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&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"&gt;&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;b&gt;Note 8. Commitments and
Contingencies&lt;/b&gt;&lt;/font&gt;&lt;/p&gt;
&lt;!-- xbrl,body --&gt;
&lt;p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"&gt;&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;b&gt;&lt;i&gt;Leases&lt;/i&gt;&lt;/b&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 4%"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;i&gt;Capital
Leases&lt;/i&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;We entered into
direct financing transactions with the State of Rhode Island and
received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of our pilot
manufacturing facility in Rhode Island. The related lease
agreements are structured such that lease payments fully fund all
semiannual interest payments and annual principal payments through
maturity in August 2014. The interest rate for the remaining bond
series is 9.5%. The bond contains certain restrictive covenants
which limit, among other things, the payment of cash dividends and
the sale of the related assets. The outstanding principal was
approximately $231,000 at June&amp;#xA0;30, 2013 and $331,000 at
December&amp;#xA0;31, 2012.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 4%"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;i&gt;Operating
Leases&lt;/i&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;We lease
various real properties under operating leases that generally
require us to pay taxes, insurance, maintenance, and minimum lease
payments. Some of our leases have options to renew.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 4%"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;i&gt;Operating
Leases &amp;#x2014; California&lt;/i&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;In September
2010, we entered into a two-year sublease agreement with Caliper
Life Sciences, Inc., for approximately 13,200 square feet in a
facility located in Mountain View, California. In June 2012, the
sublease term was extended to September&amp;#xA0;30, 2013. We will pay
approximately $1,081,000 in aggregate as rent over the term of the
lease.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;In December
2010, we entered into a commercial lease agreement with BMR-Gateway
Boulevard LLC (BMR), as landlord, for approximately 43,000 square
feet of office and research space at BMR&amp;#x2019;s Pacific Research
Center in Newark, California. The initial term of the lease is
approximately eleven and one-half years and includes escalating
rent payments which we recognize as lease operating expense on a
straight-line basis. We will pay approximately $17,869,000 in
aggregate as rent over the term of the lease to BMR. Deferred rent
for this facility was approximately $1,420,000 as of June&amp;#xA0;30,
2013, and approximately $1,389,000 as of December&amp;#xA0;31,
2012.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px; FONT-SIZE: 1px"&gt;
&amp;#xA0;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 0px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;In March 2013,
we entered into a commercial lease agreement with Prologis, L.P.
(Prologis), as landlord, for approximately 18,700 square feet of
office and research space in Sunnyvale, California. The facility is
for operations that support our clinical development activities.
The initial term of the lease is ten years and includes escalating
rent payments which we recognize as lease operating expense on a
straight-line basis. We will pay approximately $3,497,000 in
aggregate rent over the term of the lease. As part of the lease,
Prologis has agreed to provide us financial allowances to build
initial tenant improvements, subject to customary terms and
conditions relating to landlord-funded tenant improvements. The
tenant improvements are recorded as leasehold improvement assets
and amortized over the term of the lease. The financial allowances
are treated as a lease incentive and recorded as deferred rent
which is amortized as reductions to lease expense over the lease
term. Deferred rent for this facility was approximately $361,000 as
of June&amp;#xA0;30, 2013.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 4%"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;i&gt;Operating
Leases &amp;#x2014; Rhode Island&lt;/i&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;We entered into
a fifteen-year lease agreement for a scientific and administrative
facility (SAF) in Rhode Island in connection with a sale and
leaseback arrangement in 1997. The lease term expired on
June&amp;#xA0;30, 2013. For the year 2013, we paid approximately
$1,165,000 in operating lease payments and operating expenses net
of sub-tenant income.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px; MARGIN-LEFT: 4%"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;i&gt;Operating
Leases &amp;#x2014; United Kingdom&lt;/i&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;In January
2011, we amended the existing lease agreements of our wholly-owned
subsidiary, Stem Cell Sciences (U.K.) Ltd, effectively reducing our
leased space from approximately 5,000 square feet to approximately
1,900 square feet of office and lab space. The lease by its terms
was extended to September&amp;#xA0;30, 2013. We expect to pay
approximately $60,000 as rental payments under the existing lease
for 2013. StemCells, Inc. is the guarantor of Stem Cell Sciences
(U.K.) Ltd&amp;#x2019;s obligations under the existing lease.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;With the
exception of the operating leases discussed above, we have not
entered into any significant off balance sheet financial
arrangements and have not established any special purpose entities.
We have not guaranteed any debts or commitments of other entities
or entered into any options on non-financial assets.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 18px; MARGIN-BOTTOM: 0px"&gt;&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;&lt;b&gt;&lt;i&gt;Contingencies&lt;/i&gt;&lt;/b&gt;&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 6px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;In July 2006,
we filed suit against Neuralstem, Inc. in the Federal District
Court for the District of Maryland, alleging that
Neuralstem&amp;#x2019;s activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres, specifically U.S. Patent
No.&amp;#xA0;6,294,346 (claiming the use of human neural stem cells for
drug screening), U.S. Patent No.&amp;#xA0;7,101,709 (claiming the use
of human neural stem cells for screening biological agents), U.S.
Patent No.&amp;#xA0;5,851,832 (claiming methods for proliferating human
neural stem cells), and U.S. Patent No.&amp;#xA0;6,497,872 (claiming
methods for transplanting human neural stem cells). In May 2008, we
filed a second patent infringement suit against Neuralstem and its
two founders, Karl Johe and Richard Garr. In this suit, which we
filed in the Federal District Court for the Northern District of
California, we allege that Neuralstem&amp;#x2019;s activities infringe
claims in two patents we exclusively license from NeuroSpheres,
specifically U.S. Patent No.&amp;#xA0;7,361,505 (claiming composition
of matter of human neural stem cells derived from any source
material) and U.S. Patent No.&amp;#xA0;7,115,418 (claiming methods for
proliferating human neural stem cells). In addition, we allege
various state law causes of action against Neuralstem arising out
of its repeated derogatory statements to the public about our
patent portfolio. Also in May 2008, Neuralstem filed suit against
us and NeuroSpheres in the Federal District Court for the District
of Maryland seeking a declaratory judgment that the &amp;#x2018;505 and
&amp;#x2018;418 patents are either invalid or are not infringed by
Neuralstem and that Neuralstem has not violated California state
law. In August 2008, the California court transferred our lawsuit
against Neuralstem to Maryland for resolution on the merits. In
July 2009, the Maryland District Court granted our motion to
consolidate these two cases with the litigation we initiated
against Neuralstem in 2006. Discovery is ongoing in these cases and
we anticipate a trial date in 2014.&lt;/font&gt;&lt;/p&gt;
&lt;p style="MARGIN-TOP: 12px; TEXT-INDENT: 4%; MARGIN-BOTTOM: 0px"&gt;
&lt;font style="FONT-FAMILY: Times New Roman" size="2"&gt;Effective 2008,
as part of an indemnification agreement with NeuroSpheres, we are
entitled to offset all litigation costs incurred in this patent
infringement suit, against amounts that would otherwise be owed to
NeuroSpheres under our exclusive license agreements with
NeuroSpheres, such as annual maintenance fees, milestones and
royalty payments. Under the terms of our license agreements, we are
required to make annual payments of $50,000 to NeuroSpheres, and we
expect to make these annual payments through the remaining life of
the patent which, at December&amp;#xA0;31, 2010, was approximately 14
years. We have therefore capitalized $700,000 (14 years at $50,000
per year) to offset litigation costs. The amount capitalized is not
dependent on the achievement of any milestones or related to any
other contingent payments which may become due under the
arrangement. We will reduce this asset by $50,000 per year in lieu
of the cash payments due to NeuroSpheres. As the $50,000 annual
payments are fully creditable against royalties due to
NeuroSpheres, we have classified the capitalized amount as prepaid
royalties under &amp;#x201C;Other assets, non-current&amp;#x201D; on our
accompanying Consolidated Balance Sheets. We have concluded that
the estimated balance of $600,000, as of June&amp;#xA0;30, 2013, is a
fair estimate and realizable against future milestone and royalty
payments to NeuroSpheres, and that litigation costs incurred above
this amount will be expensed as incurred. Management will
reevaluate this estimate on a quarterly basis based on actual costs
and other relevant factors.&lt;/font&gt;&lt;/p&gt;
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