Summary of ADVANCED CELL TECHNOLOGY, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Overview

Certain statements in this annual report on Form 10-K that are not historical in fact constitute "forward-looking statements." Words such as, but not limited to, "believe," "expect," "anticipate," "estimate," "intend," "plan," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company's estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These risks and uncertainties, as well as the Company's critical accounting policies, are discussed in more detail under "Management's Discussion and Analysis-Critical Accounting Policies" and in periodic filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

You should read the following discussion of our financial condition and results of operations together with the audited financial statements and the notes to the audited financial statements included in this annual report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

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. Principal activities to date have included obtaining financing, securing operating facilities, and conducting research and development. We have no therapeutic products currently available for sale and do not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that our ability to continue research and development activities is dependent upon the ability of management to obtain additional financing as required.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon consolidated financial statements and condensed consolidated financial statements that we have prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the condensed consolidated financial statements and accompanying notes included in this report. We base our estimates on historical information, when available, and assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies to be critical to the estimates used in the preparation of our financial statements.

Use of Estimates - These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, management has estimated loss contingencies related to outstanding litigation. In addition, management has estimated variables used to calculate the Black-Scholes option pricing model used to value derivative instruments as discussed below under "Fair Value Measurements". Also, management has estimated the expected economic life and value of the our licensed technology, our net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the our fixed assets and its accounts receivable allowance. Actual results could differ from those estimates.

Deferred Issuance Cost-Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures.

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

On January 1, 2008, we adopted FASB ASC 820-10, "Fair Value Measurements and Disclosures." FASB ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

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

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

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

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, "Distinguishing Liabilities From Equity" and ASC 815, "Derivatives and Hedging." Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.

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

Stock Based Compensation-We record stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation." ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service period. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Comparison of Years Ended December 31, 2012 and 2011

                                                    2012                               2011
                                                              % of                               % of
                                           Amount           Revenue           Amount           Revenue
Revenue                                $     466,487           100.0 %    $     506,419           100.0 %
Cost of revenue                              117,436            25.2 %          343,950            67.9 %
Gross profit                                 349,051            74.8 %          162,469            32.1 %
Research and development expenses         11,034,836          2365.5 %        9,953,224          1965.4 %
General and administrative expenses       10,452,230          2240.6 %       11,025,459          2177.1 %
Loss on settlement of litigation                   -             0.0 %          294,144            58.1 %
Non-operating income (expense)            (7,388,246 )       -1583.8 %      (51,684,761 )      -10205.9 %
Net loss                               $ (28,526,261 )       -6115.1 %    $ (72,795,119 )      -14374.5 %

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted, and are therefore typically consistent between periods. Revenue was $466,487 for the year ended December 31, 2012, which was a decrease of $39,932 or 8% compared to the year ended December 31, 2011. The decrease is due to license agreements that were terminated in 2011.

Research and Development Expenses and Grant Reimbursements

Research and development expenses ("R&D") consist mainly of facility costs, payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants, and for scientific research. R&D expenditures for the year ended December 31, 2012 increased from $9,953,224 in 2011 to $11,034,836 in 2012 for an increase of $1,081,612 or 11%. The increase in R&D expenditures during 2012 as compared to 2011 was primarily due to an increase in clinical trial expenses of approximately $1,367,000, legal fees of approximately $485,000 and supplies of approximately $522,000 offset by a decrease in compensation of approximately $697,000 and consultant fees of approximately $311,000. Grants, which offset the research and development expense, have also increased by approximately $251,000 in 2012 as compared to 2011.

Our R&D expenses are primarily 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 R&D 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, since the research is conducted on an integrated basis.

We expect that R&D expenses will increase in the foreseeable future as we add personnel, expand our pre-clinical research, continue 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.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2012 compared to the year ended December 31, 2011 decreased by $573,229 to $10,452,230 in 2012 compared to $11,025,459 for the year ended December 31, 2011. This decrease was primarily a result of a decrease in consultant expenses of approximately $1,292,000 and offset by an increase in legal fees of approximately $635,000 and board of directors compensation of $72,000.

Other Income (Expense)

Other income (expense) consisted of the following:

                                         2012              2011             $ Change          % Change
Interest income                           15,581             35,114            (19,533 )            -56 %
Interest expense and late fees        (1,104,602 )       (1,510,693 )          406,091               27 %
Finance cost                          (3,671,970 )      (60,834,170 )       57,162,200               94 %
Gain (loss) on disposal of fixed
assets                                   (17,138 )                -            (17,138 )           -100 %
Loss attributable to equity
method investment                              -           (820,000 )          820,000              100 %
Fines and penalties                   (3,500,000 )                -         (3,500,000 )           -100 %
Adjustments to fair value of
derivatives                              889,883         11,444,988        (10,555,105 )            -92 %
Total non-operating income
(expense)                             (7,388,246 )      (51,684,761 )       44,296,515

Interest expense for the year ended December 31, 2012 compared to the year ended December 31, 2011 decreased by $406,091 to $1,104,602 in 2012 compared to $1,510,693 in 2011. The decrease is due to a decrease in amortization of debt discounts for the year ended 2012 of $406,091.

The change in finance costs during the year ended December 31, 2012, compared to that of 2011, relates primarily to settlements. During the year ended December 31, 2011, we incurred approximately $52,095,000 in financing costs due to settlements and pending litigation with Midsummer Investments, Alpha Capital, Black Mountain Equities, Cranshire Capital, CAMOFI, and various investors as part of the Global Settlement resulting from ratchet down provisions in their respective warrant agreements. We also incurred approximately 5,850,000 of finance costs related to a separate litigation claim related to the issuance of warrants for a settlement agreement. The finance charges for the year ended December 31, 2012 consist of $3,586,000 related to the final settlement with Alpha Capital plus approximately an additional $2,887,000 related to the final settlement with CAMOFI offset by a decrease in the estimate of the potential claims of approximately $2,801,000 due to the decrease in the final number of shares issued for the settlements and the decrease in our stock price from $0.08 at December 31, 2011 to $0.06 at December 31, 2012.

Fines and penalties increased by $3,500,000 for the year ended December 31, 2012 compared to December 31, 2011 due to us being named as a defendant in a civil action brought by the Securities and Exchange Commission alleging that the we violated the Securities Act of 1933 because certain sales of shares to outside organizations completed in 2008 and 2009 were neither registered under the Securities act nor subject to an exemption.

Adjustment to fair value of derivatives changed from a gain of $11,444,988 during the year ended December 31, 2011, to a gain of $889,883 during the year ended December 31, 2012. The change of $10,555,105 is primarily because during the year ended December 31, 2011 the number of warrants was reduced from 134,931,000 warrants outstanding at December 31, 2010 to approximately 21,757,000 at December 31, 2011 along with a decrease in our share price from $0.08 at December 31, 2011 to $0.06 at December 31, 2012. However during the year ended December 31, 2012, the number of warrants outstanding did not change from the outstanding amount at December 31, 2011. Our share price decreased from $0.08 at December 31, 2011 to $0.06 at December 31, 2012 which resulted in a decrease in derivative fair value of approximately $890,000.

Comparison of the Years Ended December 31, 2011 and 2010

                                                 2011                               2010
                                                           % of                               % of
                                        Amount           Revenue           Amount           Revenue
Revenue                             $     506,419           100.0 %    $     725,044           100.0 %
Cost of revenue                           343,950            67.9 %          216,600            29.9 %
Gross profit                              162,469            32.1 %          508,444            70.1 %
Research and development
expenses                                9,953,224          1965.4 %        7,461,426          1029.1 %
General and administrative
expenses                               11,025,459          2177.1 %       15,506,191          2138.7 %
Loss on settlement of litigation          294,144            58.1 %       11,132,467          1535.4 %
Change in estimate of accrued
liabilities                                     -             0.0 %       (1,263,009 )        -174.2 %
Non-operating income (expense)        (51,684,761 )      -10205.9 %      (22,044,701 )       -3040.5 %
Net loss                            $ (72,795,119 )      -14374.5 %    $ (54,373,332 )       -7499.3 %

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted, and are therefore typically consistent between periods. The decrease in revenue during the year ended December 31, 2011, was due to license agreements that were terminated in 2011 that were recognized in 2010 revenue.

Research and Development Expenses and Grant Reimbursements

Research and development expenses ("R&D") consist mainly of facility costs, payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants, and for scientific research. R&D expenditures increased from $7,461,426 in 2010 to $9,953,224 for 2011. The increase in R&D expenditures during 2011 as compared to 2010 was primarily due to an increase in compensation of approximately $1,800,000, clinical trials increases of approximately $401,000, offset by decreases in legal expenses of approximately $325,000 and outside services of approximately $441,000.

General and Administrative Expenses

General and administrative expenses for 2011 compared to 2010 decreased by $4,480,732 to $11,025,459 in 2011. This expense decrease was primarily a result of decrease in compensation and stock issued for services from the prior year. During 2010, we issued shares of our stock to our Chief Executive Officer and directors and issued stock options to employees, for a total increase in G&A salaries, bonuses and option compensation of $10.8 million. During 2011, the compensation expense decreased by approximately $4,800,000. Our legal fees increased by approximately $321,000 due to the litigation relating to the holders of debenture and warrant holders we issued in 2005 through 2008.

Change in Estimate of Accrued Liabilities

In the year ended December 31, 2011, we did not recognize any gain or loss from the change in estimate of accrued liabilities. We recognized income of $1,263,009 related to reversals in our estimates of accrued liabilities during the year ended December 31, 2010. This amount relates to prior accrued liabilities where our estimate was adjusted based on new information as it became available. This amount has been separately classified in operating expenses in the accompanying consolidated statement of operations.

Loss on Settlement of Litigation

In 2010, we settled a lawsuit with an investor, whereby we delivered to the investor 49,220,665 shares of our common stock. Further, on September 30, 2010, under the terms of a final settlement and mutual release with the same investor, we exchanged a new convertible debenture to the investor in exchange for the investor's outstanding convertible debenture. The terms of the new convertible debenture are the same as the former debenture held by the investor, except that the amounts under the debenture are due and payable on or before December 31, 2010 and June 30, 2011. Concurrently with the settlement and release, all common stock purchase warrants previously issued to the investor were cancelled (23,701,263 warrants in total) and the legal actions were dismissed. We recorded a loss on settlement in the amount of $3,132,300 during the year ended December 31, 2010 in the accompanying statement of operations.

On December 22, 2010, Optimus CGII, Ltd. ("Optimus") purchased a claim previously brought against us in a civil action by Alexandria Real Estate-79/96 Charlestown Navy Yard ("ARE"). In that action, ARE alleged that it was unable to relet premises that we had leased and vacated prior to the end of the lease term, and therefore sought rent for the vacated premises since September 2008. ARE also sought certain clean-up and storage expenses. On December 23, 2010, we settled the claim in exchange for our issuance of 55,688,368 shares of our common stock to Optimus. Accordingly, we recognized loss on settlement in the amount of $8,000,167 in our accompanying consolidated statements of operations for the year ended December 31, 2010. This settlement ended all claims previously brought against the Company by ARE and Optimus.

Other income (expense) consisted of the following:

                                         2011               2010             $ Change          % Change
Interest income                            35,114             16,724             18,390              110 %
Interest expense and late fees         (1,510,693 )      (11,726,120 )       10,215,427               87 %
Finance cost                          (60,834,170 )       (4,332,277 )      (56,501,893 )          -1304 %
Gain (loss) on disposal of fixed
assets                                          -              9,500             (9,500 )           -100 %
Gain on forgiveness of debt                                  197,370           (197,370 )           -100 %
. . .