883975--3/16/2006--STEMCELLS

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{product, liability, claim}

{product, candidate, development}

{property, intellectual, protect}

{stock, price, share}

{loan, real, estate}

{system, service, information}

{interest, director, officer}

{provision, law, control}

{personnel, key, retain}

{control, financial, internal}

{acquisition, growth, future}

{cost, contract, operation}

Our financial situation is precarious and, based on currently estimated operating expenses, our existing capital resources may not be sufficient to fund our operations beyond the next eighteen months. Our product development programs are based on novel technologies and are inherently risky. Our technology is at an early stage of discovery and development, and we may fail to develop any commercially acceptable or profitable products. Our success will depend in large part on our ability to develop and commercialize products that treat diseases other than Batten disease. We have payment obligations resulting from real property owned or leased by us in Rhode Island, which diverts funding from our stem cell research and development. We may need but fail to obtain partners to support our stem cell development efforts and to commercialize our technology. Because the patient population for NCL, or Batten disease, is very small, we may encounter difficulties in enrolling subjects in our first planned clinical trial. We have a history of operating losses, and we may fail to obtain revenues or become profitable. If we are unable to protect our patents and proprietary rights, our business, financial condition and results of operations will be harmed. If others are first to discover and patent the stem cells we are seeking to discover, we could be blocked from further work on those stem cells. If we are unable to obtain necessary licenses to third-party patents and other rights, we may not be able to commercially develop our expected products. We compete with companies that have significant advantages over us. Development of our technology is subject to and restricted by extensive government regulation, which could impede our business. We are dependent on the services of key personnel. Our activities involve hazardous materials and experimental animal testing; improper handling of these animals and materials by our employees or agents could expose us to significant legal and financial penalties. The manufacture, development and commercialization of stem cell products expose us to product liability claims, which could lead to substantial liability. Since health care insurers and other organizations may not pay for our products or may impose limits on reimbursements, our ability to become profitable could be reduced. We have limited liquidity and capital resources and may not obtain the significant capital resources we will need to sustain our research and development efforts. Ethical and other concerns surrounding the use of stem cell therapy may negatively affect regulatory approval or public perception of our product candidates, which could reduce demand for our products. Our corporate documents and Delaware law contain provisions that may make it difficult for us to be acquired in a transaction that would be beneficial to our shareholders. Risks Related to the Securities Market Our stock price has been, and will likely continue to be, highly volatile, which may negatively affect our ability to obtain additional financing in the future.

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883975--3/16/2006--STEMCELLS_INC