(FORTUNE Magazine) – Lisa Altman couldn't sleep. On a Thursday night in late July, her husband was traveling, and the novel she'd been reading was keeping her awake. So At 5 A.M. she gave up, flipped on the television, and, still groggy, began to watch CNN. The news that streamed across the bottom of the screen jolted her out of her stupor. Senate Majority Leader Bill Frist of Tennessee had broken with George W. Bush and declared that he would support an expansion of embryonic stem-cell research. Altman sat bolt upright. Then, as Frist began to speak, she hung on every word. "I could just kiss him," she remembers thinking.

Surely, she thought, this bombshell--coming from the pro-life heart surgeon, until now unflinchingly loyal to President Bush--would be enough to revive Proposition 71, California's bold but beleaguered initiative to spend $3 billion on stem-cell research. The futures of two of her three children depended on that research, she believed.

Lisa had collected hundreds of signatures to help get Prop. 71 passed, and her husband, Steve, president of the wireless powerhouse Qualcomm, had written not one but two $150,000 checks at a fundraising breakfast for it. Andy, 15, their oldest child, had been diagnosed with juvenile diabetes at 13. Their youngest, 11-year-old Lindsay, had been given an 80% to 90% chance of developing the disease any day.

Already Lindsay's immune system had turned on itself. Misguided antibodies--Lisa Altman could only picture them as "little Pac-Men" inside her kids' bodies--had begun to attack and destroy her insulin-producing islet cells. This was the fourth generation of Altmans to be afflicted, so they knew only too well that it meant way more than constant shots and distorted childhoods. Over time, the disease nearly always takes its toll in horrible complications: heart disease, neuropathy, eye hemorrhage and blindness, and early death. Steve's side of the family had experienced it all. Stem cells--self-renewing, undifferentiated cells that can grow into any cell type--held out the best hope for a cure, if scientists could find a way to turn them into insulin-producing islet cells.

When the stem-cell initiative passed on Election Day last November, the future looked bright. But by May the effort had slammed into a wall of opposition from the religious right and anti-tax groups, which stalled it with lawsuits. For Lisa, it had begun to feel like another dead end in the Pac-Man game she was already losing. Now, as she listened to Frist, she felt the momentum shift and her optimism return. This could galvanize California, reignite the giddiness, and get the ball rolling again--the way it had been last spring.

Maybe. But Frist's public stand could have unforeseen consequences. It is likely to spark one of the fiercest Senate debates since the Terri Schiavo case. And now that the Senator has made clear where he stands (see box), this may well turn out to be a Pyrrhic victory in which stem-cell science gives up more than it gets. That surprising turn of events would not be the first.

The passage of Prop. 71 had opened a path to the tiny, tantalizing, mostly forbidden world of embryonic stem-cell research--the study of how life develops from a single cell--as exciting and promising, many believe, as the sequencing of the genome. The state had figured out a way to free its scientists from the funding restrictions President Bush had imposed on the research four years ago, and a way to ensure a steady flow of financial support that would last at least a decade. Suddenly California became a mecca for biologists the world over. California universities--the same ones that gave birth to Hewlett-Packard, Sun, Google--started jockeying for position. Their best Ph.D.s began dreaming about the possibilities. The same characters who gave us Silicon Valley--the Sand Hill Road venture capital crowd--began mobilizing to deliver the next tech revolution. "Biology is the next wave of science to make a big difference, and early-development stem cells are the mother lode," says Richard Mahoney, retired CEO of Monsanto, a leader in agricultural biotech. "Nobody wants to be left behind."

The prospect of a California gold rush sent other states scrambling. All through spring and early summer, the issue swept through state legislatures, pitting economic development leaders against conservative evangelicals, creating a crazy quilt of regulations and policies. The fight spread to Congress, splitting Republicans, opening a Pandora's box by calling into question even scientific methods that are widely used, and moving President Bush toward his first veto--one that would probably be hugely unpopular.

What has happened in California shows how unpredictably complex and thorny this issue can be. Despite all the momentum, Prop. 71 has stalled and landed in the courts. Lawsuits have blocked the issuance of bonds that would fund the stem-cell research. Now the initiative's backers must scramble to arrange alternative financing and fight the legal battles as they try to judge grant applications. For the moment an odd but potent little army of pro-lifers and anti-tax groups, represented by the Life Legal Defense Foundation--the same organization that provided legal assistance to Terri Schiavo's parents--has thwarted all the Hollywood stars, the deep-pocketed venture capitalists, the Nobel Prize winners (40 of them), and patient-advocacy groups (70 of them) that endorsed the research. Senator Frist's bold and risky stance in favor of expanding the research could indeed change the momentum of the debate, as the Altmans and many others hope. But that doesn't mean the war is over. The passions in Washington reflect what's going on in California and portend a lot of hand-to-hand combat when the Senate takes up the issue in the fall.

There is no better place than here, at the edge of the San Andreas Fault, to observe the forces of free-market capitalism coming head-to-head with the forces of evangelical Christianity. This is likely to be just the beginning. If the 20th century was the Age of Physics, say both scientists and venture capitalists, the 21st will be the Age of Biology, as new tools like genomics enable scientists to manipulate life at the cellular level to try to change the course of aging, disease, and longevity. "As we move forward from here, we will be exposing the live wires of fear, and the belief that such power cannot be in the hands of mere mortals," says Daniel Perry, executive director of the Alliance for Aging Research and president of the Coalition for the Advancement of Medical Research. For at least the next two decades, he and others predict, "this is where we are going to fight a lot of our political and ideological battles."

Of course, many people warn that faith in science can be as blind as any other kind. "Twenty years ago, all we could do is kill people," says Jennifer Lahl, national director of the Center for Bioethics and Culture, a pro-life educational nonprofit. "Now we can make people, clone them, and destroy them. Is it right? We've never had to ask these questions before. It is a huge marker on the continuum of history." Advances in biotech have put us on a slippery slope, she says, and scientists are bound to explore the limits. "It's like a little algorithm. If we can do this, why can't we do that? Why can't you clone your dead child?"

The battle will determine whether the U.S. continues to lead--or falls behind--in this key area of biomedical science. South Korea surged to the forefront of the stem-cell race in May, according to the New England Journal of Medicine, with a major breakthrough that moved the science radically ahead. The National Institutes of Health, normally a guiding light in key areas of science, has vacated the debate. And the crazy patchwork of state regulations is unquestionably bad for science. "I am very worried about an ever-increasing anti-science perspective in this country, both in how science is valued and how it can be used," says Dr. Philip Pizzo, dean of the Stanford University School of Medicine. "We are now a global community, and inquiring minds are going to push the envelope, and the evidence for that is emanating from South Korea, from China, from Britain. In the U.S., we have some very, very difficult challenges and decisions to make."

THE GREAT DIVIDE

PRESSURE HAS BEEN building on both sides of this fault line as scientists have become captivated by the mysteries of stem cells. Some are found in different parts of the adult body, and these are being tested to treat heart, liver, and other diseases. But the most promising stem cells--the most plentiful and most versatile--are embryonic ones, found in the first days of cell division before they have begun to differentiate. These, of course, are also the most controversial, because while they are harvested in a petrie dish from a tiny ball of cells a tenth the size of a pinhead, they are part of an embryo that will be destroyed in the process. This fact creates a radical divide between those who believe it morally wrong to experiment with embryos (the late Pope John Paul II, President Bush) and those who believe it morally wrong not to (Nancy Reagan, Senator Arlen Specter).

The main source of embryonic stem cells has been the leftovers from in vitro fertilization clinics. But another means of creating these early-stage stem cells, called therapeutic cloning, has emerged as far more promising. With this method, scientists extract nuclear material from a person's cell, transfer it into a nonfertilized egg, and then induce the egg to grow, creating a clone. It's this procedure--encouraged in states like California and Missouri--that's expected to really make sparks fly in the Senate. For several years a bill to ban human cloning has circulated in Congress, at times getting strong support. What stem-cell supporters fear now is that the Senate debate will be a free-for-all that could loosen some restrictions but also ban or even criminalize therapeutic cloning, blocking a possible express route to curing disease.

The tug of war has been going on since human embryonic stem cells were first isolated in 1998. The Clinton administration decided to permit federal funding of embryonic research as long as it wasn't used to create or destroy the embryos. Before the research was funded, President Bush took office and put it on hold. In August 2001, shortly after a visit with the Pope and a letter from Nancy Reagan, President Bush decided to allow federally funded research only on the 78 stem-cell lines already in existence. (Once a stem cell begins to replicate, the colony of cells can produce copies indefinitely, creating a "stem-cell line" that can be shared among many scientists.) But only a few of those lines--roughly a dozen, many scientists say--have ended up being useful, and this has caused tremendous anger and frustration among patient-advocacy groups, especially parents of diabetic children. Of all the diseases stem-cell research might help cure--Parkinson's, nerve damage, cancer--diabetes is considered most within reach.

THE ARCHITECT

IT IS NOT SURPRISING, then, that the dynamo behind Prop. 71 was the father of a diabetic boy. Bob Klein, a wealthy Portola Valley developer and financier, became a fundraiser for diabetes research after his 15-year-old son, Jordan, was diagnosed with the disease. Scientists including Jeffrey Bluestone, an immunologist at the University of California at San Francisco, had developed a simple way to transplant islets into diabetic patients. Islets are found in the pancreas, and pancreas transplants had proved so successful that five years afterward 70% of the recipients no longer needed insulin. But both pancreases and islets are scarce, since they can only be obtained from cadavers. Stem cells looked like the answer, and UCSF was a pioneer in that field. The state legislature legalized embryonic stem-cell research two years ago, but a bill to fund it fell victim to last year's budget crisis. "How do we do this? We've got to get the money to do this thing," Bluestone recalls asking the advisory group for his UCSF clinic, one of whom was Klein.

Bob Klein is relentless, manic, and one of the best salesmen you'll ever meet. He is a third-generation Californian and politically connected (his grandfather was a friend of legendary lawyer Clarence Darrow's in L.A.). When he sets his mind on something, watch out. At breakfast with Steve Altman, Klein had him in tears. "We can look back five to ten years from now and know we did everything we could for our kids," Klein told him. "I think we will look back and say the medical industry as we know it changed."

By July of 2003, Klein had mobilized the Hollywood crowd: Lucy Fisher, former vice chairwoman of Columbia TriStar, and producers Doug Wick and Janet and Jerry Zucker, all of whom have diabetic children. They enlisted Michael J. Fox and Christopher Reeve (who died in October 2004). They created an ad campaign. Nancy Reagan began to speak out in favor of stem-cell research, and last July her son Ron made a speech about it at the Democratic national convention. Governor Arnold Schwarzenegger joined what some called "the Bob Train" by endorsing Prop. 71 in October. The swelling donor list included Bill Gates ($400,000), Gap CEO Don Fisher ($250,000), and Google co-founder Sergey Brin ($100,000), along with venture capitalists including John Doerr and Brook Byers, partners at Kleiner Perkins Caulfield & Byers. This was what Silicon Valley calls the "network effect," says Byers. "People who might otherwise not be aligned come together and use their relationships, and the sum is greater than the individual parts." On Nov. 2 the proposition passed with 59% of the vote.

DOCTORS AND PATIENTS

FOR EMBATTLED SCIENTISTS like Mike German, who have bet their careers on the stem cell, that was close to a miracle. All it takes to get an idea of how claustrophobic it is to be a stem-cell scientist is a few hours in Dr. German's lab at UCSF. It is so crowded you must wend your way around postdoctoral students, trying not to knock over microscopes. The air is stale; there is little natural light. In this world, there are so many obstacles that the science sometimes seems the least of them. German's colleague, Susan Fisher, a developmental biologist who works on embryonic stem cells, has derived no fewer than five new stem-cell lines. (This is so tricky--keeping the cells alive and preventing them from beginning to differentiate--that there are believed to be only about 150 stem-cell lines in the world.) But she is not allowed to mix that work, funded privately, with her federally funded research at UCSF, so she must commute 40 minutes to Menlo Park to tend to the precious embryonic cells. That was partly to blame for the loss of two of her stem-cell lines in a power failure two years ago.

German and his researchers spend their days growing mouse cells, creating different gene combinations, injecting them into mice or mouse embryos, and peering into microscopes to try to figure out what magic mix might help trigger stem cells to become insulin-producing islets. It is a little like using the process of elimination to test all the possible combinations for a combination lock. German has only enough manpower and equipment to test a few steps at a time.

Scientists like German watch in frustration as China, Singapore, and South Korea pour resources into stem-cell science. In June the Koreans stunned them by announcing they had created 11 new stem-cell lines by therapeutic cloning. Now the Koreans could follow cell development to determine what factors cause, say, Parkinson's.

Proposition 71 could help scientists like German catch up. He might get more space, more help. He would have more stem-cell lines to choose from--embryonic stem-cell lines--produced right here by Fisher, who would no longer need to commute. (Currently he has access to only two of the federally approved embryonic stem-cell colonies, which are becoming increasingly important to his work as his research advances.) "The whole thing would be accelerated," he says. Upstairs, Bluestone waits. "If Mike German gives me more islets, I can do more transplants and do more testing," says Bluestone, who has donated one of his kidneys to his diabetic father. That would speed up his own attempts to develop drugs to reprogram the body's immune system, which could help treat not just diabetes but other autoimmune diseases like rheumatoid arthritis and multiple sclerosis. One of his drugs, now in clinical trials, has helped forestall Andy Altman's diabetes by more than two years. Since many of these scientists are also doctors, they feel the biological clock ticking. "My patients want to know, 'When will this happen?'" German says. "I think about my patients a lot. These are very interesting scientific questions, intellectually exciting and so forth. But in the end, what we are trying to do is cure somebody with diabetes."

These are people they know, like Mike Gordon, a 40-year-old Palo Alto venture capitalist and donor to the stem-cell initiative, who was diagnosed with diabetes at 22 months of age. "I'd like to feel good enough to hang out and play with my kids and do their sports," Gordon says. He'd like to be able to backpack with his son Nick when the 6-year-old reaches high school. But Gordon is already developing complications like painful neuropathy, and he knows that the complications will only compound over time. "If we can't solve this problem in the next five years, with all the funding Prop. 71 will provide, then I'll be bummed. I'll be terribly disappointed," Gordon says. "But at least then we'd know it was not a funding issue--it was the complexity of science."

THE ENTREPRENEURS

ON SAND HILL ROAD, in the low-slung redwood offices of Kleiner Perkins, biotech partner Brook Byers sits back and dodges the $64,000 question, which of course is: When? When will stem-cell science lead to cures? When will the field become interesting to venture capital? "There is no way to know," he says. Blood stem cells have been successfully deployed in bone-marrow transplants for decades. So far this year the FDA has approved the trial use of adult stem cells for the repair of severe bone fractures and damage to hearts and knees. But figuring out how to make a stem cell become a pancreatic cell is much more difficult. Wall Street is wary of biotech in general, and when it comes to stem cells, that's true in spades. "It is a lot like the sequencing of the genome," says Tom Shrader, who has a Ph.D. in biophysics and biochemistry, and is a biotech analyst for Harris Nesbitt. "People will learn a lot in a short period of time. The knowledge will be a part of the arsenal, but will it lead to rapid cures? I don't think so."

There are roughly 185 stem-cell companies in the world, according to DMS Data Systems, an online medical database firm. So far, venture capital in the field is a mere $470 million. This is still basic research, the kind that the National Institutes for Health usually funds because it is still too risky for investors. But with so few embryonic cell lines eligible for federal funding, the NIH is hamstrung. It can't take its customary lead providing funding, peer review, and regulatory oversight. "I hope to be involved in a stem-cell company one day, but I don't own a position in one right now," says Byers. He and other venture capitalists got behind Prop. 71 "not because of an immediate payoff, but because I've been through this before," he says. "I believe in the pattern. Do the fundamental research first, and then the applications will be found. We can't predict when, but usually faster than we expect."

The pattern goes something like this: Get a lot of bright scientists together in one place, fund their basic research, let them pick each other's brains under the watchful eye of the nearby venture capitalists and serial entrepreneurs, and the thing will take on a life of its own. Each new scientist to move a research lab to California could add nearly $1 million to the California economy; each new biotech company could add another $14.5 million, according to an economic impact study co-written by a Stanford economist. Indirectly, the initiative could expand the state's $12 billion biotech industry (already No. 1 or No. 2 in the U.S. in patents, venture capital, and number of firms) by as much as 5%, generating an additional $1 billion each year, on average, in economic activity for the next three decades, and creating as many as 15,000 new jobs during the next 15 years.

THE GOLD RUSH

CITIES FROM LOS ANGELES to Emeryville, just south of Berkeley, began vying last spring to be California's biotech capital by snagging the headquarters of the California Institute for Regenerative Medicine, the new state agency created to administer the stem-cell initiative. All told, that would amount to not much more than a few offices and a staff of about 50. But the headquarters town would become a destination for scientists around the world, attract conventions, create buzz. San Diego, with the Scripps, Burnham, and Salk institutes, was thought to be the leading contender, offering a beautiful spot overlooking both the ocean and the Torrey Pines golf course. But in the 11th hour of an Olympic-like bidding contest, San Francisco snatched the plum from a dazed San Diego, compensating for an undistinguished second-story office on King Street with $18 million in free rent, conference rooms, and the like.

That decision gave bragging rights to Mayor Gavin Newsom, who aspired to make San Francisco a biotech hub. The offices on King Street might not look like much, but they are practically next door to Mission Bay. That's where UCSF had already begun to build the infrastructure for a biotech boom on 43 acres of landfill with the $1.6 billion from a capital campaign co-chaired by Byers and retired Intel CEO Andy Grove. The project, begun years ago, called for private development, but that never got off the ground--until the stem-cell referendum passed. In January, though, Alexandria Real Estate Equities, a NYSE REIT, eagerly announced it would transform it into a state-of-the-art biotech cluster, beginning with a biotech "hotel" (incubator) it is building on spec. The project has all the ingredients to make a successful biotech community, says Ross DeVol, an economist at the Milken Institute who has studied the formation of tech clusters. It has proximity to universities, venture capital, experienced entrepreneurs, and plenty of funding for basic research. That assumes, of course, that the opponents of Prop. 71 would not be bold enough to defy the electorate on the referendum.

THE OPPONENTS: STRANGE BEDFELLOWS

BUT FOR SOME, morality trumps democracy, especially if you believe the voters had the wool pulled over their eyes, as Dana Cody does. On a sunny June day Cody, the executive director of the Life Legal Defense Foundation, arrives for an interview tanned and dressed in tennis whites, looking more like a soccer mom than an activist pro-life lawyer. She is against abortion, she says, largely because "I have counseled enough women who have chosen that course to know that it haunts them the rest of their life. We can do better for women."

She grew up in Orange County, married a PGA golf pro, had a son who is now a flight engineer in the Navy, and got a late start on her career. She didn't enter college until 35, and she received her law degree from Western State University when she was 42. But boy, is she effective. Life Legal is a network of pro-life, pro bono lawyers in 38 states with an annual budget of $500,000 to $750,000, raised mostly by direct mail. It mainly defends the freedom of speech of pro-life activists and litigates feeding-tube cases. It was one of the two main organizations to provide legal services to Terri Schiavo's parents, the Schindlers, as they fought to keep her alive, she says. Since Life Legal takes the position that life begins at conception, it opposes embryonic stem-cell research because that amounts to "destroying human life for the sake of scientific research," she says.

To fight the stem-cell battle, though, Life Legal took a pragmatic approach, choosing to litigate on behalf of People's Advocate, a group that opposes Prop. 71 because of its cost to taxpayers. Life Legal and People's Advocate make strange but strategic partners. They found each other in the flurry of e-mails that followed the November vote. "Everybody started contacting everybody else, sending e-mails, making phone calls," Cody recalls. The network effect cuts both ways.

Their lawsuit, filed in Alameda County Superior Court, doesn't get near the moral or ethical aspects of the research, which Cody says "are irrelevant to this case." Rather it asserts that the Independent Citizens Oversight Committee, the 28-member group of university presidents, scientists, and patient advocates that serves as a board of directors for the Institute for Regenerative Medicine, is illegal because it doesn't operate under state control as the law requires of any agency that receives state funds. The allegation strikes at the heart of what Bob Klein was trying to do: craft an amendment to the state constitution airtight enough to give it stability in its early years and protect it from politics. "The ICOC is not a governmental entity and is not entitled to be in charge of public funding," Cody says. "The board members are appointees or appointees of appointees. They can only be from specified advocacy groups or institutions. They can't be removed from office. You have an ICOC with no accountability to the state in any way, shape, or form taking taxpayers' money." (The ICOC denies the charges. The initiative includes many requirements that make the agency accountable to the state, Klein says, modeled after both the University of California system and the California housing agency.)

Personally, Cody says, she hopes the delay buys time for a backlash. "I'd still like to see voters get educated and see some sort of grassroots effort to overturn the initiative."

THE CHAIN REACTION

IN THE PAST FEW MONTHS, more than three dozen state legislatures have debated more than 157 bills to permit, prohibit, or even criminalize various kinds of stem-cell research. Connecticut will spend $10 million over the next decade to fund the work. South Dakota has banned research on human embryonic stem cells, and many other states restrict it. Massachusetts voted to permit the use of embryonic stem cells, but only after overriding the governor's veto.

When the fireworks reached Congress in June, Senator Arlen Specter (R-Pennsylvania), who has Hodgkins lymphoma, began pushing a bill to expand funding for work on embryos left over from in vitro fertilization identical to one that had sailed through the house in June. The opposition was pushing back, and Frist was on the hot seat. The day before the August break, he delivered the stunning news that though it might force Presidential Bush's first veto, he believed the President's policy should be modified. He would support expansion of both federal funding and NIH oversight for the controversial research and likely bring it up again after the break. "How we answer these questions today ... will define us as a civilized and ethical society forever in the eyes of history," he said in his speech.

What Frist didn't spell out in his speech was his strong opposition to therapeutic cloning. Now, what concerns Prop. 71 proponents in California, and economic development officials in places like Missouri and New Jersey, is that they might win the battle but lose the war. The bill Specter is pushing, which Frist says he will support with reservations, could expand embryonic stem-cell research to those left over from in vitro fertilization. But another bill, sponsored by Senator Sam Brownback (R-Kansas) may also pass. That legislation would prohibit all human cloning, including nuclear transfer. That would nearly gut Prop. 71.

In May California attorney general decided there could be no bond issue until the legal questions are cleared up (two more lawsuits have been filed), and that could take a year or two. At some point the state intends to issue $100 million in bond anticipation notes--notes that will be paid off only if the initiative wins its legal battles and the state issues the general obligation bonds.

THE WAIT

THE INTERNATIONAL Society for Stem Cell Research annual conference, held at the San Francisco Marriott last month, should have been a triumphant affair. Instead, a siege mentality had set in. "We are a blue city in a blue state," Mayor Newsom assured the crowd of scientists. The underlying message: You will not be considered pariahs here. In an urgent speech, Bob Klein beseeched them not to give up. "This is a very small window of opportunity. We must act quickly, or the forces against us will change the tide," he said.

Now everybody waits. In Palo Alto, Mike Gordon, the diabetic venture capitalist, tries to be patient. But recently he lost the feeling in his feet entirely. "It's a ten-year progression, and it is going the wrong way," he says. For him, each delay means progressive damage and less chance he'll be able to backpack with Nick. "For me, this is a race against the clock."

In San Diego, Steve and Lisa Altman struggle to come to grips with the opposition to embryonic research, especially on embryos that would be thrown away. "The only reason I can justify that people are taking this position is that they don't have kids with diseases. Otherwise, how can you say, 'I'm against this?'" asks Steve. He believes people are entitled to their religious beliefs, "but I don't want their religious beliefs imposed on me and my kids," he says. "I tell you what: If there is a promising cure in another country, and there is a law that will make me a criminal if I go get it, then I will be a criminal, because I will do whatever it takes to cure my son."

REPORTER ASSOCIATE Patricia Neering

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