775,412
Convertible debentures at $0.95 at face	3,139,493
Convertible debentures at face	14,914,905
Discounts on debentures:
Original issue discount	(1,756,270		)
Conversion feature derivative	(2,868,883		)
Warrant derivative	(2,251,840		)
Other derivatives	(109,488		)
Net convertible debentures	7,928,424
Embedded derivatives	4,212,913
Convertible debentures and embedded derivatives	12,141,337
Less current portion	(7,253,508		)
Convertible debentures and embedded derivatives- long term	$	4,887,829

5.WARRANT DERIVATIVES

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

Accordingly, in accordance with the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” the Company has reviewed all instruments previously recorded as permanent equity under EITF 00-19 which are described in detail in Note 7—Stockholders’ Equity Transactions. As of September 15, 2005, the closing date of the convertible debenture financing, a $25,600,000 increase in the fair value of instruments previously recorded as permanent equity with a value of zero was recorded based upon fair values computed under a Black Scholes model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 64%, (3) risk-free interest rate of approximately 3.90%, and (4) expected life and exercise prices consistent with each individual instrument.

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

At September 30, 2006, the fair value of each instrument was again computed under a Black Scholes model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 173%, (3) risk-free interest rate of approximately 4.81%, and (4) expected life and exercise prices consistent with each individual instrument. These calculations resulted in an

11

aggregate value of derivative instruments of approximately $8,300,000. As a result, for the three and nine months ended September 30, 2006 the Company recorded approximately $2,000,000 as a debit and $16,700,000 as a credit to Adjustment to Fair Value of Derivatives respectively.

Of the total proceeds from the issuance of the 2005 debentures as more fully described in Note 4, approximately $5,700,000 was initially allocated to the freestanding warrants associated with the debentures based upon the fair value of the Warrants. The assumptions used in the Black Scholes model for determining the initial fair value of the warrants were as follows: (1) dividend yield of 0%; (2) expected volatility of 64%, (3) risk-free interest rate of 3.99%, and (4) expected life of 5 years. In accordance with FAS 133 “Accounting for Derivative Instruments and Hedging Activities”, EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” and EITF 05-04 “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19”, the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheets.

Of the total proceeds from the issuance of the 2006 debentures as more fully described in Note 3, approximately $3,000,000 was initially allocated to the freestanding warrants associated with the debentures based upon the fair value of the Warrants. The assumptions used in the Black Scholes model for determining the initial fair value of the warrants were as follows: (1) dividend yield of 0%; (2) expected volatility of 173%, (3) risk-free interest rate of 4.75%, and (4) expected life of 5 years. In accordance with FAS 133 “Accounting for Derivative Instruments and Hedging Activities”, EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” and EITF 05-04 “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19”, the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheets.

The carrying value of outstanding warrant derivatives from the 2005 debentures were adjusted to their fair value at August 23, 2006 of approximately $8,000,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.81%, and (4) expected remaining life of 4.0 years. This resulted in an increase in the fair value of the warrant liability of approximately $1,500,000 which was recorded through results of operations as a debit to adjustments to fair value of securities. The outstanding derivatives after the repricing and exercise were then adjusted to their fair value at August 24, 2006 of approximately $3,500,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.81%, and (4) expected remaining life of 4.0 years. This resulted in an increase in the fair value of the warrant liability of approximately $2,000,000 which was recorded through results of operations as a debit to charges related repricing and issuance of warrants.

The carrying value of outstanding warrant derivatives from the January 2005 Preferred financing were adjusted to their fair value at August 23, 2006 of approximately $9,400,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.91%, and (4) expected remaining life of 1.25 years. This resulted in an increase in the fair value of the warrant liability of approximately $6,200,000 which was recorded through results of operations as a debit to Adjustment to Fair Value of Derivatives. On August 24, 2006, the Company’s Board of Directors agreed to reprice these warrants to $0.95 per share and to extend the life of the warrants by one year. The outstanding derivatives after the repricing were then adjusted to their fair value at August 24, 2006 of approximately $7,100,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.91%, and (4) expected remaining life of 2.25 years. This resulted in a decrease in the fair value of the warrant liability of approximately $200,000 which was recorded through results of operations as a credit to charges related to repricing and issuance of warrants.

The fair value of warrants exercised at August 24, 2006 was recorded as equity in Additional Paid in Capital.  The fair value of replacement warrants issued to warrant holders who exercised their rights on August 24, 2006 , which aggregated approximately $6,900,000, was calculated based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.81%, and (4) expected remaining life of 5.0 years.

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The carrying value of the remaining 2005 debenture warrant derivatives at September 30, 2006 has been adjusted to reflect fair value of approximately $1,500,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 173%, (3) risk-free interest rate of 4.62%, and (4) expected remaining life of 3.75 years. This resulted in an additional decrease in the fair value of the warrant derivative liability of approximately $2,000,000 which was recorded through results of operations as a credit to Adjustment to Fair Value of Derivatives, bringing the total adjustment to approximately $4,900,000 for the three months ended September 30, 2006.

The carrying value of the replacement warrant derivatives at September 30, 2006 has been adjusted to reflect “fair value” of approximately $2,900,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0% (2) expected volatility of 173%, (3) risk-free interest rate of 4.62%, and (4) expected remaining life of 3.75 years. This resulted in a decrease in the fair value of the warrant derivative liability of approximately $4,000,000 which  was recorded as a debit to Adjustment to Fair Value of Derivatives in the results of operations for the three months ended September 30, 2006.

The carrying value of the January 2005 financing  warrant derivatives at September 30, 2006 have been adjusted to reflect fair value of approximately $2,800,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 173%, (3) risk-free interest rate of 4.62%, and (4) expected remaining life of 3.75 years. This resulted in an additional decrease in the fair value of the warrant derivative liability of approximately $4,300,000 which was recorded through results of operations as a credit to Adjustment to Fair Value of Derivatives.

6.             ADJUSTMENTS TO FAIR VALUE OF DERIVATIVES

The Company records adjustments to various derivative liabilities described more fully in Note 3 – Convertible Debentures 2006, Note 4 – Convertible Debentures 2005 and Note 5 – Warrant Derivatives.  As more fully described in Note 3, the Company entered into a Securities Purchase Agreement on September 6, 2006, and repriced certain warrant derivatives as described in Note 5 which resulted in adjustments 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 in the quarter ended September 30, 2006.  The table summarizes by category of derivative liability the impact from market changes during the quarter, impact of additional investments and repricing and exercise of certain warrants.

	Impact of			“Market”
	Additional Investment			Fair Value			Total Fair Value
	9.6.06			Adjustment			Adjustment
PIPE Hybrid instrument September, 2006	$	—		$	(2,510,466	)	$	(2,510,466	)
Embedded PIPE derivatives September, 2005	(18,281		)	233,042			214,761
Embedded derivatives - NP Other	(128,216		)	(2,930		)	(131,146		)
Warrants PIPE September, 2005	—			4,858,960			4,858,960
Other Warrant derivatives	2,213,326			429,952			2,643,278
	$	2,066,829		$	3,008,558		$	5,075,387

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7.STOCKHOLDERS’ EQUITY TRANSACTIONS

We are authorized to issue two classes of capital stock, to be designated, respectively, Preferred Stock and Common Stock. As of September 30, 2006, the total number of shares of Preferred Stock we are authorized to issue is 50,000,000, par value $0.001 per share. As of September 30, 2006, the total number of shares of Common Stock we are authorized to issue is 100,000,000, par value $0.001 per share. We had no Preferred Stock outstanding as of September 30, 2006. We had 33,414,516 shares of Common Stock outstanding as of September 30, 2006.

In August 2006, the Company issued 780,000 shares of Common Stock to employees. These shares are fully vested at issuance and are valued at fair market price on date of grant of $0.28.

In August 2006, the Company issued 1,050,000 fully vested warrants to purchase common stock at $2.54 per share with a term of three years in connection with consulting services provided during the quarter. The warrants were valued at approximately $174,000 using the Black Scholes pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 167%, (3) risk-free interest rate of 4.80%, and (4) expected life of 3.0 years. This warrant is classified as a warrant derivative.

In July 2006, the Company issued 44,216 fully vested shares of Common Stock to Alan Shapiro in consideration for service on the Company’s Board of Directors and Audit Committee. These shares are valued at market price on date of grant.

In April 2006, the Company issued 320,000 fully vested warrants to purchase common stock at $2.54 per share with a term of five years in connection with consulting services provided during the quarter. The warrants were valued at approximately $82,000 using the Black Scholes pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 78%, (3) risk-free interest rate of 5.10%, and (4) expected life of 5.0 years. This warrant is classified as a warrant derivative.

In March 2006, the Company issued 250,000 fully vested warrants to purchase common stock at $2.54 per share with a term of three and a half years in connection with consulting services provided during the quarter. The warrants were valued at $156,894, using the Black Scholes pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 74%, (3) risk-free interest rate of 4.82%, and (4) expected life of 3.5 years. This warrant is classified as a warrant derivative.

8.OPTIONS OUTSTANDING

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 September 30, 2006, ACT had granted 2,604,000 common share purchase options under the 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 September 30, 2006, ACT had granted 1,301,161 common share purchase options under the plan.

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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. 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.

Pursuant to the 2005 Plan, on August 18, 2006, the term of existing common stock purchase options to an employee was changed, resulting in a remeasurement of the fair value of those options. The options granted have an exercise price of $0.85 and $2.20 per share, the market price of the Company’s stock on the date of grant. The fair value of the options was estimated at approximately $39,000 using the Black Scholes option pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 93%, (3) risk-free interest rate of 4.59%, and (4) expected life of 6 years. The fair value was treated in accordance with FAS 123(R) and is being amortized over a period of four years. Since the Company vests options on the graded method, the fair value is amortized on a straight line basis which approximates the vesting schedule.

Pursuant to the 2005 Plan, on July 11, 2006, we granted 90,000 common stock purchase options to employees and directors. The options granted have an exercise price of $0.35 per share, the market price of the Company's stock on the date of grant. Employee options vest monthly over a period of  four years and director options were fully vested upon issue. The fair value of the options was estimated at $18,128 using the Black Scholes option pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%, (2) expected volatility of 172%, (3) risk-free interest rate of 5.10%, and (4) expected life of 4 years. The fair value was treated in accordance with FAS 123(R) and is being amortized over a period of four years. Since the Company vests options on the graded method, the fair value is amortized on a straight line basis which approximates the vesting schedule.

Pursuant to the 2005 Plan, on April 20, 2006, we granted 235,000 common stock purchase options to employees and directors. The options granted have an exercise price of $1.35 per share, the market price of the Company's stock on the date of grant. Employee options vest monthly over a period of four years and director options were fully vested upon issue. The fair value of the options was estimated at $89,343 using the Black Scholes option pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%, (2) expected volatility of 78%, (3) risk-free interest rate of 5.10%, and (4) expected life of 6 years. The fair value was treated in accordance with FAS 123(R) and is being amortized over a period of four years. Since the Company vests options on the graded method, the fair value is amortized on a straight line basis which approximates the vesting schedule.

Pursuant to the 2005 Plan, on January 26, 2006, we granted 230,000 common stock purchase options to employees and directors. The options granted have an exercise price of $2.04 per share, the market price of the Company's stock on the date of grant. Employee options vest monthly over a period of four years and director options were fully vested upon issue. The fair value of the options was estimated at $314,328 using the Black Scholes option pricing model. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%, (2) expected volatility of 74%, (3) risk-free interest rate of 4.38%, and (4) expected life of 6 years. The fair value was treated in accordance with FAS 123(R) and is being amortized over a period of four years. Since the Company vests options on the graded method, the fair value is amortized on a straight line basis which approximates the vesting schedule.

The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) Expected dividends on the underlying shares over the remaining term of the option are based upon historical dividend data. (2) The expected volatility of the price of the underlying shares over the expected term of the option is based upon historical share price data. (3) The expected term 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.

							Weighted
	Shares						Average		Weighted
	Available		Stock Options		Price Per		Exercise		Average
	For Grant		Outstanding		Share		Price		Life
Balance at December 31, 2005	285,269		12,703,809		$	0.05-$2.48	$	0.76	8.7 years
Annual increase pursuant to plan	1,172,035		—		—		—		—
Options granted	(230,000	)	230,000		$	2.04	$	2.04	9.0 years
Options granted	(235,000	)	235,000		$	0.65	$	0.65	9.0 years
Options granted	(90,000	)	90,000		$	0.35	$	0.35	10.0 years
Options exercised	—		(20,000	)	$	0.05	$	0.05	—
Options exercised	—		(6,000	)	$	0.85	$	0.85	—
Options forfeited	415,833		(415,833	)	$	.85 - $2.20	$	1.50	9.0 years
Stock awards	(780,000	)	780,000		—		—		—
Balance at September 30, 2006	538,137		13,596,976		$	0.05-$2.48	$	0.71	8.2 years

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

As of September 30, 2006 and December 31, 2005, there were 6,525,004 and 6,320,961 exercisable options outstanding at a weighted average exercise price per share of $0.61 and $0.57, respectively, and with a weighted average life of 8.40 years and 9.02 years respectively. During the period, 415,833 options were forfeited. Options exercised during the period had no intrinsic value. The aggregate intrinsic value of all options vested and expected to vest is approximately $1.3 million. All fully vested options in the Company are exercisable.

During the period, 415,833 options were forfeited.

Options exercised during the period had no intrinsic value. The aggregate intrinsic value of all options vested and expected to vest is approximately $1.3 million. All fully vested options in the Company are exercisable.

The fair value of all options vested during the year ended December 2005 and the nine months ended September 30, 2006 was $505,180 and $452,319 respectively.

The following table illustrates the effect on net income and earnings per share for the period ended September 30, 2005 if the Company had applied the fair value recognition provisions of FAS 123 to options granted under the company's stock option plans in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black Scholes calculation and amortized to expense over the options' vesting periods.

	For the Three Months Ended September 30, 2005			For the Nine Months Ended September 30, 2005
Net loss as reported	$	(2,310,607	)	$	(5,951,954	)
Current period expense calculated under APB 25	—			—
Stock compensation calculated under FAS 123	(341,107		)	(416,046		)
Pro forma net loss	$	(2,651,714	)	$	(6,368,000	)
Basic and diluted historical loss per share	$	(0.10	)	$	(0.26	)
Pro forma basic and diluted loss per share	$	(0.11	)	$	(0.27	)

The above pro forma disclosures are provided for 2005 because employee stock options were not accounted for using the fair-value method during that period.

For the three and nine months ended September 30, 2006, a charge of approximately $46,000 and $133,000 respectively was recorded through results of operations as Research and Development expense related to share based compensation. For the three and nine months ended September 30, 2006, a charge of approximately $30,000 and $128,000 respectively was recorded through results of operations as General and Administrative expense related to share based

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compensation. These amounts were calculated using a pre-vesting forfeiture rate of 13%, based on historical employee turnover and forfeiture data.

A summary of the status of unvested employee stock options as of September 30, 2006 and changes during the period then ended, is presented below:

	Options		Weighted Average Grant Date Fair Value Per Share
Unvested at December 31, 2005	5,489,041		$	0.19
Granted	555,000		$	0.75
Vested	(1,778,207	)	$	0.25
Unvested at September 30, 2006	4,265,834		$	0.24

As of September 30, 2006, the total remaining unrecognized compensation cost related to unvested stock options amounted to $1.0 million, which will be amortized over the weighted-average remaining requisite service period of four years.

9.ACT GROUP SETTLEMENT

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

We analyzed the $600,000 of convertible promissory notes payable and related warrants issued by the Company in connection with this settlement, and determined that the warrants should be recorded as free standing warrant derivative liabilities, and the conversion option and anti-dilution provisions represent embedded derivative instruments under the provisions of FAS 133, “Accounting for Derivative Instruments and Hedging Activities”. Accordingly, we separately valued these instruments and recorded discounts offsetting Notes Payable—Other.

In August 2006, we repaid in full the convertible promissory notes payable. This cash payment, along with accrued interest and costs, resulted in payment in full of the outstanding notes payable balances and in a loss on extinguishment of  approximately $263,000. As a result of repaying in full the outstanding notes payable, the fair value of the embedded derivative for the conversion option of approximately $14,000 was charged to Adjustment to Fair Value of Derivatives.

In September 2006, the Company received notice of exercise of the warrants issued as part of the Settlement Agreement noted above. In accordance with anti-dilution provisions in the warrant and the issuance of 2006 convertible debentures described in Note 3, the exercise resulted in issuance of approximately 3,200,000 shares of common stock as more fully described in Note 13 – Subsequent Events. The warrants were adjusted to their fair value at September 5, 2006 of approximately $185,000 based upon a Black Scholes calculation as follows: (1) dividend yield of 0%, (2) expected volatility of 175%, (3) risk-free interest rate of 4.71%, and (4) expected remaining life of 2.6 years. This resulted in an increase in the fair value of the warrant liability of approximately $18,000 which was recorded through results of operations as a debit to Adjustment to Fair Value of Derivatives. Upon receipt of notice of exercise of the warrants, the warrant liability was extinguished and a liability was recorded to recognize the stock due to the holders of the warrants. As explained below in Note 13—Subsequent Events, the stock was delivered to the holders of these warrants on October 3, 2006 and the liability was then taken to equity.

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The fair value of the shares issued is recorded in accrued expenses and will be recorded as equity in October 2006 after shares have been issued. The embedded derivatives for anti-dilution protection were adjusted to their “fair value” at September 5, 2006 of approximately $114,000 based upon a Binomial Pricing Model. This resulted in an increase in the fair value of the derivative value of approximately $18,000 which was recorded through results of operations as a debit to Adjustment to Fair Value of Derivatives. The embedded derivatives for anti-dilution proctection were adjusted to their “fair value” at September 5, 2006 of $0 based upon a Binomial Pricing Option.  This resulted in a decrease in the fair value of the derivative value of approximately $114,000 which was recorded through results of operations as a credit to Adjustment to Fair Value of Derivatives.

10.LEGAL PROCEEDINGS

University of Massachusetts and Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron Corporation and Exeter Life Sciences, Inc. , U.S. District Court for the District of Columbia. We filed an action on February 18, 2005 in the U.S. District Court for the District of Columbia. We brought this action under 35 U.S.C. 146 to reverse the decision of the Board of Patent Appeals and Interferences regarding a patent to a method of cloning non-human animals. The patent, U.S. Patent No. 5,945,577, is licensed by the University of Massachusetts exclusively to us.

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

On August  30, 2006, the Company entered into a License and Settlement Agreement between the Company, the University of Massachusetts (the “University”) and Start Licensing, Inc. (“Start”) relating to the settlement of the patent interference actions most recently described above (“Geron-Related Proceedings”).  The terms of the License and Settlement Agreement include an initial payment to the Company of $500,000 and milestone payments to the Company of up to $750,000.  In addition, Start, Geron Corporation and Roslin Institute (“Roslin”) each agree not to sue the Company under certain patent applications owned by Roslin.  In exchange, the Company and the University agreed to dismiss their appeal in the Geron-Related Proceedings with prejudice, transfer control of related University patents to Start and pay certain legal fees. Under the terms of the settlement agreement, the Company retained its rights under the University patents in the human field.

University of Massachusetts v. James M. Robl and Phillippe Collas , Massachusetts Superior Court (Suffolk County). The University of Massachusetts, referred to as UMass, filed a complaint on February 22, 2004 in the Superior Court (Suffolk County) for the Commonwealth of Massachusetts. A decision adverse to UMass in this litigation could have had a materially adverse effect on our business. The complaint alleged the misappropriation by the defendants of valuable inventions in the fields of animal cloning and cell reprogramming, made by the defendants at UMass and with UMass support, that are exclusively licensed to ACT by UMass. The complaint included counts for declaratory judgment, breach of contract seeking specific performance, injunctive relief and damages, intentional interference with contract and prospective contractual relations, conversion, breach of duty, and breach of the covenant of good faith and fair dealing. During 2006, the Company successfully intervened in the litigation to protect its interests.

In order to withdraw its intervention and to settle the above-referenced litigation, on May 9, 2006, the Company entered into two licensing agreements with Kirin Brewery Company, Ltd. and certain of its subsidiaries, including Kirin SD, Inc. (collectively, “Kirin”). The Company entered into a non-exclusive, non-royalty bearing and fully paid license with Kirin. Pursuant to that license the Company has granted Kirin the use of specified intellectual property for use in connection with the development of polyclonal antibodies in non-human mammals. Additionally, the Company entered into an exclusive license with Kirin. Pursuant to that license, the Company has obtained exclusive rights from Kirin to important intellectual property that is directed at methods for the reprogramming of cells for use in connection with the research, development and sale of therapeutic and diagnostic human cell products. The terms of this royalty-bearing license include an initial payment and royalty payments based upon a percentage of net sales, with minimum royalties commencing in 2006. As a result of this transaction, the Company agreed to withdraw its intervention in this case and agreed to a settlement of the matters related to this litigation.

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11.COMMITMENTS AND CONTINGENCIES

We are a party to a license agreement with the University of Massachusetts, as amended from time to time (the “UMass License”). Under the UMass License, we were granted certain exclusive rights to license and sublicense certain products and services invented as part of the collaborative effort. The term of the UMass License extends to the expiration of the related patents, currently 2021. We are required to pay royalties ranging from 2.5% to 4.5% of net sales of licensed products and services, as defined. Minimum royalties of $45,000 per year must be paid to UMass. For 2005 and 2004, we have paid only the minimum royalty required. Additionally, we are required to pay sublicense fees of 18% for sublicense income, as defined. We are required to spend a minimum annual amount of $200,000 on research and development.

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

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

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

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 California commencing November 2005 and expiring May 2008. Annual minimum lease payments are as follows:

2006	$	272,774
2007	568,509
2008	386,311
2009	246,146
2010	83,400

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

2006	$	43,986
2007	87,972
2008	36,655
	168,613
Imputed interest	(22,581		)
Net asset value	146,032
Less current portion	(77,584		)
Long-term commitment under capital lease	$	68,448

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Rent expense recorded in the financial statements for the nine month periods ended September 30, 2006 and 2005 was approximately $577,000 and $367,000, respectively.

We have 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.

12.GAIN ON SALE OF ASSET

In May 2006, the Company sold a minority interest it owned in an entity for cash proceeds of approximately $767,000, resulting in a Gain on Sale of Asset as the Company had no asset value recorded for its investment. As part of this sale, the Company entered into a series of agreements that resolved certain legal matters described more fully in Note 10 — Legal Proceedings under University of Massachusetts v. James M. Robl and Phillippe Collas and the case was dismissed.

13.SUBSEQUENT EVENTS

In October and November 2006, the Company made its monthly redemptions of convertible debentures described in Note 3. The terms of the agreement provide for payment in cash, or company stock under certain circumstances. In connection with the October redemption, the Company paid cash of approximately $470,000 and issued approximately 431,000 shares of common stock.

At September 30, 2006, approximately 99,000 of the shares related to the October redemption had been preliminarily issued by the transfer agent in accordance with the terms of the debenture agreement. Such shares are not reflected as issued and outstanding by the company prior to finalizing share and cash payments in connection with the redemption in October 2006. In connection with the November redemption, the Company paid cash of approximately $255,000 and issued approximately 727,000 shares.

In October 2006, the Company issued approximately 3,200,000 shares due to holders of warrants which were exercised in September 2006.

On October 13, 2006 the Company had a shareholders meeting at which shareholders approved increasing the authorized share count from 100 million to 500 million shares of common stock.

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

OVERVIEW

This Quarterly Report on Form 10-QSB 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 26 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-QSB.

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.

SIGNIFICANT ACCOUNTING POLICIES

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Condensed Consolidated Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. We do not believe that there have been significant changes to our accounting policies during the nine months ended September 30, 2006, as compared to those policies disclosed in the December 31, 2005 financial statements filed in our Annual Report on Form 10-KSB with the SEC on March 31, 2006.

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

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial

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condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

Use of Estimates—These 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, our management has estimated the expected economic life and value of our licensed technology, our net operating loss for tax purposes and our stock, option and warrant expenses related to compensation to employees and directors, consultants and investment banks. Actual results could differ from those estimates.

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

Valuation of Derivative Instruments—These 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 during the reporting periods. Specifically, 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. In determining the appropriate fair value, the Company uses a variety of valuation techniques including Black Scholes models, Binomial Option Pricing models, Standard Put Option Binomial models and net present value of certain penalty amounts. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives. In addition, the fair value of freestanding derivative instruments such as warrant derivatives are valued using Black Scholes models.

Cash and Equivalents—Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank deposit accounts, which at times, may exceed federally insured limits. We have not experienced any losses in such accounts.

Equipment—We record our equipment at historical cost. We expense maintenance and repairs as incurred. Depreciation is provided for by the straight-line method over three to six years.

Revenue Recognition—Our revenues are generated from license and research agreements with collaborators. Licensing revenue is recognized ratably over the life of 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 as a reduction of research and development expense once the reimbursements are approved and the Company is assured of collectibility.

Intangible and Long-Lived Assets—We follow SFAS 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 period ended September 30, 2006, no impairment losses were recognized.

Research and Development Costs—Research and development costs consist of expenditures for the research and development of patents and technology, which are not capitalizable. Our research and development costs consist mainly of payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants.

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

The Company uses the fair value method for equity instruments granted to non-employees and uses the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.

At September 30, 2006, the Company has two stock-based employee compensation plans, which are described more fully in Note 6. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FAS Statement No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Operations for the years ended December 31, 2005 or 2004, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FAS Statement No. 123(R) Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). Results for prior periods have not been restated.

RESULTS OF OPERATIONS

Revenues

Revenues for the three and nine months ended September, 2006 and 2005 were approximately $129,000, $333,000, $83,000, and $312,000 respectively. These amounts relate primarily to license fees and royalties collected that are being amortized over the period of the license granted. The reduction in revenue in current periods was due to decreased revenue levels from licensees’ operations.

Research and Development Expenses and Grant Reimbursements

Research and development expenses for the three and nine months ended September 30, 2006 and 2005 were approximately $2,586,000, $7,012,000, $734,000 and $1,668,000, respectively. During the nine months ended September 30, 2006, the Company has significantly increased scientific research and has allocated a much greater portion of expenditure and focus on Research and Development activity than had previously been the case. Additional expenditure in this area includes scientific payroll and payroll related expenses, facilities costs and scientific supplies as well as investment in the infrastructure needed to support this greater scientific activity.

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.

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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 and nine months ended September 30, 2006 and 2005 were approximately $6,000, $370,000, $172,000 and $597,000, respectively. These amounts represent approved reimbursements pursuant the grant from NIST. This grant expired in May 2006.

General and Administrative Expenses

General and administrative expenses for the three and nine months ended September 30, 2006 and 2005 were approximately $1,337,000, $5,845,000, $2,331,000 and $5,572,000, respectively. The principal increase in expense in the nine month period versus the same period last year is a result of additional salary costs related to the addition of key personnel and approximately $600,000 of costs incurred by the Company for investor relations related expenses during the current period. Expenses for the three month period versus the same period last year have decreased primarily as a result of decreased general and administrative infrastructure costs and legal fees.

Other Income (Expense)

Other income (expense) for the three and nine months ended September 30, 2006 and 2005 were approximately ($26,800,000), ($4,100,000), $540,000 and $524,000, respectively. The increase in other expense in the three and nine months ended September 30, 2006, compared to other income in the prior periods, relates primarily to adjustments to fair value of derivatives related to the Convertible Debenture financing and the Charges related to issuance of Convertible Debentures. The increase in interest expense in the three and nine months ended September 2006, compared to interest expense in the prior periods relates primarily to interest recorded in connection with the convertible debentures.

Fluctuations in the Company’s stock price will result in large changes to the valuations of the Convertible Debentures related to the 2005 and 2006 financings and related derivatives. In the nine months to September 30, 2006, the Company’s stock price has ranged from $0.28 per share to $1.83 per share, which has resulted in large changes in the value of the derivative instruments. These changes are taken to the results of operations through the Adjustments to fair Value of Securities line with resulting large swings shown in the Other Income (Expense) line.

Net Loss

Net loss for the three and nine months ended September 30, 2006 and 2005 was approximately ($30,600,000), ($16,500,000), ($2,311,000) and ($5,952,000), respectively. The increase 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.

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Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements , or SFAS 157, which provides guidance on how to measure assets and liabilities that use fair value. This Statement clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 will apply whenever another generally accepted accounting principle requires, or permits, assets or liabilities to be measure at fair value but does not expand the use of fair value to any new circumstances. This statement will also require additional disclosures in both annual and quarterly reports. SFAS 157 is effective for fiscal years beginning after November 2007, and will be adopted by us beginning January 1, 2008. We are currently evaluating the potential impact this statement may have on our financial statements, but do not believe the impact of adoption will be material.

In September 2006, the SEC staff issued Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , or SAB 108 . SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006. We have evaluated the potential impact that SAB 108 may have on our financial statements and do not believe the impact of the application of this guidance will be material.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans , or SFAS 158. This Statement requires companies to recognize in their statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to measure a plan’s assets and its obligations that determine its funded status as of the end of the company’s fiscal year. Additionally, SFAS 158 requires companies to recognize changes in the funded status of a defined benefit postretirement plan in the year that the changes occur and those changes will be reported in comprehensive income. The provisions of SFAS 158 are effective as of the end of fiscal year 2006 and we are currently in the process of quantifying the impact to the financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We are financing our operations primarily with $8,750,000 of proceeds of convertible debentures issued in September, 2006 and described in our Current Report on Form 8-K filed with the Securities and Exchange Commission and above in Note 3, Convertible Debentures 2006, and $4,314,588 of proceeds from warrant exercises as described above in Note 5 – Warrant Derivatives, and $17,750,000 of proceeds of convertible debentures issued September 15, 2005 and described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2005. 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.

Cash and cash equivalents at September 30, 2006 and December 31, 2005 were approximately $13,100,000 and $13,900,000, respectively. The decrease in the current period is primarily the result of cash received in for warrant exercises and in connection with issuance of Convertible debentures, offset by cash utilized in operations, capital expenditures, and $600,000 of costs incurred by the Company for investor relations related expenses in the current period.

Our cash and cash equivalents are limited. We expect to require substantial additional funding. 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, maintaining 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 our 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 twelve months from the date of the 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.

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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-QSB. 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. We are in the pre-clinical stage, and 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

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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.

We have sold the 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 the Company’s 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 June 30, 2007 without raising additional financing.

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 United States Food and Drug Administration, or 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 clinical testing, regulatory, manufacturing, or in 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 compete with us effectively. Of course, any of the world’s largest pharmaceutical companies represents a significant actual or potential competitor with vastly greater resources than ours.

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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 human therapeutic or agricultural products. 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 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 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 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 and embryonic stem cell 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 and embryonic stem cell 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.

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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.

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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 Relating to the September 2005 and September 2006 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 September 6, 2006, $25,897,208 aggregate original principal amount of convertible debentures with an original issue discount of 20.3187%. We are required to redeem on a monthly basis, by payment with cash or with shares of our common stock, 1/30th of the aggregate original principal amount of the debentures. Unless waived by the holders of the debentures, in order to redeem with shares of our common stock we must satisfy certain conditions which have yet to be satisfied, including such conditions as the listing of our shares of common stock on either the NASDAQ National Market, the NASDAQ Small Cap Market, or the American Stock Exchange. These monthly payments will impact the amount of working capital available to us. The Debentures issued in September 2005 financing (referred to as the 2005 Debentures) are due and payable on September 14, 2008, unless sooner converted into shares of our common stock, and the Debentures issued in September 2006 financing (referred to as the 2006 Debentures) are due and payable on August 30, 2009, unless sooner converted into shares of our common stock. 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. 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 in full, and warrants that are registered and available for sale and the sale of these shares may depress the market price of our common stock. As of September 6, 2006, we had:

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certain outstanding 2005 Debentures that may be converted into an estimated 3,274,608 shares of common stock based on a conversion price of $0.95, and

certain outstanding 2005 Debentures that may be converted into an estimated 5,132,645 shares of common stock based on a conversion price of $2.30, and

outstanding 2005 Warrants to purchase 2,716,734 shares of common stock with an exercise price of $0.95 that were issued in connection with the sale of the 2005 Debentures, and

outstanding 2006 Debentures that may be converted into an estimated 38,129,340 shares of common stock based on a conversion price of $0.288, and

outstanding 2006 Warrants to purchase 23,640,191 shares of common stock with an exercise price of $0.3168 that were issued in connection with the sale of the 2006 Debentures.

       Sales of a substantial number of shares of our common stock in the public market 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.

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, including investors in this offering. In addition, the issuance of the 2006 Debentures and the 2006 Warrants triggered certain anti-dilution rights for certain third parties currently holding securities of the Company 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.

Risks Relating to Government Regulation

Companies such as ours engaged in research using nuclear transfer and embryonic 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. 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.

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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 the Company’s Annual Report on Form 10-KSB filed with the SEC on March 31, 2006 under the heading “DESCRIPTION OF BUSINESS—Government Regulation”.

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

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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 yet accurately predict when we might first submit any Investigational New Drug, or IND, application to the FDA, or whether any such IND application would be granted on a timely basis, if at all, nor can we assure you that we will successfully complete any clinical trials in connection with any such IND application. Further, we cannot yet accurately predict when we might first submit any product license application for FDA approval or whether any such product license application would be granted on a timely basis, if at all. As a result, 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 Company’s Annual Report on Form 10-KSB filed with the SEC on March 31, 2006 under the heading “DESCRIPTION OF BUSINESS—Government Regulation”.

For-profit entities may 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 in the Company’s Annual Report on Form 10-KSB filed with the SEC on March 31, 2006 under the heading “DESCRIPTION OF BUSINESS —California Proposition 71”. There is ongoing litigation in California that may delay, or prevent the sale of State bonds that would fund the activities contemplated by California voters. In addition, 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

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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.

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.

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To be successful, our proposed products must be accepted by the health care community, which can be very slow to adopt or unreceptive to new technologies and products.   Our 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

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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 need to improve our financial control procedures.   Since the January 31, 2005 merger, we have determined that there are deficiencies in the operating effectiveness of our internal controls over financial reporting that we believe would collectively constitute significant deficiencies and material weaknesses under standards established by the American Institute of Certified Public Accountants, resulting in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. Since the merger, additional management processes and procedures have been added to supplement the underlying systems of internal accounting control to allow timely preparation and filing of required financial reports.

In our opinion, we have not established and did not maintain effective internal control over financial reporting as of September 30, 2006. We also believe that because of the effect of the material weakness we have identified, we have not maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have taken initial remedial steps, and will continue our on-going evaluation of internal controls and expect to improve our internal controls over financial reporting as necessary to assure their effectiveness, but there can be no assurance that we will succeed or that other deficiencies will not be identified.

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 have established corporate offices and an additional research facility in California. We will likely continue to incur significant costs associated with maintaining multiple locations.

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 by 2007 our management assess our internal control over financial reporting annually and include a report on its assessment in our annual report. 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 controls. There exist material weaknesses and deficiencies at this time in our internal controls. These weaknesses and deficiencies could have a material adverse effect on our business and operations.

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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

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

Not including the shares of common stock underlying the 2005 Debentures (and the warrants issued in connection therewith), the 2006 Debentures (and the warrants issued in connection therewith), and the warrants issued in connection with the warrant repricing (which are further described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2006) , there are presently approximately 26,500,000 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.

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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.

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.CONTROLS AND PROCEDURES

(a)           Evaluation of disclosure controls and procedures. Our management, with the participation of our principal executive officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-QSB. Based on such evaluation, due to the material weaknesses in our internal controls over financial reporting further described below, our principal executive officer has concluded that such disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. We have implemented, and are in the process of implementing, new disclosure controls and procedures to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in applicable SEC rules and forms are effective.

(b)           Changes in internal controls. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2006. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

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Management’s assessment identified material deficiencies in our internal control over financial reporting. These deficiencies include lack of segregation of duties, limited capability to interpret and apply United States generally accepted accounting principles, lack of adequate documentation of our system of internal controls, lack of formal accounting policy and procedures and related documentation, deficiencies in our information technology systems and lack of a formal budgeting process. We also have not yet instituted new internal control processes related to our identified material weaknesses, significant deficiencies and deficiencies, as has been characteristic of companies that have completed their review of internal controls and have had to report on the effect of such review. Accordingly, our internal control over financial reporting may be subject to additional material weaknesses and deficiencies that we have not identified. Management has determined that these significant deficiencies, in the aggregate, constituted a material weakness in the design and operation of our internal controls in effect prior to September 30, 2006. We hired a chief financial officer on April 1, 2005, and we are in the process of implementing new controls; however, these controls were not fully in operation during the third quarter of 2006. As a result of the material weaknesses described in the preceding paragraph, we believe that, as of September 30, 2006, our internal control over financial reporting was not effective based on the COSO criteria.

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

None.

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 or, in the case of equity compensation to employees, directors and eligible consultants, Rule 701 therewith.

On September 6, 2006, in connection with the closing of the exercise of the additional investment right described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2006, we issued to certain accredited investors an aggregate of $10,981,250 principal amount convertible debentures with an original issue discount of 20.3187%. In connection with the closing of the issuance and sale of convertible debentures, we received gross proceeds of $8,750,000. The convertible debentures are due and payable three years from the date of issuance, unless sooner converted into shares of our common stock. The conversion price of the debentures is $0.288, subject to anti-dilution and other customary adjustments. In connection with the securities purchase agreement, we also issued warrants to purchase an aggregate of 19,064,670 shares of our common stock. The term of the warrants is five years and the exercise price is $0.3168 per share, subject to anti-dilution and other customary adjustments.

On August 28, 2006, in connection with the warrant repricing transaction described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2006, we issued to certain purchasers warrants to purchase an aggregate of 4,541,672 shares of our common stock. The term of the warrants is five years and the exercise price is $1.60 per share, subject to anti-dilution and other customary adjustments.

On August 23, 2006, in connection with certain consulting services provided to us, we issued to Trilogy Capital Partners, Inc. a warrant to purchase 1,050,000 shares of our common stock, of which 550,000 are immediately vested and exercisable and 500,000 will vest and become exercisable after six months.  The term of the warrants is three years and the exercise price is $2.54 per share, subject to anti-dilution and other customary adjustments.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

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

A special meeting of our stockholders was held on October 13, 2006, for the purpose described below.  The voting record for the matter presented to the stockholders is as set forth immediately following the description of the matter. 

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To amend the Company's Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock, par value $0.001 per share ("Common Stock"), from 100,000,000 to 500,000,000, with no change in the par value.  

Number of Votes FOR: 18,192,411

Number of Votes AGAINST: 686,211

Number of Votes ABSTAINING: 48,004

Number of Broker Non-Votes: 0

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

Exhibit No.	Exhibit Description
3.1	Certificate of Amendment to Certificate of Incorporation dated October 13, 2006 (previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on October 13, 2006 (File No. 000-50295) and incorporated by reference herein).
10.1	Consulting Agreement between Advanced Cell Technology, Inc. and James G. Stewart dated August 17, 2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 18, 2006 (File No. 000-50295) and incorporated by reference herein).
10.2	Securities Purchase Agreement dated August 30, 2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
10.3	Registration Rights Agreement dated September 15, 2005 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
10.4	Form of Common Stock Purchase Warrant (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
10.5	Form of Amortizing Convertible Debenture (previously filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
10.6	Form of Lock-up Agreement (previously filed as Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
10.7	License and Settlement Agreement between the Company, the University of Massachusetts and Start Licensing, Inc.*
31.1	Section 302 Certification of Chief Executive Officer.*
31.2	Section 302 Certification of Chief Accounting Officer.*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2	Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350.*

*Filed herewith

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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
Dated: November 16, 2006

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Exhibit Index

Exhibit No.		Exhibit Description
	3.1	Certificate of Amendment to Certificate of Incorporation dated October 13, 2006 (previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on October 13, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.1	Consulting Agreement between Advanced Cell Technology, Inc. and James G. Stewart dated August 17, 2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 18, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.2	Securities Purchase Agreement dated August 30, 2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.3	Registration Rights Agreement dated September 15, 2005 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.4	Form of Common Stock Purchase Warrant (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.5	Form of Amortizing Convertible Debenture (previously filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.6	Form of Lock-up Agreement (previously filed as Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed on September 8, 2006 (File No. 000-50295) and incorporated by reference herein).
	10.7	License and Settlement Agreement between the Company, the University of Massachusetts and Start Licensing, Inc.*
	31.1	Section 302 Certification of Chief Executive Officer.*
	31.2	Section 302 Certification of Chief Accounting Officer.*
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
	32.2	Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350.*

*Filed herewith

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EX-10.7

EXHIBIT 10.7

SETTLEMENT AND LICENSE AGREEMENT

In this Settlement and License Agreement (“Agreement”), effective as of the 30th day of August, 2006 (the “Effective Date”), Advanced Cell Technology, Inc., a Delaware corporation with offices located at 1201 Harbor Bay Parkway, Suite 120, Alameda, California 94502 (“ACT”), The University of Massachusetts, a public institution of higher education of the Commonwealth of Massachusetts, as represented by its Amherst campus (“UMass”), and Start Licensing, Inc., a Delaware corporation with offices located at 12357-A Riata Trace Parkway, Suite 150, Austin, Texas 78727 (“Start”) agree as follows:

Article 1 - Background

1.1           UMass owns certain Stice Patents (hereafter defined) which, pursuant to that certain Exclusive License Agreement effective April 16, 1996, as amended (“UMass-ACT Agreement”), have been exclusively licensed to ACT in a defined field that includes the Start Field (hereinafter defined).

1.2           Roslin Institute (Edinburgh) (“Roslin”) owns certain Campbell Patents (hereafter defined) which have been exclusively licensed to Geron Corporation (“Geron”) and Exeter Life Sciences (“Exeter”) and exclusively sublicensed to Start in the field of cloning non-human animals, tissues, and cells, and products and by-products comprised of, made in, produced by or originating, extracted or isolated from such non-human animals, tissues and cells.

1.3           Under 35 U.S.C. §146, UMass and ACT filed actions against Roslin, Geron, and Exeter (as hereafter defined, the Pending Actions) seeking reversal of adverse holdings by the United States Patent and Trademark Office (“USPTO”) of certain interference proceedings involving certain Stice Patents and certain Campbell Patents.

1.4           UMass, ACT and Start wish to settle the Pending Actions.

1.5           In connection with the settlement of the Pending Actions, UMass, ACT and Start wish to grant rights under the involved patents in accordance with the terms of this Agreement.

Article 2 - Definitions

For purposes of this Agreement, the following words and phrases shall have the following meanings:

2.1           “ACT Field” means non-human animal research or non-human animal studies, including without limitation preclinical trials, that is useful in connection with the research and development, manufacture and sale of therapeutic and diagnostic human cell products; provided, however, that the ACT Field does not include (a) any use of human embryos, cells, or tissues or (b) the sale, lease, distribution, transfer, or other disposition of (i) non-human animals, embryos,

1

cells, or tissues, and (ii) products and by-products comprised of, made in, produced by or originating, extracted or isolated from such non-human animals, embryos, cells or tissues.

2.2           “ANZ Patents” means the AU Patent and the NZ Patent, each of which are included in the Stice Patents.

2.3           “AU Patent” means Australian Patent Application No. 742,363.

2.4           “Campbell Patents” means the patents and patent applications listed on Exhibit A attached hereto, any divisional, continuation, continuation-in-part of such patent applications, any and all patents issuing thereon, any and all reissues, reexaminations, extensions, divisions, renewals, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any of the foregoing, and any other patents or patent applications anywhere in the world that correspond to any of the foregoing, or from which any of the foregoing claim priority, or that claim priority back to any of the foregoing.

2.5           “NZ Patent” means New Zealand Patent Application No. 336,612.

2.6           “Party” means UMass and ACT jointly or Start, and “Parties” means UMass and ACT jointly and Start.

2.7           “Pending Actions” means the actions pending in the U.S. District Court for the District of Columbia styled as University of Massachusetts, et al v. Roslin Institute (Edinburgh), et al, Case No. 1:05-cv-00353-RMU, and University of Massachusetts, et al v. Roslin Institute (Edinburgh), et al, Case No. 1:05-cv-00706-RMU.

2.8           “Start Field” means all uses and applications in non-human animals, excluding the production of cloned animals for the primary purpose of producing human and non-human animal therapeutics and human healthcare products, including without limitation the production of biopharmaceutical agents in milk, including but not limited to proteins, peptides, polypeptides for pharmaceutical, nutraceutical or other use, but only to the extent and only so long as such field is exclusively licensed under the Stice Patents by ACT to GTC Biotherapeutics.

2.9           “Stice Patents” means the patents and patent applications listed on Exhibit B attached hereto, any divisional, continuation, continuation-in-part of such patent applications, any and all patents issuing thereon, any and all reissues, reexaminations, extensions, divisions, renewals, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any of the foregoing, and any other patents or patent applications anywhere in the world that correspond to any of the foregoing, or from which any of the foregoing claim priority, or that claim priority back to any of the foregoing.

2.10         “UMass Field” means the production of immunoglobulin in the blood of Bos taurus, Bos indicus, and Leporidae.

For purposes of this Agreement, except as otherwise expressly provided herein or unless the context otherwise requires:  (a) the use herein of the plural shall include the single and vice versa and the use of the masculine shall include the feminine; (b) unless otherwise set forth herein, the use of the term “including” or “includes” means “including [includes] but [is] not limited to”;

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and (c) the words “herein,” “hereof,” “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular provision.  Additional terms may be defined throughout this Agreement.

Article 3 - Dismissal

3.1           Upon receipt of (i) the $500,000 payment in accordance with section 6.1(a) of this Agreement, and (ii) the fully executed Covenant Not to Sue in accordance with section 4.5 of this Agreement, UMass and ACT shall execute a stipulation for dismissal with prejudice of the Pending Actions substantially in form set forth in Exhibit C hereto (the “Stipulation for Dismissal”), and Start shall obtain the execution of such Stipulation for Dismissal by Roslin, Geron and Exeter.  Immediately after filing a copy of this fully executed Agreement with the USPTO as provided in section 3.2 of this Agreement below, UMass and ACT, through their counsel, will file the fully executed Stipulation for Dismissal with the U.S. District Court.

3.2           Pursuant to 35 U.S.C. §135(c), UMass and ACT shall, upon receipt of the $500,000 payment and the executed Covenant Not to Sue as provided in sections 6.1(a) and 4.5 of this Agreement, and before filing the Stipulation for Dismissal of the Pending Actions, file a true copy of this Agreement in the USPTO in conjunction with each interference that is the subject of a Pending Action.

Article 4 - License Grants and Covenants

4.1           ACT hereby grants to Start a worldwide, exclusive, fully paid-up, royalty-free sublicense, with the right to grant sublicenses, under all of and to the extent of its rights and interests in the Stice Patents under the UMass-ACT Agreement, until the last Stice Patent expires, to make, have made, use, develop, sell, offer for sale, lease, distribute, import, export and otherwise dispose of any and all products, to develop and perform services, to use and practice any processes, arts or methods, and to otherwise commercialize and exploit such Stice Patents in the Start Field except for the UMass Field.  Start acknowledges UMass has retained certain rights under the Stice Patents pursuant to the UMass-ACT Agreement, including rights to use the Stice Patents for academic research and teaching purposes.

4.2           UMass hereby grants to Start a worldwide, exclusive, fully paid-up, royalty-free license, with the right to grant sublicenses, under all of its rights and interests in the Stice Patents subject to the UMass-ACT Agreement, until the last Stice Patent expires, to make, have made, use, develop, sell, offer for sale, lease, distribute, import, export and otherwise dispose of any and all products, to develop and perform services, to use and practice any processes, arts or methods, and to otherwise commercialize and exploit such Stice Patents in the UMass Field.

4.3           The license granted to Start in section 4.1 of this Agreement will be subject to any nonexclusive license under the Stice Patents granted by ACT to third parties prior to the Effective Date.  All such existing licensees are identified in Exhibit D attached hereto.  Start agrees to negotiate in good faith with any qualified licensee identified in Exhibit D for a nonexclusive license under one or more of the Campbell Patents.  ACT shall also include in Exhibit D the identification of all exclusive licenses granted under the Stice Patents as of the

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Effective Date, including the name of the licensee and a description of the exclusively licensed field.

4.4           In the event of the expiration or termination for any reason of the UMass-ACT Agreement, UMass agrees that the license under the Stice Patents and other associated rights granted in this Agreement to Start will continue, and UMass will assume all obligations of ACT in this Agreement with respect to the Stice Patents, except for the obligation of ACT to bear costs and expenses associated with the performance of section 5.3 of this Agreement.

4.5           Start agrees to covenant not to sue or otherwise assert any Campbell Patent against ACT or UMass, or their officers, trustees, employees, agents or research collaborators based on activities in the ACT Field or on academic research or teaching activities in the UMass Field by executing a covenant not to sue substantially in the form set forth in Exhibit E attached hereto (the “Covenant Not to Sue”).  Start agrees it will obtain execution by Roslin, Geron, and Exeter of such Covenant Not to Sue, and Start will deliver the fully executed Covenant Not to Sue to ACT and UMass within one (1) business day after the Effective Date of this Agreement by the Parties.

4.6           Start hereby grants to ACT a worldwide, nonexclusive, royalty-free, paid-up sublicense under the Stice Patents to conduct activities in the ACT Field. The license granted to ACT in this section 4.6 does not include the right to sublicense; provided, however, that under the license ACT may extend to its research collaborators the right to use the Stice Patents to conduct activities in the ACT Field.

Article 5 - Patent Matters

5.1           ACT and UMass hereby disclaim all claims in U.S. Patent Nos. 5,945,577 and 6,235,970 and the subject matter of all such claims, except the subject matter of claim 14, as presented in U.S. Patent Application Serial No. 10/833,993, filed April 28, 2004, as an application for reissue of the ‘970 Patent.  Within ten (10) days after the Effective Date, ACT and UMass will file in the USPTO the appropriate documents substantially in the form set forth in Exhibit F attached hereto to make of record the disclaimers set forth in this section 5.1 as to U.S. Patent Nos. 5,945,577 and 6,235,970 and will deliver to Start a copy of the disclaimers as filed in the USPTO.  ACT and UMass further agree not to assert any patent right claiming the subject matter of the claims disclaimed pursuant to this section 5.1 in any country.

5.2           Subject to the terms of this Agreement, including without limitation sections 5.5 and 6.1(a) of this Agreement, and except for the ANZ Patents, ACT and UMass hereby assign to Start all their rights to prosecute, maintain and enforce any and all Stice Patents having one or more claims directed to or otherwise encompassing non-human subject matter as of the Effective Date (“Transferred Stice Patents”).  The foregoing assignment of rights shall include all rights to apply for, file, register, prosecute, maintain, extend, and renew the Transferred Stice Patents, the right, subject to section 5.4 of this Agreement, to abandon, disclaim or surrender the Transferred Stice Patents, the right to settle or terminate any interference proceedings, re-examinations, oppositions, or other challenges to the validity of the Transferred Stice Patents, and the right to bring actions for present or future infringement of or otherwise enforce the Transferred Stice Patents.  ACT and UMass shall execute and deliver such documents and

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perform such acts as are necessary to establish or otherwise perfect Start’s rights under this section 5.2.

5.3           ACT shall at its sole expense for a period of sixty (60) days after the Effective Date (“Transition Period”) (a) continue to prosecute and maintain the Transferred Stice Patents in the ordinary course with respect to any filings or communications with patent authorities during such period, (b) provide Start the opportunity to comment on any filings and communications with patent authorities during such period prior to their submission and comply with Start’s reasonable instructions with respect to any such filings and communications, and (c) not abandon the prosecution of any such patents and patent applications or any claims therein absent written consent of Start.  ACT shall provide to Start within thirty (30) days after the Effective Date the contact information for all outside patent prosecution counsel, any patent prosecution docket listings maintained either by such outside prosecution counsel or internally by ACT, and copies of all patent and patent applications files maintained by such outside patent prosecution counsel or internally by ACT.  ACT shall bear its own costs and expenses, and those of its outside counsel, in copying and delivering records, files and other materials in connection with transitioning prosecution and maintenance of the Transferred Stice Patents to Start.  ACT and UMass shall execute powers of attorney for the prosecution and maintenance of the Transferred Stice Patents, and otherwise perform all acts and make all filings to permit Start to, effective as of the end of the Transition Period, prosecute, maintain, and enforce each such patent or application in all jurisdictions, and transact all matters connected therewith.  Commencing from the end of the Transition Period, Start shall bear all costs and expenses associated with its prosecution and maintenance of the Transferred Stice Patents.

5.4           ACT shall make reasonable commercial efforts to cooperate fully with Start, at Start’s expense (subject to ACT’s expense obligations under section 5.3 above), in effecting an orderly transition of the prosecution and maintenance of the Transferred Stice Patents and ACT and UMass shall cooperate with Start in the preparation, filing, prosecution, maintenance and, as applicable, enforcement of the Transferred Stice Patents, including without limitation promptly executing all papers and instruments or requiring their respective employees to execute all papers and instruments to enable Start to file, prosecute, maintain and enforce the Transferred Stice Patents in any jurisdiction.

5.5           To the extent possible under the patent laws of the relevant jurisdictions and within six (6) months from the Effective Date, Start will cooperate with ACT, at ACT’s expense, in filing divisional or continuation applications, as appropriate, from the Transferred Stice Patents  to separate claims solely directed to human subject matter from claims that encompass non-human subject matter.  Start will assign back to ACT its rights granted under section 5.2 of this Agreement to prosecute, maintain and enforce applications having only claims solely directed to human subject matter, and will otherwise perform all acts and make all filings necessary to permit ACT to prosecute, maintain and enforce such applications.  ACT agrees that for any such application, as well as any applications in the Stice Patents not transferred to Start pursuant to this Article 5, and any divisional, continuation, continuation-in-part of any such foregoing applications, and any and all patents issuing thereon (collectively “Retained Stice Patents”), ACT will limit the claims in such applications or resulting patents to claims solely directed to human subject matter.  Start shall execute and deliver such documents and perform such acts as

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are necessary to establish or perfect ACT’s rights under this section 5.5.  Start will have no right or license under any claim of a Retained Stice Patent solely directed to human subject matter.

5.6           With respect to the NZ Patent, within ninety (90) days after the Effective Date ACT will, at Start’s expense and to the extent possible under the patent laws of New Zealand, cancel any claim directed solely to non-human subject matter and reintroduce such claim or claims in a divisional or continuation application.  ACT and UMass will assign to Start their rights to prosecute, maintain and enforce such application.  With respect to the AU Patent, within ninety (90) days after the Effective Date ACT will, at Start’s expense and to the extent possible under the patent laws of Australia, cancel any claim not directed solely to non-human subject matter and reintroduce such claim or claims in a divisional or continuation application, such application to be prosecuted, maintained and enforced by ACT.  ACT and UMass will then assign to Start their rights to prosecute, maintain and enforce the AU Patent.  The assignment of rights to Start to prosecute, maintain and enforce applications under this section 5.6 shall be equivalent to the rights assigned by UMass and ACT to Start under section 5.2 of this Agreement with respect to the Transferred Stice Patents.  Each such application will be considered a Transferred Stice Patent.  Within thirty (30) days of the filing of each divisional or continuation application contemplated in this section 5.6, ACT and UMass will perform all acts and make all filings necessary to permit Start to prosecute, maintain and enforce each application transferred to Start under this section 5.6, and will cooperate with Start in the prosecution and maintenance of each such application, as is otherwise provided in sections 5.3 and 5.4 of this Agreement with respect to Transferred Stice Patents.

5.7           Subsequent to the filing of the divisional or continuation applications as provided in sections 5.5 and 5.6, ACT and Start will each bear its own expense as to the ongoing prosecution and maintenance of the applications each respectively controls.

Article 6 - Consideration

6.1           In consideration for the dismissal with prejudice of the Pending Actions and the rights granted under the Stice Patents, Start will pay to ACT as follows:

(a)Five hundred thousand U.S. dollars ($500,000) within one (1) business day after after the Effective Date of this Agreement by the Parties, subject to the following credit:

(i)credit of any attorneys fees and/or costs related to the Pending Actions incurred by Start after May 10, 2006; provided, however, that the credit referred to in this section 6.1(a)(i) does not include costs or attorneys’ fees incurred by Start in connection with the negotiation and preparation of this Agreement.

(b)Two hundred fifty thousand U.S. dollars ($250,000) within 5 business days after release by the United States Food and Drug Administration (“FDA”) of a final public announcement, statement or notification permitting agricultural products from animals produced by somatic cell nuclear transfer (“SCNT”) or their progeny to enter the human food chain; provided, however, that in the event new

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restrictions are imposed by the FDA in connection with the above-referenced public announcement, statement or notification, and ACT and Start agree in writing that such new restrictions are likely to delay the commercialization of agricultural products from animals produced by SCNT by more than twelve (12) months, such agreement not to be unreasonably withheld by ACT, then payment under this section 6.1(b) shall be made by Start within five (5) business days of the first commercial sale of such agricultural product that complies with such new restrictions.

(c)Five hundred thousand U.S. dollars ($500,000) within five (5) business days after the first occurrence of a Start sublicensee receiving approval by the FDA of a New Drug Application for a human therapeutic product comprised of, made in, produced by or otherwise originating from an animal generated using SCNT, or from the tissues or cells of such animal, under license from Start.

6.2           The amounts to be paid pursuant to section 6.1 of this Agreement will be paid by wire transfer to the account identified, and pursuant to the instructions, set forth in Exhibit G attached hereto.

6.3           (a)  Failure to pay the five hundred thousand dollar ($500,000) amount to ACT in accordance with the requirements of section 6.1(a) above shall constitute a material breach of this Agreement and result in the automatic termination of this Agreement; provided, however, that any delay in such payment for reasons not within Start’s control, including any delay attributable to the operations of the financial institutions involved in transacting the payment, shall not constitute material breach of this Agreement.  Notwithstanding the foregoing and in addition to any and all other contractual or equitable rights of ACT, all past due amounts owed by Start to ACT under this Agreement shall bear simple interest at the U.S. Prime Rate, as reported by the Wall Street Journal, Eastern Edition, on the due date (or the next business day if the due date is not a business day), calculated based on the number of days between the actual date the payment is made and the date the payment was due; provided, however, that in no event shall such rate exceed the maximum legal annual interest rate.

(b)  Failure to file Stipulation for Dismissal in accordance with the requirements of section 3.1 above shall constitute a material breach of this Agreement and result in (i) the automatic termination of this Agreement, (ii) the automatic refund to Start of the $500,000 payment made to ACT pursuant to section 6.1(a) above, and (iii) the automatic termination of the Covenant Not to Sue.

Article 7 - Term and Termination

7.1           The term will begin on the Effective Date and, unless terminated earlier pursuant to the terms of this Agreement, will expire on the date of expiration of the last of the Campbell Patents and Stice Patents to expire.

7.2           Either Party may terminate this Agreement upon sixty (60) days prior written notice to the other Party (a) for any material breach of this Agreement by such other Party if the breaching Party fails to remedy such breach within such sixty (60) day period, or (b) if the other Party files

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for protection under applicable bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it and such proceeding remains undismissed or unstayed for a period of more than sixty (60) days.

7.3           The expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination or preclude either Party from pursuing all rights at law and in equity with respect to any breach under this Agreement.  Notwithstanding the foregoing, neither Party will be liable for punitive, exemplary or consequential damages incurred by the other Party arising out of any breach under this Agreement.  Upon expiration or termination, except as provided in section 7.4, all rights and licenses granted under this Agreement shall terminate.

7.4           If ACT and UMass terminate this Agreement pursuant to section 7.2 of this Agreement for material breach by Start, or if this Agreement automatically terminates pursuant to section 6.3 of this Agreement, all licenses and rights granted to Start under this Agreement will terminate, and all licenses and rights granted to ACT and UMass hereunder will continue, provided that ACT and UMass continues to comply with their obligations hereunder.  If Start terminates this Agreement pursuant to section 7.2 of this Agreement for material breach by ACT or UMass, all licenses and rights granted to ACT and UMass under this Agreement will terminate, and all licenses and rights granted to Start hereunder will continue, provided that Start continues to comply with its obligations hereunder.

7.5           The termination provisions set forth in this Article 7 are in addition to the provisions for the automatic termination of this Agreement set forth in Article 6 of this Agreement.

Article 8 - Representations and Warranties

8.1           Each Party represents and warrants to the other Parties that, as of the Effective Date this Agreement has been duly executed and delivered by it and constitutes a legal, valid and binding obligation enforceable against it in accordance with such Agreement’s terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors’ rights generally and by general equity principles, including judicial principles affecting the availability of injunction and specific performance.

8.2           Start represents that, as of the Effective Date, all necessary approvals or consents of this Agreement under relevant agreements, including without limitation from Roslin, Geron, and Exeter, have been obtained.

8.3           UMass represents to Start that it owns all right, title and interest in the Stice Patents and, except for any rights in the U.S. Government, that ACT is the only licensee granted rights by UMass.

8.4           UMass represents to Start that it has the right and authority to grant the license granted to Start in section 4.2 of this Agreement.

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8.5           UMass and ACT represent to Start that ACT is the exclusive licensee under the Stice Patents in the Start Field except for the UMass Field, and that it has the right to grant sublicenses of the type granted to Start in this Agreement.

8.6           UMass and ACT represent to Start that Exhibit D includes the identity of each person or entity having rights under any Stice Patent by virtue of UMass or ACT action.

8.7           Start represents to ACT that it is the exclusive licensee under the Campbell Patents in the Start Field, subject to rights retained by Roslin and rights retained by licensees under prior licenses from Geron and Exeter.

8.8           Start represents to ACT that Start has the sole right to enforce the Campbell Patents in the ACT Field pursuant to its license under the Campbell Patents.

8.9           Each Party represents and warrants to the other Parties that, to its knowledge, there is no claim, investigation, suit, action or proceeding pending (except the Pending Actions) or, expressly threatened, against such Party before or by any governmental entity or arbitrator that is likely to impair the ability of such Party to perform any obligation under this Agreement.

8.10         Each Party represents and warrants to the other Parties that it has not entered into any enforceable agreement with any third party which is in conflict with the rights granted to the other Parties under this Agreement or that is inconsistent with or that would prevent the Party from performing under this Agreement.

8.11         Nothing in this Agreement shall be construed as:

(a)a warranty or representation by any Party as to the valid­ity, enforceability or scope of any patent; or

(b)a warranty or representation by any Party that anything made, used, sold, or otherwise disposed of pursuant to this Agreement is or will be free from infringement of patents or other intangible rights of third par­ties; or

(c)except as expressly provided in this Agreement, a requirement that any Party shall file any patent applica­tion, secure any patent, or maintain any patent in force; or

(d)an obligation on any Party to bring or prosecute actions or suits against third parties for infringement of any patent; or

(e)an obligation to furnish any manufacturing or technical information; or

(f)granting by implication, estoppel, or otherwise, any license or rights under patents, trade secrets, know-how, copyrights, or other intangible rights owned or controlled by a Party other than as expressly granted herein.

8.12         EACH PARTY HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.  EACH PARTY HEREBY WAIVES, RELEASES AND RENOUNCES ANY

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OBLIGATION, RIGHT, LIABILITY, CLAIM OR REMEDY FOR (A) LOSS OF USE, REVENUE OR PROFIT, OR ANY OTHER DAMAGES, (B) INFRINGEMENT OF THIRD PARTY INTANGIBLE PROPERTY RIGHTS, and (C) INCIDENTAL OR CONSEQUENTIAL DAMAGES.

Article 9 - Indemnification

9.1           ACT shall defend Start, and their respective agents, directors, officers and employees (the “Start Indemnitees”), at the cost and expense of ACT, and will indemnify and hold harmless the Start Indemnitees from and against any and all losses, costs, damages, fees or expenses (including reasonable attorney fees and other litigation expenses) (“Start Losses”) incurred by or awarded against any Start Indemnitee relating to or in connection with any claim or action, regulatory investigation, or any other cause, brought against any Start Indemnitee by a third party arising out of:

(a)any material breach by ACT of its representations, warranties, covenants or obligations made under this Agreement; or

(b)any gross negligent act or omission or willful misconduct of ACT or any of their employees, sublicensees, contractors or agents, in performing its obligations under this Agreement;

provided, however, that, the foregoing indemnity shall not apply to the extent that any such Start Losses are (i) attributable to the gross negligence or willful misconduct of the Start Indemnitees or (ii) otherwise subject to an obligation by Start to indemnify ACT Indemnitees under section 9.2 of this Agreement.

9.2           Start shall defend ACT and UMass, and their respective agents, directors, officers and employees (the “ACT Indemnitees”), at Start’s cost and expense, and will indemnify and hold harmless the ACT Indemnitees from and against any and all losses, costs, damages, fees or expenses (including reasonable attorney fees and other litigation expenses) (“ACT Losses”) incurred by or awarded against any ACT Indemnitee relating to or in connection with any claim or action, regulatory investigation, or any other cause, brought against any ACT Indemnitee by a third party arising out of:

(a)any material breach by Start of its representations, warranties, covenants or obligations made under this Agreement; or

(b)any gross negligent act or omission or willful misconduct of Start or any of its employees, sublicensees, contractors or agents, in performing its obligations under this Agreement;

provided, however, that, the foregoing indemnity shall not apply to the extent that any such ACT Losses are (i) attributable to the gross negligence or willful misconduct of the ACT Indemnitees, or (ii) otherwise subject to an obligation by ACT to indemnify Start Indemnitees under section 9.1 of this Agreement.

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9.3           Each Party will promptly notify the other in the event it becomes aware of a claim for which indemnification may be sought hereunder.  In case any proceeding (including any governmental investigation) shall be instituted involving any Party in respect of which indemnity may be sought pursuant to this Article 9, such Party (the “Indemnified Party”) shall promptly notify the other Party(ies) (the “Indemnifying Party”) in writing and the Indemnifying Party and Indemnified Party shall meet to discuss how to respond to any claims that are the subject matter of such proceeding.  The Indemnifying Party, upon request of the Indemnified Party, shall retain counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party and shall pay the fees and expenses of such counsel related to such proceeding.  The Indemnified Party agrees to cooperate fully with the Indemnifying Party in the event a claim is made or lawsuit is filed, at the Indemnifying Party’s expense.  In any such proceeding, the Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them.  All such fees and expenses shall be reimbursed as they are incurred.  The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment.  The Indemnifying Party shall not, without the written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which the Indemnified Party is, or arising out of the same set of facts could have been, a party and indemnity could have been sought hereunder by the Indemnified Party, unless such settlement includes an unconditional release of the Indemnified Party from all liability on claims that are the subject matter of such proceeding.

9.4           The rights and obligations of the Parties set forth in this Article 9 shall survive any termination of this Agreement.

Article 10 - Publicity

10.1         Any public announcement or statement by any Party concerning this Agreement or the subject matter thereof shall be subject to the prior written consent of all Parties.  Without limiting the foregoing, the Parties hereby approve and consent to the press releases and Form 8-K filings included in Exhibit H attached hereto, the release or filing of which shall not occur until the executed Stipulation for Dismissal has been filed with the District Court as provided in section 3.1 of this Agreement.

10.2         Except for a mutually agreed upon public announcement or statement, each party will hold in confidence the terms of this Agreement; provided, however, that any Party shall be entitled to disclose the terms of this Agreement pursuant to compliance with applicable laws and regulations including, without limitation, state and federal securities laws and regulations imposed on such Party.

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Article 11 - Other Provisions

11.1         This Agreement contains the entire understanding between and among the Parties hereto and supersedes any prior understandings and agreements between or among them respecting the subject matter of this Agreement.

11.2         Except as otherwise provided in this Agreement, no amendment, modification, or supplement of any provision of the Agreement will be valid or effective unless made in writing and signed by a duly authorized officer of each Party. The officers signing this Agreement shall be duly authorized officers for all purposes of this Agreement, unless notice is given to the contrary.

11.3         No provision of this Agreement shall be waived by any act, omission, or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party.

11.4         This Agreement may be assigned only with the prior permission of the other Party(ies), which permission will not be unreasonably withheld, delayed or conditioned.  This Agreement shall be binding upon the permitted successors, assigns, legal representatives, executors, administrators and heirs of the Parties, as applicable.

11.5         This Agreement shall be construed, governed, interpreted and applied in accordance with the laws of the State of Delaware without regard to principles of conflicts of law thereof, except that questions affecting the construction and effect of any patents or patent applications shall be determined by the law of the country in which the patent was granted or filed, as applicable.

11.6         The Parties agree to follow the procedures set forth in this section 11.6 to resolve any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or invalidity thereof (each, a “Dispute”).

(a)In the event of any Dispute arising out of or relating to this Agreement, either Party may initiate mediation upon written notice to the other party, whereupon both Parties shall engage in a mediation proceeding under the then current CPR Institute for Dispute Resolution (“CPR”) Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section override inconsistent provisions of the CPR Model Procedure.  The mediator will be selected from the CPR Panels of Neutrals.  If the parties cannot agree upon the selection of a mediator within thirty (30) days after initiation of mediation, then upon the request of either party, the CPR shall appoint the mediator.  The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within sixty (60) days after initiation of mediation.

(b)If the parties fail to resolve the dispute through mediation, or if neither party elects to initiate mediation, each party may pursue any other remedies legally available to resolve the dispute.

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(c)Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement.  However, a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations.

(d)Although the procedures specified in this section 11.6 are the exclusive procedures for resolution of disputes arising out of or relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, that action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement.

(e)The parties agree that all applicable statutes of limitation and time-based defenses (such as, estoppel and laches) are tolled while the procedures set forth in subsection 11.6(a) are pending.  The parties shall take any actions necessary to effectuate this result.

11.7         All notices regarding this Agreement shall be given in writing and shall be effective when either served by personal delivery, or deposited, postage prepaid, in the United States registered or certified mail, addressed to the Parties at their respective addresses herein set forth, or to such other address or addresses as either Party may later specify by written notice to the other.

To UMass:

The University of Massachusetts

Attn:

To ACT:

Advanced Cell Technology, Inc.
1201 Harbor Bay Parkway, Suite 120
Alameda, California 94502

Attn:

To Start:

Start Licensing, Inc.

12357-A Riata Trace Parkway, Suite 150

Austin, Texas 78727

Attn:

Any change of address of a Party shall be promptly communicated in writing the other Parties.

11.8         This agreement may be executed in several counterparts, each of which shall be deemed an original copy and all of which shall constitute one agreement binding on all Parties hereto not withstanding that all Parties shall not have signed the same counterparts.

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NOW, THEREFORE, the Parties, intending to be bound by this Settlement and License Agreement, have caused their respective authorized representatives to sign below.

ADVANCED CELL TECHNOLOGY, INC.

By:	/s/ WILLIAM M. CALDWELL, IV
Printed Name:			William M. Caldwell, IV
Title:		Chief Executive Officer
Date: August 25, 2006
START LICENSING, INC.
By:	/s/ SCOTT K. DAVIS
Printed Name:			Scott K. Davis
Title:		President
Date:		August 28, 2006
THE UNIVERSITY OF MASSACHUSETTS
By:	/s/ WILLIAM ROSENBERG
Printed Name:				William Rosenberg
Title:		Executive Director, CVIP
Date:		8/29/06

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EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William M. Caldwell, IV, certify that:

(1) I have reviewed this Quarterly Report on Form 10-QSB of Advanced Cell Technology, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

(4) The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Not applicable];

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

(5) The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 20, 2006	/s/ WILLIAM M. CALDWELL, IV
	William M. Caldwell, IV
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ivan Wolkind, certify that:

(1) I have reviewed this Quarterly Report on Form 10-QSB of Advanced Cell Technology, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

(4) The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Not applicable];

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

(5) The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 20, 2006	/s/ IVAN WOLKIND
	Ivan Wolkind
	Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-QSB of Advanced Cell Technology, Inc. (the “Company”) for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, William M. Caldwell, IV, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 20, 2006	/s/ WILLIAM M. CALDWELL, IV
	William M. Caldwell, IV
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-QSB of Advanced Cell Technology, Inc. (the “Company”) for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Ivan Wolkind, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 20, 2006	/s/ IVAN WOLKIND
	Ivan Wolkind
	Chief Accounting Officer