UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549




FORM 10-K


(Mark
One)




x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
  For
the fiscal year ended December 31, 2009.
 or
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
  For
the transition period fromto.




Commission
File Number 000-1357459




NEURALSTEM,
INC.


(Exact
name of registrant as specified in its charter)




Delaware
                52-2007292State
      or other jurisdiction of
                  incorporation
      or organization
                (I.R.S.
      Employer
                  Identification
      No.)9700
      Great Seneca Highway
                  Rockville,
      MD
                20850(Address
      of principal executive offices)
                (Zip
      Code)




Registrant’s
telephone number, including area code(301)-366-4841




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class
              
              Name
      of each exchange on which registeredCommon
      stock, $0.01 par value
              
              NYSE
      Amex





Securities
registered pursuant to Section 12(g) of the Act:


None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈ Yes  xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  ̈Yes  xNo





Indicate
by check mark whether the registrant (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
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  x  Yes  ̈No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  x  Yes  ̈No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   ̈


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer   ̈
            
            Accelerated
      filer  ̈
            
            Non-accelerated
      filer  ̈
              (Do
      not check if a smaller reporting
              company)
            
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).  Yes   ̈  No  x




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter based upon the closing price of the common stock
as reported by NYSE Amex on such date, was approximately
$33,827,962.




The
number of shares outstanding of Registrant’s common stock, $0.01 par value at
March 25, 2010 was42,820,875.




DOCUMENTS
INCORPORATED BY REFERENCE




None.




SUBSEQUENT
EVENTS





During
the first quarter of 2010, the Company entered into a series of transactions
resulting in securing what management believes provides sufficient financing to
fund operations through the first quarter of 2011.  As a result of these
transactions, it received net proceeds from the exercise of our Series A, B, C
and D warrants of $7.3 million.  On March 16, 2010 the Company had
cash on hand of $7.5 million.





On
January 21, 2010, Neuralstem, Inc. announced that the first Amyotrophic Lateral
Sclerosis (“ALS” or “Lou Gehrig’s disease”) patient was treated with its spinal
cord stem cells at the Emory ALS Center at Emory University, in Atlanta,
GA.







NEURALSTEM,
INC





FORM 10-K





FOR
THE YEAR ENDED DECEMBER 31, 2009





INDEX




PagePART I
                                                                            
                                                                            3Item
      1.
                                                                            
                                                                            Business
                                                                            
                                                                            3Item
      1A.
                                                                            
                                                                            Risk
      Factors
                                                                            
                                                                            13Item
      2.
                                                                            
                                                                            Properties
                                                                            
                                                                            21Item
      3.
                                                                            
                                                                            Legal
      Proceedings
                                                                            
                                                                            21Item
      4.
                                                                            
                                                                            Removed and
    Reserved
                                                                            
                                                                            21PART II
                                                                            
                                                                            22Item
      5.
                                                                            
                                                                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                            
                                                                            22Item
      6.
                                                                            
                                                                            Selected
      Financial Data
                                                                            
                                                                            24Item
      7.
                                                                            
                                                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                            
                                                                            24Item
      7A.
                                                                            
                                                                            Quantitative
      and Qualitative Disclosures About Market Risk
                                                                            
                                                                            30Item
      8.
                                                                            
                                                                            Financial
      Statements and Supplementary Data
                                                                            
                                                                            30Item
      9.
                                                                            
                                                                            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                                                            
                                                                            46Item
      9A.
                                                                            
                                                                            Controls
      and Procedures
                                                                            
                                                                            47Item
      9B.
                                                                            
                                                                            Other
      Information
                                                                            
                                                                            48PART III
                                                                            
                                                                            48Item
      10.
                                                                            
                                                                            Directors,
      Executive Officers and Corporate Governance
                                                                            
                                                                            48Item
      11.
                                                                            
                                                                            Executive
      Compensation
                                                                            
                                                                            52Item
      12.
                                                                            
                                                                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                            
                                                                            56Item
      13.
                                                                            
                                                                            Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                            
                                                                            58Item
      14.
                                                                            
                                                                            Principal
      Accounting Fees and Services
                                                                            
                                                                            58PART IV
                                                                            
                                                                            58Item
      15.
                                                                            
                                                                            Exhibits,
      Financial Statement Schedules
                                                                            
                                                                            59




2




PART I


We
urge you to read this entire Annual Report on Form 10-K, including the” Risk
Factors” section, the financial statements and related notes included
herein.  As used in this Annual Report, unless context otherwise
requires, the words “we,” “us,”“our,” “the Company,” “Neuralstem” and
“Registrant” refer to Neuralstem, Inc.  Also, any reference to “common
share” or “common stock,” refers to our $.01 par value common
stock.





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





Certain
statements contained in this Annual Report on Form 10-K constitute
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements included in this Annual Report, including those related to
our cash, liquidity, resources and our anticipated cash expenditures, as well as
any statements other than statements of historical fact, regarding our strategy,
future operations, financial position, projected costs, prospects, plans and
objectives are forward-looking statements.  These forward-looking
statements are derived, in part, from various assumptions and analyses we have
made in the context of our current business plan and information currently
available to us and in light of our experience and perceptions of historical
trends, current conditions and expected future developments and other factors we
believe are appropriate in the circumstances. You can generally identify forward
looking statements through words and phrases such as“believe”, “expect”, “seek”,
“estimate”, “anticipate”, “intend”, “plan”, “budget”, “project”, “may likely
result”, “may be”, “may continue”  and other similar
expressions, although not all forward-looking statements contain these
identifying words. We cannot guarantee future results, levels of activity,
performance or achievements, and you should not place undue reliance on our
forward-looking statements.





Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
described in Part I, Item 1A, “Risk Factors” and elsewhere
in this Annual Report. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures or strategic investments. In addition, any forward-looking statement
represents our expectation only as of the day this Annual Report was first filed
with the Securities and Exchange Commission (“SEC”) and should not be relied on
as representing our expectations as of any subsequent date. While we may elect
to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our expectations
change.





When
reading any forward-looking statement, you should remain mindful that actual
results or developments may vary substantially from those expressed in or
implied by such statement for a number of reasons or factors, including but not
limited to:







·
            the
      success of our research and development activities, the development of a
      viable commercial product, and the speed with which regulatory
      authorizations and product launches may be
  achieved;





·
            whether
      or not a market for our product develops, and, if a market develops, the
      rate at which it develops;





·
            our
      ability to successfully sell or license our products if a market
      develops;





·
            our
      ability to attract and retain qualified personnel to implement our
      business plan and corporate growth
strategies;





·
            our
      ability to develop sales, marketing, and distribution
      capabilities;





·
            our
      ability to obtain reimbursement from third party payers for our proposed
      products if they are developed;





·
            the
      accuracy of our estimates and
projections;





·
            our
      ability to fund our short-term and long-term financing
    needs;





·
            changes
      in our business plan and corporate strategies;
  and





·
            other
      risks and uncertainties discussed in greater detail in the section
      captioned “Risk
      Factors”





Each
forward-looking statement should be read in context with and in understanding of
the various other disclosures concerning our company and our business made
elsewhere in this Annual Report as well as our public filings with the SEC. You
should not place undue reliance on any forward-looking statement. We are not
obligated to update or revise any forward-looking statements contained in this
Annual Report or any other filing to reflect new events or circumstances unless
and to the extent required by applicable law.





ITEM
      1.
            BUSINESS





Overview





We are
focused on the development and commercialization of treatments for central
nervous system disease based on transplanting human neural stem cells and small
molecule drugs.  We are headquartered in Rockville,
Maryland.


3


We have
developed and maintain a portfolio of patents and patent applications that form
the proprietary base of our research and development efforts in the areas of
neural stem cell research, small molecule research, and related technologies. We
believe our patented technology, in combination with our know-how, and
collaborative projects with major research institutions, provide a competitive
advantage and will enable us to  develop and commercialize products
for use in treatment of a number of neurodegenerative conditions and in
regenerative repair of acute disease.





Regenerative
medicine is a young and emerging field. There can be no assurances that our
intellectual property portfolio will ultimately produce viable commercialized
products and processes. Even if we are able to produce a commercially viable
product, there are strong competitors in this field and our product may not be
able to successfully compete against them.





All of
our research efforts to date are at either the level of research or pre-clinical
stage of development, or at the clinical stage of development.  On December
18, 2008 we filed our first Investigational New Drug Application (“IND”) with
the U.S. Food and Drug Administration (“FDA”) to begin a clinical trial to treat
Amyotrophic Lateral Sclerosis (“ALS” or “Lou Gehrig’s disease”). On September
21, 2009, the FDA approved our IND.  The first patient was dosed on January
21, 2010.





The
Field of Regenerative Medicine





The
emerging field of treatment called "regenerative medicine" or "cell therapy"
refers to treatments that are founded on the concept of producing new cells to
replace malfunctioning or dead cells as a way to treat disease and injury. Many
significant and currently untreatable human diseases arise from the loss or
malfunction of specific cell types in the body. Our focus is the development of
effective methods to generate replacement cells from neural stem cells. We
believe that replacing damaged or malfunctioning or dead neural cells with fully
functional ones may be a useful therapeutic strategy in treating many diseases
and conditions of the central nervous system (“CNS”) including: Alzheimer's
disease, Parkinson's disease, Multiple Sclerosis, ALS, depression, and injuries
to the spinal cord.





Stem
Cell Therapy Background




Cells
maintain normal physiological function in healthy individuals by secreting or
metabolizing substances, such as sugars, amino acids, neurotransmitters and
hormones, which are essential to life. When cells are damaged or destroyed, they
no longer produce, metabolize or accurately regulate those substances. Cell loss
or impaired cellular functions are leading causes of degenerative diseases, and
some of the specific substances or proteins that are deficient in some of these
diseases have been identified. Although administering these substances or
proteins has some advantages over traditional pharmaceuticals, such as
specificity, there is no existing technology that can deliver them precisely to
the sites of action, under the appropriate physiological regulation, in the
appropriate quantity, nor for the duration required to cure the degenerative
condition. Cells, however, may do all this naturally. Thus, where failing cells
are no longer producing needed substances or proteins or where there has been
irreversible tissue damage or organ failure, transplantation of stem or
progenitor cells may enable the generation of new functional cells, thus
potentially restoring organ function and the patient's health.





Stem
cells have two defining characteristics: (i) they produce mature cells
which make up particular organs; and (ii) they self renew — that
is, some of the cells developed from stem cells are themselves new stem cells,
thus permitting the process to continue again and again. Stem cells are known to
exist for a number of systems of the human body, including the blood and immune
system, the central and peripheral nervous systems (including the brain), the
skin, bone, and even hair. They are thought to exist for many others, including
the liver and pancreas endocrine systems, gut, muscle, and heart. Stem cells are
responsible for organ regeneration during normal cell replacement and, to a
greater or lesser extent, after injury.




Stem
cells are rare and only available in limited supply, whether from the patients
themselves or from donors. Also, stem cells can often be obtained only through
significant surgical procedures. Therefore, in order to develop stem cell
therapeutics, three key challenges must be overcome: (i) identification of
stem or progenitor cells of a particular organ and testing them for therapeutic
potential; (ii) creation of processes to enable use of these rare cells in
clinical applications, such as expanding and banking them in sufficient
quantities to transplant into multiple patients; and (iii) demonstration of
the safety and efficacy of these potential therapeutics in human clinical
trials.




The
Potential of Our Tissue-Derived Stem Cell-Based Therapy





We
believe that, if successfully developed, stem cell therapeutics have the
potential to provide a broad therapeutic approach comparable in importance to
traditional pharmaceuticals and genetically engineered biologics. With respect
to the human neural stem cells, we have developed proprietary and reproducible
processes to identify, isolate, expand, and control cell differentiation in
mature functioning human neurons1and glia2and
bank human neural stem cells derived from brain tissue. Because the cells are
normal human neural stem cells, they may be better suited for transplantation
and may provide a safer and more effective alternative to therapies that are
based on cells derived from cancer cells, animal derived cells or cells derived
from an unpurified mix of many different cell types.





1 Neuronsare a major class
of cells in the nervous system. Neurons are sometimes called nerve cells, though
this term is technically imprecise since many neurons do not form nerves. In
vertebrates, they are found in the brain, the spinal cord and in the nerves and
ganglia of the peripheral nervous system, and their primary role is to process
and transmit neural information. One important characteristic of neurons is that
they have excitable membranes which allow them to generate and propagate
electrical signals.


2 Gliacells, commonly
called neuroglia or simply glia, are non-neuronal cells that provide support and
nutrition, maintain homeostasis, form myelin, and participate in signal
transmission in the nervous system. In the human brain, glia are estimated to
outnumber neurons by as much as 50 to 1.


4


Potential
Markets





We
believe the potential markets for regenerative medicine based on our
technologies are large. The table below summarizes the potential United States
patient populations which we believe may be amenable to neural cell
transplantation or treatment with our small molecule compound and represent
potential target markets for our proposed products:





Medical Condition
                  
                  Number of PatientsStem
      cellsALS
                  
                  30,000
                  (1)Huntington’s
      disease
                  
                  15,000
                  (2)Spinal
      Cord Injury
                  
                  250,000
                  (4)Stroke
                  
                  6.5
      million
                  (3)Small
      molecule compoundAlzheimer’s
      disease
                  
                  4.5
      million
                  (5)Depression
                  
                  14.8
      million
                  (5)Schizophrenia
                  
                  2.4
      million
                  (5)Stroke
                  
                  6.5
      million
                  (3)





(1)
Agency for Toxic Substances and Disease Registry (ATSDR),


(2)
National Institute of the Neurological Disorders and Stroke (NINDS)


(3) 2005
American Heart Association study


(4) The
University of Alabama National Spinal Cord Injury Statistical Center - March
2002


(5)
National Institute of Health





Our
Technology





Stem
Cells





Our
technology includes the ability to isolate human neural stem cells from most
areas of the human brain and spinal cord and to grow them into physiologically
relevant human neurons of all types. Our core patents entitled:





·
            Isolation, Propagation, and
      Directed Differentiation of Stem Cell from Embryonic and Adult Central
      Nervous System of Mammal;
and





·
            In Vitro Generation of
      Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem
      Cell





contain
claims which cover the details of this process and the culture of cells created.
What differentiates our stem cell technology from others is that our patented
processes do not require us to “push” the cells towards a certain fate by adding
specific growth factors. Our cells actually “become” the type of cell they are
fated to be. We believe this process and the resulting cells create a technology
platform that allows for the efficient isolation and ability to produce, in
commercially reasonable quantities, neural stem cells.





Our
technology allows for cells to grow in cultured dishes, also known as“in vitro” growth, without
mutations or other adverse events that would compromise their usefulness. We
believe this provides the following advantages:





·
            Our
      cells are multipotent, so they give rise to the three critical cell types
      of the nervous system: neurons (cells that carry signals throughout the
      brain and spinal cord), astrocytes (cells that support and protect
      neurons), and oligodendrocytes (cells that provide insulation to neurons
      to make signaling efficient).


·
            The
      cells are lineage-restricted, so they only give rise to cells of the
      nervous system. For example, our spinal cord stem cells can only form
      cells found within the spinal
column.


·
            Our technology enables
      large-scale expansion of neural stem cells under controlled conditions
      without introducing mutations or other adverse events that would
      compromise their usefulness.


·
            Our
      spinal cord cells can be produced in commercial
  quantities.


5





·
            We
      have isolated and cultured cells from multiple regions of the brain,
      allowing application to a number of serious disorders. Cells have been
      isolated from spinal cord (ALS, spinal cord injury), hippocampus (stroke,
      Alzheimer’s disease), midbrain (Parkinson’s disease), and cortex
      (ischemia).


·
            Universal
      Compatibility.   The Company’s stem cell products are provided
      to patients as ‘allografts,’ As such, the recipient is not genetically
      identical to the donor, and may be treated with a course of
      immunosuppressant drugs to prevent rejection of the cells. This strategy
      allows for a single stem cell product to be provided to many thousands of
      patients, ensuring the highest degree of quality in manufacturing and
      predictability in outcome. Because the brain and spinal cord are
      considered ‘immune privileged’ by most experts in the field, it is
      expected that immune suppression of the patient will only be performed for
      a brief period, allowing for minimal disruption of their normal immune
      function.


·
            Our
      biologic drug candidates can be stored frozen at end-user medical
      facilities until they are needed. This is a key feature of our
      technology.




Although
not the focus of our business, our technology also has ancillary uses with
respect to drug development. Our ability to grow and differentiate neural
cellsin vitro, gives
us the ability to analyze the potential biological effects of molecules on these
cells.





Small molecule
Compounds





The
Company has developed and patented a series of small molecule
compounds (low molecular weight organic compounds which can efficiently
cross the blood/brain barrier).  The Company expects to file an IND to
commence a human safety trial of its lead compound to treat major depression in
late 2010 or early 2011.





Business
Strategy




Neuralstem
has a number of prospects for developing treatments for central nervous system
disease using its stem cells and small molecule compounds.





A central
focus of Company strategy is keeping its fixed costs as low as possible through
outsourcing a wide variety of functions including some legal services, financial
transaction processing, laboratory staffing, regulatory management, IT, public
relations and research projects. As a result we can find the best possible
resource to fill a particular need, and after the project is completed the
associated costs stop. This low fixed cost approach enables the company to fit
its development spending to the cash on hand.





Stem
Cells





The
Company has focused its most intensive cell development activities on treating
spinal cord injury and disease. All preclinical safety and efficacy testing has
been successfully completed for our first application in Amyotrophic Lateral
Sclerosis (ALS, or Lou Gehrig’s disease). This work culminated in the filing of
an Investigational New Drug (IND) application to the FDA.  In
September of 2009 the FDA approved the Company’s application, making ours the
first neural stem cell clinical trial in the United States for
ALS.  Neuralstem believes that it can manage the clinical trial and
product approval process without a strategic partner.





In
preparation for the clinical trials described above, Neuralstem has reached the
following milestones with regard to our spinal cord stem cell product: (1) the
cells have been produced in large quantities under Good Manufacturing Practices
(GMP) methodology; (2) the cells have completed pre-clinical safety testing in
the context of delivery to the spinal cord; and (3) the Company has developed a
process for delivering the cells to the spinal cord.  We are also
working on the following additional indications for our
technologies:





·
            Spinal
      Cord Injury


·
            Stroke


·
            Huntington’s
      disease


·
            ALS





Small
Molecule Compounds





As a
first indication, Neuralstem is targeting depression. The Company plans to file
a request with the FDA to initiate clinical trials for this application without
a partner, and may also manage initial clinical safety and efficacy trials by
itself. Because of the complexity and cost of managing clinical trials after the
earliest phases, Neuralstem will seek a strategic partner to manage the later
stages of the trials.





Our
Research and Programs





We have
devoted substantial resources to our research programs to isolate and develop a
series of neural stem cell banks that we believe can serve as a basis for
therapeutic products. Our efforts to date have been directed at methods to
identify, isolate and culture large varieties of stem cells of the human nervous
system, and to develop therapies utilizing these stem cells. This research is
conducted both internally and through the use of third party laboratory
consulting companies under our direct supervision.


6


In
addition to research which we conduct internally or under our direct
supervision, we conduct research and development through research
collaborations. These collaborations, or programs, are undertaken with both
commercial and scholarly institutes pursuant to the terms and conditions of our
standard material transfer agreement.





The terms
of our standard material transfer agreement require us to provide our research
partner or collaborator with access to our technology or “research materials,”
which are comprised of our neurological stem cells, for a specific pre-defined
purpose. As part of the agreement, we agree to provide sufficient research
materials and technical assistance to accomplish the purpose of the program. The
determination of sufficiency is determined at our sole discretion. As part of
these agreements, we are entitled to certain reporting rights and the right to
have patentable discoveries presented to us prior to publication in order for us
to file applicable patents. In the event we choose to file a patent, we will
either be responsible for all filing and maintenance fees or we will split the
fees with our research partner depending on the type of patent to be filed. The
agreements also provide for us to receive a fully paid up, royalty free,
non-exclusive license to any inventions made by our partner with respect to our
technologies and their interest in any intellectual property jointly developed
and first right to negotiate an exclusive license. The agreements also provide
confidentiality between the parties. Generally each party is responsible for its
own expense, there are no milestone payment or royalty payment requirements
and the duration of these agreements is for a three year term which can be
terminated by either party by providing 90 days written notice.  Also,
these agreements may require us to pay for certain costs and expenses incurred
in connection with the research.




Examples
of such projects include:




University
of California San Diego, San Diego, CA: In May of 2002, we initiated a
research project with the University of California in San Diego for the purpose
of researching the applicability of our technology to the treatment of Ischemic
Spastic Paraplegia and traumatic spinal cord injury. The project is ongoing. The
research yielded findings that contributed to our filing of patent entitled
Transplantation of Human Cells for Treatment of Neurological
Disorders.





Johns
Hopkins University, School of Medicine, Baltimore, MD: In March of 2001
we initiated a research project with Johns Hopkins University, School of
Medicine for the purpose of researching the applicability of our technology to
the treatment of Amyotrophic Lateral Sclerosis and traumatic spinal cord injury.
The project is ongoing. The research yielded findings that contributed to our
filing of patent entitled Transplantation of Human Cells for Treatment of
Neurological Disorders.





University
of Southern Florida, Tampa, FL: In September of 2005 we initiated a
research project with the University of Southern Florida for the purpose of
researching the applicability of our technology to the treatment of Parkinson's
Disease. The project is ongoing.





University
of Central Florida, Orlando, FL: In March of 2006 we initiated a research
project with the University of Central Florida for the purpose of researching
the applicability of our technology to the treatment of spinal cord injuries.
The project is ongoing.




University
of Pennsylvania whereby we have entered into an agreement with the
university to assist us in developing “A Feasibility and Safety Study of human
Spinal Stem Cell Transplantation for the Treatment of Ischemic Spastic
Paraplegia Due to Spinal Cord Ischemia.





China
Medical University & Hospital of Taiwan, to  collaborate on
Amyotrophic Lateral Sclerosis (ALS or Lou Gehrig's disease) with Dr. Shinn-Zong
Lin, MD, PhD as principle investigator.





Albert-Ludwigs-University
in Freiburg, Germany, to collaborate on the treatment of Huntington's
disease.





University
of  Cincinnati to collaborate on the treatment of Parkinson’s
Disease





University
of Michigan to collaborate on the treatment of ALS





Emory
University for ALS clinical trials.





The
forgoing is not exhaustive and is only meant to provide a brief overview of the
types of projects we are undertaking with third parties.




Manufacturing




We
currently manufacture our cells both in-house and on an outsource basis. We
manufacture cells in-house which are not required to meet stringent FDA
requirements. We use these cells in our research and collaborative programs. We
outsource all the manufacturing and storage of our stem cells to be used in
pre-clinical works, and which are accordingly subject to higher FDA
requirements, to Charles River Laboratories, Inc., of Wilmington, Massachusetts.
The Charles River facility has the capacity to be used for cell processing under
the FDA determined Good Manufacturing Practices (GMP) in quantities sufficient
for our current and anticipated pre-trial and clinical trial needs in both
the near to intermediate term. We have no quantity or volume commitment with
Charles River Laboratories and our cells are ordered and manufactured on an as
needed basis.


7




Products
& Marketing




Because
of the early stage of our programs, we have yet to identify any specific product
and we have not yet addressed questions of channels of distribution and
marketing of potential future products.




Our
Intellectual Property





Our
research and development is supported by our intellectual property. We currently
own or have exclusive licenses to 14 patents and 22 patent applications pending
worldwide in the field of regenerative medicine and cell therapy.





Our
success will likely depend upon our ability to preserve our technologies and
operate without infringing the proprietary rights of other parties. However, we
may rely on certain proprietary technologies and know-how that are not
patentable. We protect our proprietary information, in part, by the use of
confidentiality agreements with our employees, consultants and certain of our
contractors.





When
appropriate, we seek patent protection for inventions in our core technologies
and in ancillary technologies that support our core technologies or which we
otherwise believe will provide us with a competitive advantage. We accomplish
this by filing patent applications for discoveries we make, either alone or in
collaboration with scientific collaborators and strategic partners. Typically,
although not always, we file patent applications both in the United States and
in select international markets. In addition, we plan to obtain licenses or
options to acquire licenses to patent filings from other individuals and
organizations that we anticipate could be useful in advancing our research,
development and commercialization initiatives and our strategic business
interests.




The
following table identifies the issued and pending patents we own that we believe
currently support our technology platform.


8


Patents
Pending




Number
                
                Country
                
                Filing
                  Date
                
                IssueDate
                
                Expiration
                  Date
                
                Title2257068
                
                CA
                
                5/7/1997
                
                N/A
                
                N/A
                
                ISOLATION,
      PROPOGATION, AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM CENTRAL
      NERVOUS SYSTEM OF MAMMALS2343571
                
                CA
                
                9/20/1999
                
                N/A
                
                N/A
                
                STABLE
      NEURAL STEM CELL LINES99948396.9
                
                EP
                
                9/20/1999
                
                N/A
                
                N/A
                
                STABLE
      NEURAL STEM CELL LINES2000-574224
                
                JP
                
                9/20/1999
                
                N/A
                
                N/A
                
                STABLE
      NEURAL STEM CELL LINES3790356.4
                
                EP
                
                12/5/2003
                
                N/A
                
                N/A
                
                METHOD
      FOR DISCOVERING NEUROGENIC AGENTS11/281,640
                
                US
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS200580039450
                
                CN
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS5851748.3
                
                EP
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS2613/CHENP/2007
                
                IN
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS183092
                
                IL
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS2007-543219
                
                JP
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS10-2007-7012097
                
                KR
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS1-2007-501016
                
                PH
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS2007122507
                
                RU
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS1-2007-01216
                
                VN
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEURODEGENERATIVE
      CONDITIONS20073078
                
                NO
                
                11/17/2005
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS11/852,922
                
                US
                
                9/10/2007
                
                N/A
                
                N/A
                
                METHOD
      FOR DISCOVERING NEUROGENIC AGENTS11/932,923
                
                US
                
                10/31/2007
                
                N/A
                
                N/A
                
                TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS12/404,841
                
                US
                
                3/16/2009
                
                N/A
                
                N/A
                
                METHODS
      OF TREATING ISCHEMIC SPASTITICY12/424,238
                
                US
                
                4/15/2009
                
                N/A
                
                N/A
                
                STABLE
      NEURAL STEM CELL LINES12/500,073
                
                US
                
                7/9/2009
                
                N/A
                
                N/A
                
                USE
      OF FUSED NICOTINAMIDES TO PROMOTE
NEUROGENESIS


9


Patents
Issued





Number
                    
                    Country
                    
                    Filing
                      Date
                    
                    Issue Date
                    
                    Expiration
                      Date
                    
                    Title5,753,506
                    
                    US
                    
                    9/25/1996
                    
                    5/19/1998
                    
                    9/25/2016
                    
                    ISOLATION
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS6,040,180
                    
                    US
                    
                    5/7/1997
                    
                    3/21/2000
                    
                    5/7/2017
                    
                    IN
      VITRO GENERATION OF DIFFERENTIATED NEURONS FROM CULTURES OF MAMMALIAN
      MULTIPOTENTIAL CNS STEM CELLS6,284,539
                    
                    US
                    
                    10/9/1998
                    
                    9/4/2001
                    
                    10/9/2018
                    
                    METHOD
      FOR GENERATING DOPAMINERGIC CELLS DERIVED FROM NEURAL
      PRECURSORS7,544,511
                    
                    US
                    
                    1/14/2002
                    
                    6/9/2009
                    
                    4/13/2017
                    
                    STABLE
      NEURAL STEM CELL LINES7,560,553
                    
                    US
                    
                    3/17/2008
                    
                    7/14/2009
                    
                    8/9/2024
                    
                    USE
      OF FUSED NICOTINAMIDES TO PROMOTE NEUROGENESIS755849
                    
                    AU
                    
                    9/20/1999
                    
                    4/3/2003
                    
                    9/20/2019
                    
                    STABLE
      NEURAL STEM CELL LINES915968
                    
                    EP
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPOGATION, AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM CENTRAL
      NERVOUS SYSTEM OF MAMMALS915968
                    
                    ES
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS915968
                    
                    FR
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS915968
                    
                    GB
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS915968
                    
                    IE
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS915968
                    
                    SE
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS915968
                    
                    CH
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS69737949.3
                    
                    DE
                    
                    5/7/1997
                    
                    7/25/2007
                    
                    5/7/2017
                    
                    ISOLATION,
      PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND
      ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS132324
                    
                    SG
                    
                    11/17/2005
                    
                    11/30/2009
                    
                    11/17/2025
                    
                    TRANSPLANTATION
      OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL
    DISORDERS





We also
rely upon trade-secret protection for our confidential and proprietary
information and take active measures to control access to that
information.




Our
policy is to require our employees, consultants and significant scientific
collaborators and sponsored researchers to execute confidentiality and
assignment of invention agreements upon the commencement of an employment or
consulting relationship with us. These agreements generally provide that all
confidential information developed or made known to the individual by us during
the course of the individual's relationship with us is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees and consultants, the agreements generally provide that all
inventions conceived by the individual in the course of rendering services to us
shall be our exclusive property.


10


The
patent positions of pharmaceutical and biotechnology companies, including ours,
are uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application can be denied or significantly reduced
before or after the patent is issued. Consequently, we do not know whether any
of our pending applications will result in the issuance of patents, or if any
existing or future patents will provide significant protection or commercial
advantage or will be circumvented by others. Since patent applications are
secret until the applications are published (usually eighteen months after the
earliest effective filing date), and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make the inventions covered by each of our
pending patent applications or that we were the first to file patent
applications for such inventions. There can be no assurance that patents will
issue from our pending or future patent applications or, if issued, that such
patents will be of commercial benefit to us, afford us adequate protection from
competing products, or not be challenged or declared invalid.




In the
event that a third party has also filed a patent application relating to
inventions claimed in our patent applications, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
uncertainties and cost for us, even if the eventual outcome is favorable to us.
There can be no assurance that our patents, if issued, would be held valid by a
court of competent jurisdiction.




A number
of pharmaceutical, biotechnology and other companies, universities and research
institutions have filed patent applications or have been issued patents relating
to cell therapy, stem cells and other technologies potentially relevant to or
required by our expected products. We cannot predict which, if any, of such
applications will issue as patents or the claims that might be
allowed.




If third
party patents or patent applications contain claims infringed by our technology
and such claims are ultimately determined to be valid, there can be no assurance
that we would be able to obtain licenses to these patents at a reasonable cost,
if at all, or be able to develop or obtain alternative non-infringing
technology. If we are unable to obtain such licenses or develop or obtain
alternative non-infringing technology at a reasonable cost, we may not be able
to develop certain products commercially. There can be no assurance that we will
not be obliged to defend ourselves in court against allegations of infringement
of third party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. An adverse outcome
in such a suit could subject us to significant liabilities to third parties,
require us to seek licenses from third parties, or require us to cease using
such technology.





Competition





The
biotechnology industries are characterized by rapidly evolving technology and
intense competition. Our competitors include major multinational pharmaceutical
companies, specialty biotechnology companies and chemical and medical products
companies operating in the fields of regenerative medicine, cell therapy, tissue
engineering and tissue regeneration. Many of these companies are
well-established and possess technical, research and development, financial and
sales and marketing resources significantly greater than ours. In addition,
certain smaller biotech companies have formed strategic collaborations,
partnerships and other types of joint ventures with larger, well established
industry competitors that afford these companies potential research and
development and commercialization advantages. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting and financing research activities which may produce products
directly competitive to those we are developing. Moreover, many of these
competitors may be able to obtain patent protection, obtain FDA and other
regulatory approvals and begin commercial sales of their products before we
do.





Although
not necessarily direct competitors, some of the specialty biotechnology
companies include Geron Corporation, Genzyme Corporation, StemCells, Inc.,
Aastrom Biosciences, Inc. and Viacell, Inc. Some of these companies
are well-established and have substantial technical and financial resources
compared to us. However, as cell-based products are only just emerging as
medical therapies, many of our direct competitors are smaller biotechnology and
specialty medical products companies. These smaller companies may become
significant competitors through rapid evolution of new technologies. Any of
these companies could substantially strengthen their competitive position
through strategic alliances or collaborative arrangements with large
pharmaceutical or biotechnology companies.





The
diseases and medical conditions we are targeting have no effective long-term
therapies. Nevertheless, we expect that our technologies and products will
compete with a variety of therapeutic products and procedures offered by major
pharmaceutical companies. Many pharmaceutical and biotechnology companies are
investigating new drugs and therapeutic approaches for the same purposes, which
may achieve new efficacy profiles, extend the therapeutic window for such
products, alter the prognosis of these diseases, or prevent their onset. We
believe that our products, when and if successfully developed, will compete with
these products principally on the basis of improved and extended efficacy and
safety and their overall economic benefit to the health care system. Competition
for our products may be in the form of existing and new drugs, other forms of
cell transplantation, surgical procedures, and gene therapy. We believe that
some of our competitors are also trying to develop similar stem cell-based
technologies. We expect that all of these products will compete with our
potential stem cell products based on efficacy, safety, cost and intellectual
property positions. We may also face competition from companies that have filed
patent applications relating to the use of genetically modified cells to treat
disease, disorder or injury. In the event our therapies should require the use
of such genetically modified cells, we may be required to seek licenses from
these competitors in order to commercialize certain of our proposed products,
and such licenses may not be granted or be extremely expensive.





If we
develop products that receive regulatory approval, they would then have to
compete for market acceptance and market share. For certain of our potential
products, an important success factor will be the timing of market introduction
of competitive products. This timing will be a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.


11


Government
Regulation





Regulation
by governmental authorities in the United States and other countries is a
significant factor in our research and development and will be a significant
factor in the manufacture and marketing of our proposed products. The nature and
extent to which such regulation applies to us will vary depending on the nature
of any products we may develop. We anticipate that many, if not all, of our
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical and clinical testing and other approval procedures of the
FDA and similar regulatory authorities in European and other countries. Various
governmental statutes and regulations also, govern, or influence testing,
manufacturing, safety, labeling, storage and recordkeeping related to such
products and their marketing. The process of obtaining these approvals and the
subsequent compliance with appropriate statutes and regulations require the
expenditure of substantial time and money, and there can be no guarantee that
approvals will be granted.





FDA
Approval





We are
presently at the stage of clinical development.  On December 18, 2008 we
filed our first investigational new drug application (IND) with the FDA to begin
a clinical trial to treat amyotrophic ALS or Lou Gehrig’s Disease. On September
22, 2009, the FDA provided us approval of the IND.





The
protocol for each clinical study must be approved by an independent
institutional review board, or IRB, of the institution at which the study is
conducted, and the informed consent of all participants must be obtained. The
Emory IRB approved our trial in December of 2009.  The first patient
was dosed January 21, 2010.  The IRB reviews the existing information
on the product, considers ethical factors, the safety of human subjects, the
potential benefits of the therapy and the possible liability of the institution.
The IRB is responsible for ongoing safety assessment of the subjects during the
clinical investigation.





Clinical
development is traditionally conducted in three sequential phases.







·
            Phase
      1 studies for a cell therapy product are designed to evaluate safety in a
      small number of subjects in a selected patient population by assessing
      adverse effects, and may include multiple dose levels. This study may also
      gather preliminary evidence of a beneficial effect on the
      disease.





·
            Phase
      2 may involve studies in a limited patient population to determine
      biological and clinical effects of the product and to identify possible
      adverse effects and safety risks of the product in the selected patient
      population.





·
            Phase
      3 trials would be undertaken to conclusively demonstrate clinical benefit
      or effect and to test further for safety within a broader patient
      population, generally at multiple study sites. The FDA continually reviews
      the clinical trial plans and results and may suggest changes or may
      require discontinuance of the trials at any time if significant safety
      issues arise.





The
results of the preclinical studies and clinical studies are submitted to the FDA
in the form of Biological License Application (“BLA”) marketing approval
authorization applications.  The FDA must approve the applications
prior to any commercial sale or practice of the technology or product. Biologic
product manufacturing establishments located in certain states also may be
subject to separate regulatory and licensing requirements. The testing and
approval process will require substantial time, effort and expense. The time for
approval is affected by a number of factors, including relative risks and
benefits demonstrated in clinical trials, the availability of alternative
treatments and the severity of the disease, and animal studies or clinical
trials that may be requested during the FDA review period.





Our
research and development is based largely on the use of human stem and
progenitor cells. The FDA has initiated a risk-based approach to regulating
human cell, tissue and cellular and tissue-based products and has published
current Good Tissue Practice regulations. As part of this approach, the FDA has
published final rules for registration of establishments that engage in the
recovery, screening, testing, processing, storage or distribution of human
cells, tissues, and cellular and tissue-based products, and for the listing of
such products. While the Company believes that it is in compliance with all such
practices and regulations; we are not required to register until we apply for
licensure from the FDA for our product, subject to successful completion of
human trials. In addition, the FDA has published rules for making
suitability and eligibility determinations for donors of cells and tissue and
for current good tissue practice for manufacturers using them, which have
recently taken effect. We cannot now determine the full effects of this
regulatory initiative, including precisely how it may affect the clarity of
regulatory obligations and the extent of regulatory burdens associated with our
stem cell research and the manufacture and marketing of stem cell
products.





European and
Other Regulatory Approval   Approval of a product by
regulatory authorities comparable to the FDA in Europe and other countries will
likely be necessary prior to commencement of marketing a product in any of these
countries. The regulatory authorities in each country may impose their own
requirements and may refuse to grant approval, or may require additional data
before granting approval, even though the relevant product has been approved by
the FDA or another authority. The regulatory authorities in the European Union,
or EU, and other developed countries have lengthy approval processes for
pharmaceutical products. The process for gaining approval in particular
countries varies, but is generally similar to the FDA approval process. In
Europe, the European Committee for Proprietary Medicinal Products provides a
mechanism for EU-member states to exchange information on all aspects of product
licensing. The EU has established a European agency for the evaluation of
medical products, with both a centralized community procedure and a
decentralized procedure, the latter being based on the principle of licensing
within one member country followed by mutual recognition by the other member
countries.


12


Other
Regulations   In addition to safety regulations enforced
by the FDA, we are also subject to regulations under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act
and other present and potential future and federal, state, local, and foreign
regulations.





Outside
the United States, we will be subject to regulations that govern the import of
drug products from the United States or other manufacturing sites and foreign
regulatory requirements governing human clinical trials and marketing approval
for our products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.




The
United States Congress, several states and foreign countries have considered
legislation banning or restricting human application of stem cell-based and
nuclear transfer based technologies. No assurance can be given regarding future
restrictions or prohibitions that might affect our technology and business. In
addition, we cannot assure you that future judicial rulings with respect to
nuclear transfer technology or human stem cells will not have the effect of
delaying, limiting or preventing the use of nuclear transfer technology or stem
cell-based technology or delaying, limiting or preventing the sale, manufacture
or use of products or services derived from nuclear transfer technology or stem
cell-derived material. Any such legislative or judicial development would harm
our ability to generate revenues and operate profitably.




For
additional information about governmental regulations that will affect our
planned and intended business operations, see "Risk Factors.”





Employees




As of
March 13, 2010, we had eight full-time employees and six full time independent
contractors.  Of these employees, ten work on research and
development and four in administration. We also use the services of numerous
outside consultants in business and scientific matters.





Where
to Find More Information




We make
our public filings with the SEC, including our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
exhibits and amendments to these reports.  Also our executive
officers, directors and holders of more than 10% of our common stock, file
reports with the SEC on Forms 3, 4 and 5 regarding their ownership of our
securities. These materials are available on the SEC’s web site,http://www.sec.gov.
You may also read or copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.  Alternatively, you may obtain copies of these
filings, including exhibits, by writing or telephoning us at:





NEURALSTEM,
INC


9700
Great Seneca Highway,


Rockville,
Maryland 20850


Attn:
Chief Financial Officer


Tel:
(301) 366-4841




ITEM
      1A.
            RISK
      FACTORS





We have
described below a number of uncertainties and risks which, in addition to
uncertainties and risks presented elsewhere in this Annual Report, may adversely
affect our business, operating results and financial condition.  The
uncertainties and risks enumerated below as well as those presented elsewhere in
this Annual Report should be considered carefully in evaluating us, our business
and the value of our securities. The following important factors, among others,
could cause our actual business, financial condition and future results to
differ materially from those contained in forward-looking statements made in
this Annual Report or presented elsewhere by management from time to
time.





Risks
Relating to Our Stage of Development





We
have a limited operating history and have significantly shifted our operations
and strategies since inception.





Since
inception in 1996 and through December 31, 2009, we have raised $62,551,375 of
capital and recorded accumulated losses totaling $67,566,831.  On December
31, 2009, we had a working capital surplus of $892,552 and stockholders’ deficit
of $5,015,456.  Our net losses for the two most recent fiscal years have
been $10,364,363 and $11,830,798 for 2009 and 2008 respectively.  We
had no revenues for the twelve months ended December 31, 2009.


13


Our
ability to generate revenues and achieve profitability will depend upon our
ability to complete the development of our proposed stem cell products, obtain
the required regulatory approvals, manufacture, and market and sell our proposed
products. In part because of our past operating results, no assurances can be
given that we will be able to accomplish any of these goals.





Although
we have generated some revenue in prior years, we have not generated any revenue
from the commercial sale of our proposed stem cell products. Since inception, we
have engaged in several related lines of business and have discontinued
operations in certain areas. For example, in 2002, we lost a material contract
with the Department of Defense and were forced to close our principal facility
and lay off almost all of our employees in an attempt to focus our development
strategy on stem cell technologies. This limited and changing history may not be
adequate to enable you to fully assess our future prospects. No assurances can
be given as to exactly when, if at all, we will be able to fully develop,
commercialize, market, sell and/or derive material revenues from our proposed
products





We
will need to raise additional capital to continue operations.





Since
inception, we have relied almost entirely on external financing to fund
operations. Such financing has come primarily from the sale of common stock and
the exercise of investor warrants.  As of December 31, 2009, we had
cash and cash equivalents on hand of $2,309,774.  Presently, we have a
monthly cash burn rate of approximately $600,000.  We will need to
raise additional capital to fund anticipated operating expenses and future
expansion. Among other things, external financing will be required to further
develop our technologies and products, as well as to pay general operating
costs.   On September 21, 2009, the FDA approved our IND application to
commence Phase I trials for ALS. The first patient was dosed on January 21,
2010.





We have
expended and expect to continue to expend substantial cash in the research,
development, clinical and pre-clinical testing of our stem cell technologies
with the goal of ultimately obtaining FDA approval to market our proposed
products. We will require additional capital to conduct research and
development, establish and conduct clinical and pre-clinical trials, enter into
commercial-scale manufacturing arrangements and to provide for marketing and
distribution of our products.





Our long
term capital requirements are expected to depend on many factors,
including:





·
            the
      continued progress and costs of our research and development
      programs;





·
            the
      progress of pre-clinical studies and clinical
  trials;





·
            the
      time and costs involved in obtaining regulatory
  clearance;





·
            the
      costs involved in preparing, filing, prosecuting, maintaining and
      enforcing patent claims;





·
            The
      cost of defending any patent
litigation;





·
            the
      costs of developing sales, marketing and distribution channels and our
      ability to sell our products if
developed;





·
            the
      costs involved in establishing manufacturing capabilities for commercial
      quantities of our proposed
products;





·
            competing
      technological and market
developments;





·
            market
      acceptance of our proposed
products;





·
            the
      costs of recruiting and retaining employees and consultants;
      and





·
            the
      costs associated with educating and training physicians about our proposed
      products.





We cannot
assure you that financing will be available if needed. If additional financing
is not available, we may not be able to fund operations and planned growth,
develop or enhance our technologies, take advantage of business opportunities or
respond to competitive market pressures.  If we exhaust our cash
reserves and are unable to realize adequate additional financing, we may be
unable to meet operating obligations which could result in us initiating
bankruptcy proceedings or delaying, or eliminating some or all of our research
and product development programs.





Additional
financing requirements could result in dilution to existing
stockholders.





We are
not able to finance our operations by generating
revenue.  Accordingly, we will be required to secure additional
financing which may be dilutive to current shareholders.  We are
authorized to issue 150,000,000 shares of common stock and 7,000,000 shares of
preferred stock. Such securities may generally be issued without the approval or
consent of our stockholders.  The issuance of such securities may
result in substantial dilution.


14


Risks
Relating to Our Business





Our
business is dependent on a single product candidate.





At
present our ability to progress as a company is significantly dependent on a
single product candidate for ALS which is entering Phase I clinical
trials.  Any clinical, regulatory or other development that
significantly delays or prevents us from completing any of our trials, any
material safety issue or adverse side effect to any study participant in any of
these trials, or the failure of these trials to show the results expected would
likely depress our stock price significantly and could prevent us from raising
the substantial additional capital we will need to further develop our cellular
technologies. Moreover, any material adverse occurrence in our first clinical
trials could substantially impair our ability to initiate clinical trials to
test our stem cell therapies in other potential indications. This, in turn,
could adversely impact our ability to raise additional capital and pursue our
planned research and development efforts.





Our
business relies on stem cell technologies that we may not be able to
commercially develop.





We have
concentrated the majority of our research on stem cell
technologies.  Our ability to generate revenue and operate profitably
will depend on being able to develop these technologies for human applications.
These are emerging technologies and have limited human applications. We cannot
guarantee that we will be able to develop our technologies or that such
development will result in products with any commercial utility or value. We
anticipate that the commercial sale of such products and royalty/licensing fees
related to the technology, will be our primary sources of revenues. If we are
unable to develop the technologies, we may never realize any
revenue.





Our
product development programs are based on novel technologies and are inherently
risky.





We are
subject to the risks of failure inherent in the development of products based on
new technologies. The novel nature of these therapies creates significant
challenges in regard to product development and optimization, manufacturing,
government regulation, third party reimbursement, and market acceptance. For
example, the pathway to regulatory approval for cell-based therapies, including
our product candidates, may be more complex and lengthy than the pathway for
conventional drugs. These challenges may prevent us from developing and
commercializing products on a timely or profitable basis or at all.





Our
inability to complete pre-clinical and clinical testing and trials will impair
our viability.





On
September 21, 2009, we received approval from the FDA for our first IND in order
to commence clinical trials.  We commenced the trials on January 21,
2010 with the dosing of our first patient.  Although we have commenced
the trials, the outcome of the trials is uncertain, and if we are unable to
satisfactorily complete such trials, or if such trials yield unsatisfactory
results, we will be unable to commercialize our proposed products. No assurances
can be given that the clinical trials will be completed or result in a
successful outcome.





If
regulatory authorities do not approve our products or if we fail to maintain
regulatory compliance, we would be unable to commercialize our therapeutic
products, and our business and results of operations would be materially
harmed.





Our
proposed products may not have favorable results in clinical trials or receive
regulatory approval.





Positive
results from pre-clinical studies should not be relied upon as evidence that
clinical trials will succeed. Even if our product candidates achieve positive
results in pre-clinical studies, we will be required to demonstrate through
clinical trials that the product candidates are safe and effective for use in a
diverse population before we can seek regulatory approvals for their commercial
sale. There is typically an extremely high rate of attrition from the failure of
product candidates as they proceed through clinical trials. If any product
candidate fails to demonstrate sufficient safety and efficacy in any clinical
trial, then we would experience potentially significant delays in, or be
required to abandon, development of that product candidate. If we delay or
abandon our development efforts of any of our product candidates, then we may
not be able to generate sufficient revenues to become profitable, and our
operations could be materially harmed.





There
are no assurances that we will be able to submit or obtain FDA approval of a
biologics license application.





There can
be no assurance that even  if the clinical trials of any potential
product candidate are successfully initiated and completed, we will be able to
submit a Biologics License Application (“BLA”) to the FDA or that any BLA we
submit will be approved in a timely manner, if at all. If we are unable to
submit a BLA with respect to any future product candidate, or if any BLA we
submit is not approved by the FDA, we will be unable to commercialize that
product. The FDA can and does reject BLAs and requires additional clinical
trials, even when product candidates performed well or achieved favorable
results in clinical trials. If we fail to commercialize our product candidate,
we may be unable to generate sufficient revenues to attain profitability and our
reputation in the industry and in the investment community would likely be
damaged, each of which would cause our stock price to decrease.





The manufacturing
of stem cell-based therapeutic products is novel and dependent upon specialized
key materials.





The
manufacturing of stem cell-based therapeutic products is a complicated and
difficult process, dependent upon substantial know-how and subject to the need
for continual process improvements.  We depend almost exclusively on
third party manufacturers to supply our cells.  In addition, our
suppliers’ ability to scale-up manufacturing to satisfy the various requirements
of our planned clinical trials is uncertain.  Manufacturing
irregularities or lapses in quality control could have a material adverse effect
on our reputation and business, which could cause a significant loss of
stockholder value. Many of the materials that we use to prepare our cell-based
products are highly specialized, complex and available from only a limited
number of suppliers. At present, some of our material requirements are single
sourced, and the loss of one or more of these sources may adversely affect our
business


15


Our
business is subject to ethical and social concerns.





The use
of stem cells for research and therapy has been the subject of debate regarding
ethical, legal and social issues.  Negative public attitudes toward
stem cell therapy could result in greater governmental regulation of stem cell
therapies, which could harm our business. For example, concerns regarding such
possible regulation could impact our ability to attract collaborators and
investors.  Existing and potential U.S. government regulation of human
tissue may lead researchers to leave the field of stem cell research or the
country altogether, in order to assure that their careers will not be impeded by
restrictions on their work. Similarly, these factors may induce graduate
students to choose other fields less vulnerable to changes in regulatory
oversight, thus exacerbating the risk that we may not be able to attract and
retain the scientific personnel we need in the face of competition among
pharmaceutical, biotechnology and health care companies, universities and
research institutions for what may become a shrinking class of qualified
individuals





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 licensees, licensors, or others with
whom we have contractual or other business relationships or with our competitors
or others whose interests differs from ours. If we are unable to resolve these
conflicts on terms that are satisfactory to all parties, we may become involved
in litigation brought by or against it. Any 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 which could have
a materially adverse effect on our business.  By way of example, in
May of 2008, we filed a complaint against StemCells Inc., alleging that U.S.
Patent No. 7,361,505 (the “‘505 patent”), allegedly exclusively licensed to
StemCells, Inc., is invalid, not infringed and unenforceable. On the same day,
StemCells, Inc. filed a complaint alleging that we had infringed, contributed to
the infringement of, and or induced the infringement of two patents owned by or
exclusively licensed to StemCells relating to stem cell culture compositions. At
present, the litigation is in its initial stages and any likely outcome is
difficult to predict.





We
may not be able to obtain necessary licenses to third-party patents and other
rights.





A number
of companies, universities and research institutions have filed patent
applications or have received patents relating to technologies in our field. We
cannot predict which, if any, of these applications will issue as patents or how
many of these issued patents will be found valid and enforceable. There may also
be existing issued patents on which we would be infringed by the
commercialization of our product candidates. If so, we may be prevented from
commercializing these products unless the third party is willing to grant a
license to us. We may be unable to obtain licenses to the relevant patents at a
reasonable cost, if at all, and may also be unable to develop or obtain
alternative non-infringing technology. If we are unable to obtain such licenses
or develop non-infringing technology at a reasonable cost, our business could be
significantly harmed. Also, any infringement lawsuits commenced against us may
result in significant costs, divert our management’s attention and result in an
award against us for substantial damages, or potentially prevent us from
continuing certain operations.





We
may not be able to obtain third-party patient reimbursement or favorable product
pricing.





Our
ability to successfully commercialize our proposed products in the human
therapeutic field depends to a significant degree on patient reimbursement of
the costs of such products and related treatments. We cannot assure you that
reimbursement in the United States or foreign countries will be available for
any products developed, or, if available, will not decrease in the future, or
that reimbursement amounts will not reduce the demand for, or the price of, our
products.  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 the current business
model.





Our
products may not be profitable due to manufacturing costs.





Our
products may be significantly more expensive to manufacture than other drugs or
therapies currently on the market today due to a fewer number of potential
manufacturers, greater level of needed expertise and other general market
conditions affecting manufacturers of stem cell based
products.  Accordingly, we may not be able to charge a high enough
price for us to make a profit from the sale of our cell therapy
products.





We
are dependent on the acceptance of our products by the health care
community.





Our
proposed products, 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 will depend on a number of factors,
including:


16





·
            the
      clinical efficacy and safety of our proposed
  products;





·
            the
      superiority of our products to alternatives currently on the
      market;





·
            the
      potential advantages of our products over alternative treatment methods;
      and





·
            the
      reimbursement policies of government and third-party
    payors.





If the
health care community does not accept our products for any reason, our business
would be materially harmed.





We
depend on two key employees for our continued operations and future
success.





The loss
of either of our key executive officers, Richard Garr and Karl Johe, would be
detrimental to us.





·
            We
      currently do not maintain “key person” life insurance on the life of Mr.
      Garr. As a result, the Company will not receive any compensation upon the
      death or incapacity of this key
individual;





·
            We
      currently do maintain “key person” life insurance on the life of Mr. Johe.
      As a result, the Company will receive approximately $1,000,000 in the
      event of his death or incapacity.





In
addition, we anticipate growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing.  We anticipate the need for additional
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 our business.





The
employment contracts of key employees contain significant anti-termination
provisions which could make changes in management difficult or
expensive.





We have
entered into employment agreements with Messrs. Garr and Johe which expire on
November 1, 2012.  In the event either individual is terminated prior
to the full term of their respective contracts, for any reason other than a
voluntary resignation, all compensation due to such employee under the terms of
the respective agreement shall become due and payable immediately. These
provisions will make the replacement of either of these employees very costly
and could cause difficulty in effecting a change in control. Termination prior
to the full term of these contracts would cost us as much as $1,000,000 per
contract and the immediate vesting of all outstanding options and/or warrants
held by Messrs. Garr and Johe.





Our
competition has significantly greater experience and financial
resources.





The
biotechnology industry is characterized by intense competition. We compete
against numerous companies, many of which have substantially greater resources.
Several such enterprises have initiated cell therapy research programs and/or
efforts to treat the same diseases which we target. Although not necessarily
direct competitors, companies such as Geron Corporation, Genzyme Corporation,
StemCells, Inc., Advanced Cell Technology, Inc., Aastrom Biosciences, Inc. and
Viacell, Inc., as well as others, may have substantially greater resources and
experience in our fields which put us at a competitive
disadvantage.





Our
outsource model depends on third parties to assist in developing and testing our
proposed products.





Our
strategy for the development, clinical and preclinical testing and
commercialization of our proposed products is based on an outsource model. This
model requires us to engage third parties in order to further develop our
technology and products as well as for the day to day operations of our
business. In the event we are not able to enter into such relationships in the
future, our ability to operate and develop products may be seriously hindered or
we would be required to expend considerable resources to bring such functions
in-house. Either outcome could result in our inability to develop a commercially
feasible product or in the need for substantially more working capital to
complete the research in-house.





The
development, manufacturing and commercialization of cell-based therapeutic
products expose us to product liability claims.





By
developing and, ultimately, commercializing medical products, we are exposed to
the risk of product liability claims. Product liability claims against us could
result in substantial litigation costs and damage awards against us. We have
obtained liability insurance that covers our clinical trials.  If and
when we begin commercializing products, we will need to increase our insurance
coverage.  We may not be able to obtain insurance on acceptable terms,
if at all, and the policy limits on our insurance policies may be insufficient
to cover our liability.


17





We
intend to rely upon third-party FDA-approved manufacturers for our stem
cells.





We
currently have no internal manufacturing capability, and will rely extensively
on FDA-approved licensees, strategic partners or third party contract
manufacturers or suppliers. Should we be forced to manufacture our stem cells,
we cannot give you any assurance that we will be able to develop an internal
manufacturing capability or procure alternative third party suppliers. Moreover,
we cannot give you any assurance that any contract manufacturers or suppliers we
procure will be able to supply our product in a timely or cost effective manner
or in accordance with applicable regulatory requirements or our
specifications.





Risks
Relating to Our Common Stock





Our
common shares are sporadically or “thinly” traded.





Our
common shares have historically been sporadically or “thinly” traded, meaning
that the number of persons interested in purchasing our common shares at or near
the asking price at any given time may be relatively small or non-existent. This
situation is attributable to a number of factors, including the facts that we
are a small company which is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community.  Even if we came to the attention of such persons, they
tend to be risk-adverse and would be reluctant to follow an unproven development
stage company such as ours or purchase or recommend the purchase of our shares
until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in our shares is
minimal or non-existent, as compared to a seasoned issuer which has a large and
steady volume of trading activity that will generally support continuous sales
without a material reduction in share price. We cannot give you any assurance
that a broader or more active trading market for our common shares will develop
or be sustained, or that current trading levels will be sustained. Due to these
conditions, we can give you no assurance that you will be able to sell your
shares if you need money or otherwise desire to liquidate your
investment.





As
a result of a recent accounting pronouncement, we no longer meet the continued
listing requirements of the NYSE AMEX.





Effective
January 1, 2009, we adopted new guidance issued by FASB related to determining
whether an instrument or embedded feature is indexed to an entity’s own
stock.  As a result, we reclassified 8,547,762 of our issued and
outstanding common stock purchase warrants from equity to liability
status.  The adjustment also had the effect of reducing stockholder’s
equity by $2.8 million.  Due to such adjustment, we may no longer meet
the continued listing requirements of the NYSE AMEX with regard to stockholders
(deficit) equity.   On June 4, 2009, as anticipated, we received
notification from the NYSE AMEX that we are not in compliance with continued
listing requirements contained in Section 1003(i) of the NYSE AMEX company
guide.  In order to maintain our listing on the NYSE AMEX, we were
required to submit a plan detailing how we intend to regain
compliance.  On July 6, 2009, we submitted our plan.  On
August 18, 2009, the NYSE AMEX notified that it would continue listing our
common shares subject to the following conditions:





·
            That
      we regain compliance with Section 1003(i) of the NYSE AMEX company guide
      by December, 2010, and





·
            That
      we provide the Exchange Staff with updates in conjunction with the
      initiatives of the Plan as appropriate or upon request, but no later than
      at each quarter completion concurrent with our appropriate filing with the
      Securities and Exchange Commission.





We
are currently being monitored by the NYSE AMEX with regard to listing
qualifications.





On
February 16, 2010 we received a letter from the NYSE Amex informing it that it
had now resolved the continued listing deficiencies referenced in the NYSE Amex
LLC's ("NYSE Amex") letters dated June 4, 2009 and August 18, 2009. The Exchange
said that while the Company remains noncompliant with the stockholders' equity
requirements under Section 1003 of the NYSE Amex Company Guide, the Exchange
staff has determined that the Company complies with the alternative listing
standards in Section 1003, including the requirement for $50,000,000 million in
market capitalization. The Exchange will continue to monitor the Company's
compliance with the continued listing standards in Section 1003 of the NYSE Amex
Company Guide. As provided in Section 1009(f) of the NYSE Amex Company
Guide.  If the Company is able to demonstrate compliance with the
continued listing standards for a period of two consecutive quarters ending June
30, 2010, the Exchange staff will deem the Plan Period over. However, if the
Company cannot demonstrate compliance over the next two quarters, the Plan
Period will remain open and Exchange staff will continue to monitor the Company
throughout the end of the Plan Period, December 6, 2010. At any time during the
Plan Period, the Exchange staff may initiate delisting proceedings based on its
evaluation of the Company. In the event the Company does not comply with all
continued listing standards as of December 6, 2010, the Exchange staff will
promptly initiate delisting procedures.





The
delisting of our common shares from the NYSE Amex may limit the ability of our
stockholders to sell their common stock.





We are
currently being monitored by the NYSE AMEX.  If we are delisted, our
stock will most likely commence trading on the Over-the-Counter Bulletin Board
or the Pink Sheets. In such case, a stockholder likely would find it more
difficult to trade our common stock or to obtain accurate market quotations for
it.  If our common stock is delisted, it will become subject to the
Securities and Exchange Commission’s “penny stock rules,” which impose sales
practice requirements on broker-dealers that sell that common stock to persons
other than established customers and “accredited investors.” Application of this
rule could make broker-dealers unable or unwilling to sell our common stock and
limit the ability of stockholders to sell their common stock in the secondary
market.


18


The
market price for our common shares is particularly volatile.





The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than those of a seasoned issuer. The volatility in
our share price is attributable to a number of factors. First, our common shares
are sporadically or thinly traded. As a consequence of this lack of liquidity,
the trading of relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either direction. The
price for our shares could, for example, decline precipitously in the event that
a large number of our common shares are sold on the market without commensurate
demand.  Secondly, we are a speculative or “risky” investment due to
our limited operating history, lack of significant revenues to date and the
uncertainty of future market acceptance for our products if successfully
developed. As a consequence of this enhanced risk, more risk-adverse investors
may, under the fear of losing all or most of their investment in the event of
negative news or lack of progress, be more inclined to sell their shares on the
market more quickly and at greater discounts than would be the case with the
stock of a seasoned issuer. Additionally, in the past, plaintiffs have often
initiated securities class action litigation against a company following periods
of volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and
resources.





The
following factors may add to the volatility in the price of our common
shares:  actual or anticipated variations in our quarterly or annual
operating results; government regulations; announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments;
and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common shares will be
at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price.





We
face risks related to compliance with corporate governance laws and financial
reporting standard.





The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the SEC 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 (“Section 404”), will materially
increase the Company's legal and financial compliance costs and make some
activities more time-consuming, burdensome and expensive.  ). On
October 2, 2009, the SEC announced it would extend the deadline for
non-accelerated filers to comply with Section 404(b) of the Sarbanes-Oxley Act.
 Unless further extended, we will be required to include attestation
reports in our annual report for year ending on December 31, 2010.  We
anticipate this will further increase the costs associated with our compliance
with the Sarbanes-Oxley Act of 2002.





Any
failure to comply with the requirements of the Sarbanes-Oxley Act of 2002, our
ability to remediate any material weaknesses that we may identify during our
compliance program,  or difficulties  encountered in their
implementation,  could harm our operating results,  cause us
to fail to meet our reporting  obligations  or result
in  material  misstatements  in
our  financial statements. Any such failure could
also adversely affect the results of the periodic management
evaluations of our internal controls and, in the case of a failure to remediate
any material weaknesses that we may identify, would adversely
affect the annual auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that are required under Section 404 of
the Sarbanes-Oxley Act.  Inadequate internal controls could also
cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common
stock.





We
have never paid a cash dividend and do not intend to pay cash dividends on our
common stock in the foreseeable future.





We have
never paid cash dividends nor do we anticipate paying cash dividends in the
foreseeable future.  Accordingly, any return on your investment will
be as a result of stock appreciation.





Issuance
of additional securities could dilute your proportionate ownership and voting
rights.




We are
entitled under our amended and restated certificate of incorporation to issue up
to 150,000,000 common and 7,000,000 “blank check” preferred shares. As
of December 31, 2009, we have issued and outstanding 35,743,831 common shares,
24,365,916 common shares reserved for issuance upon the exercise of current
outstanding options and warrants (excluding options and warrants issued under
our equity compensation plans), 319,341 common shares reserved for issuance of
additional grants under our 2005 incentive stock plan, and 760,000 shares
reserved for issuance of grants under our 2007 stock plan. Accordingly, we will
be entitled to issue up to 88,810,912 additional common shares
and 7,000,000 additional preferred shares. Our board may generally issue
those common and preferred shares, or options or warrants to purchase those
shares, without further approval by our shareholders based upon such factors as
our board of directors may deem relevant at that time. Any preferred shares we
may issue shall have such rights, preferences, privileges and restrictions as
may be designated from time-to-time by our board, including preferential
dividend rights, voting rights, conversion rights, redemption rights and
liquidation provisions. It is likely that we will be required to issue a large
amount of additional securities to raise capital to further our development and
marketing plans. It is also likely that we will be required to issue a large
amount of additional securities to directors, officers, employees and
consultants as compensatory grants in connection with their services, both in
the form of stand-alone grants or under our various stock option plans, in order
to attract and retain qualified personnel. In the event of issuance, your
proportionate ownership and voting rights may be significantly decreased and the
value of your investment impacted.


19


Risks
Relating to Intellectual Property and Government Regulation





We
may not be able to withstand challenges to our intellectual property
rights.





We rely
on our intellectual property, including issued and applied-for patents, as the
foundation of our business. Our intellectual property rights may come under
challenge.  No assurances can be given that, even though issued, our
current and potential future patents will survive such challenges. For example,
in 2005 our neural stem cell technology was challenged in the U.S. Patent and
Trademark Office. Although we prevailed in this particular matter upon
re-examination by the patent office, these cases are complex, lengthy,
expensive, and could potentially be adjudicated adversely to our interests,
removing the protection afforded by an issued patent. The viability of our
business would suffer if such patent protection were limited or eliminated.
Moreover, the costs associated with defending or settling intellectual property
claims would likely have a material adverse effect on our business and future
prospects. At present, there is litigation with StemCells, Inc. which is in its
initial stages and any likely outcome is difficult to predict.





We
may not be able to adequately protect against the piracy of the intellectual
property in foreign jurisdictions.





We
anticipate conducting research in countries outside of the United
States.  A number of our competitors are located in these countries
and may be able to access our technology or test results.  The laws
protecting intellectual property in some of these countries may not adequately
protect our trade secrets and intellectual property.  The
misappropriation of our intellectual property may materially impact our position
in the market and any competitive advantages, if any, that we may
have.





Our
products may not receive regulatory approval.





The FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacturing 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 vary
substantially based upon the type, complexity and novelty of the proposed
product.  On September 21, 2009 the FDA approved our IND application
to commence a Phase I trial for ALS.  We commenced the trials on
January 21, 2010 with the dosing of our first patient.  We cannot assure
you that we will successfully complete any clinical trials in connection with
such IND. Further, we cannot predict when we might first submit any product
license application for FDA approval or whether any such product license
application will be granted on a timely basis, if at all.  Moreover,
we cannot assure you that FDA approvals for any products developed by us will be
granted on a timely basis, if at all. Any 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.





Development
of our technologies is subject to extensive government regulation.





Our
research and development efforts, as well as any future clinical trials, and the
manufacturing and marketing of any products we may develop, will be subject to,
and restricted by, extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
necessary regulatory approvals is lengthy, expensive and uncertain. FDA and
other legal and regulatory requirements applicable to the development and
manufacture of the cells and cell lines required for our preclinical and
clinical products could substantially delay or prevent us from producing the
cells needed to initiate additional clinical trials. We may fail to obtain the
necessary approvals to commence clinical testing or to manufacture or market our
potential products in reasonable time frames, if at all. In addition, the U.S.
Congress and other legislative bodies may enact regulatory reforms or
restrictions on the development of new therapies that could adversely affect the
regulatory environment in which we operate or the development of any products we
may develop.





We base
our research and development on the use of human stem cells obtained from human
tissue. The U.S. federal and state governments and other jurisdictions impose
restrictions on the acquisition and use of human tissue, including those
incorporated in federal Good Tissue Practice, or “GTP,” regulations. These
regulatory and other constraints could prevent us from obtaining cells and other
components of our products in the quantity or of the quality needed for their
development or commercialization. These restrictions change from time to time
and may become more onerous. Additionally, we may not be able to identify or
develop reliable sources for the cells necessary for our potential products —
that is, sources that follow all state and federal laws and guidelines for cell
procurement. Certain components used to manufacture our stem and progenitor cell
product candidates will need to be manufactured in compliance with the FDA’s
Good Manufacturing Practices, or “GMP.” Accordingly, we will need to enter into
supply agreements with companies that manufacture these components to “GMP”
standards.  There is no assurance that we will be able to enter into
any such agreements.





Noncompliance
with applicable requirements both before and after approval, if any, can subject
us, our third party suppliers and manufacturers and our other collaborators to
administrative and judicial sanctions, such as, among other things, warning
letters, fines and other monetary payments, recall or seizure of products,
criminal proceedings, suspension or withdrawal of regulatory approvals,
interruption or cessation of clinical trials, total or partial suspension of
production or distribution, injunctions, limitations on or the elimination of
claims we can make for our products, refusal of the government to enter into
supply contracts or fund research, or government delay in approving or refusal
to approve new drug applications.


20





We
cannot predict if or when we will be permitted to commercialize our products due
to regulatory constraints.





Federal,
state and local governments and agencies in the United States (including the
FDA) 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 its research and development work.
The preclinical testing and clinical trials of our proposed products are subject
to extensive government regulation that may prevent us from creating
commercially viable products. In addition, our sale of any commercially viable
product will be subject to government regulation from several standpoints,
including manufacturing, advertising, marketing, promoting, selling, 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.




ITEM
      2.
            PROPERTIES





We
currently lease two facilities.
Our executive offices and primary research facilities are located at 9700 Great
Seneca Highway, Rockville MD, 20850. We lease these facilities consisting of
approximately 2,500 square feet for $8,220 per month. The term of our lease
expires on January 31, 2011.





We
entered into a lease in 2009 consisting of approximately 2,375 square feet of
research space in San Diego, California at a monthly lease rate of $4,806. The
lease terminates in August of 2011.





The
aforesaid properties are in good condition and we believe they will be suitable
for our purposes for the next 12 months. There is no affiliation between us or
any of our principals or agents and our landlords or any of their principals or
agents.




ITEM
      3.
            LEGAL
      PROCEEDINGS





As of the
date of this Annual Report, there are no material pending legal or governmental
proceedings relating to our company or properties to which we are a party, and
to our knowledge there are no material proceedings to which any of our
directors, executive officers or affiliates are a party adverse to us or which
have a material interest adverse to us, other than the following:




·
            On
      May 7, 2008, we filed suit against StemCells, Inc., StemCells California,
      Inc. (collectively “StemCells”) and Neurospheres Holding Ltd.,
      (collectively StemCells and Neurospheres Holding Ltd are referred to as
      “Plaintiffs”) in U.S. District Court for the District of Maryland,
      alleging that U.S. Patent No. 7,361,505 (the “’505 patent”), alleging that
      the ‘505 patent was exclusively licensed to the Plaintiffs, is invalid,
      not infringed, and unenforceable.   See Civil Action No.
      08-1173.   On May 13, we filed an Amended Complaint seeking
      declaratory judgment that U.S. Patent No. 7,155,418 (the “’418 patent”) is
      invalid and not infringed and that certain statements made by our CEO are
      not trade libel or do not constitute unfair competition as alleged by the
      Plaintiffs.  On July 15, 2008, the Plaintiffs filed a Motion to
      Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal
      Jurisdiction, and Improper Venue or in the Alternative to Transfer to the
      Northern District of California.  On August 27, 2008, Judge Alexander
      Williams, Jr. of the District of Maryland denied StemCells’ Motion to
      Dismiss, but granted Neurospheres’ motion to dismiss. On September 11,
      2008, StemCells filed its answer asserting counterclaims of infringement
      for the ‘505 patent, the 418 patent, and state law claims for trade libel
      and unfair competition. This case was consolidated with the 2006
      litigation discussed below and it is not known when, nor on what basis,
      this matter will be concluded.





·
            On
      July 28, 2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the
      U.S. District Court in Maryland, alleging that Neuralstem has been
      infringing, contributing to the infringement of, and or inducing the
      infringement of four patents owned by or exclusively licensed to StemCells
      relating to stem cell culture compositions, genetically modified stem cell
      cultures, and methods of using such cultures.  See Civil Action
      No. 06-1877.  We answered the Complaint denying infringement,
      asserting that the patents are invalid, asserting that we have intervening
      rights based on amendments made to the patents during reexamination
      proceedings, and further asserting that some of the patents are
      unenforceable due to inequitable conduct.  Neuralstem has also
      asserted counterclaims that StemCells has engaged in anticompetitive
      conduct in violation of antitrust laws.  Discovery has commenced
      and it is not known when, nor on what basis, this matter will be
      concluded.




ITEM
      4.
            REMOVED
      AND RESERVED.




21


PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
Information





Our
common stock is traded on the NYSE Amex under the symbol "CUR."  The
following table sets forth, for the periods indicated, the high and low intraday
sale prices for our common stock.





High
                  
                  Low2008First
      Quarter
                  
                  $
                  3.58
                  
                  $
                  2.29Second
      Quarter
                  
                  $
                  2.59
                  
                  $
                  1.31Third
      Quarter
                  
                  $
                  1.86
                  
                  $
                  1.20Fourth
      Quarter
                  
                  $
                  2.15
                  
                  $
                  1.012009First
      Quarter
                  
                  $
                  1.79
                  
                  $
                  0.80Second
      Quarter
                  
                  $
                  1.30
                  
                  $
                  1.03Third
      Quarter
                  
                  $
                  2.08
                  
                  $
                  1.04Fourth
      Quarter
                  
                  $
                  1.91
                  
                  $
                  1.26





Holders





As of
March 8, 2010 our common stock was held by approximately 725 record
holders.  We believe our actual number of shareholders may be
significantly higher as 34,638,732 shares are currently being held in street
name.





Dividends





We have
not paid any cash dividends to date and have no plans to do so in the immediate
future.





Equity
Compensation Plan Information





The
following table sets forth information with respect to our 2005 & 2007 Stock
Plans as of December 31, 2009.




(a)
                                
                                (b)
                                
                                (c)Number of Securities
                                  to be Issued
                                  upon Exercise of
                                  Outstanding
                                  Options, Warrants
                                  andRights
                                
                                Weighted-Average
                                  Exercise Price of
                                  Outstanding
                                  Options,
                                  Warrants and
                                  Rights
                                
                                Number of Securities
                                  Remaining Available for
                                  Future Issuance under
                                  Equity Compensation Plans
                                  (Excluding Securities
                                  Reflected in Column (a))Equity
      compensation plans approved by security holders2005 Stock Plan, as
      amended
                                3,680,659
                                
                                $
                                1.26
                                
                                319,3412007
      Stock Plan
                                5,615,475
                                
                                
                                3.38
                                
                                534,525Equity
      compensation plans not approved by security holders
                                N/A
                                
                                
                                N/A
                                
                                N/ATotal
                                9,296,134
                                
                                $
                                2.52
                                
                                853,866





Recent
Sales of Unregistered Securities





The
following information is given with regard to unregistered securities sold
during the period covered by this report.  The unregistered securities
were issued pursuant to section 4(2) of the Securities Act:


22





·
            On
      January 5, 2009 we granted a consultant options to purchase 100,000 common
      shares at a price per share of $1.64.  The options were issued
      as compensation for services rendered.  The grant was made
      pursuant to our 2005 Stock Plan.  The options have a term of 7
      years.





·
            On
      March 30, 2009, we granted a consultant a common stock purchase warrant to
      purchase 96,000 common shares at a price per share of
      $1.25.  The warrant will expire on
  3/30/2015.





·
            On
      June 3, 2009, we granted a consultant100,000 options to purchase common
      shares at a price of $1.13.  The options were issued as
      compensation for services rendered.  The grant was made pursuant
      to our 2005 Stock Plan.  The options vest as
      follows:  25,000 vested immediately; 25,000 vest at the six
      month anniversary; 25,000 vest at the twelve month anniversary; 25,000
      vest at the eighteen month anniversary.  The options expire on
      June 3, 2019.





·
            On
      July 2, 2009, pursuant to our director compensation policy, we granted
      each of Messrs. Ogilvie and Oldaker options to purchase 35,000 common
      shares as compensation for their services on our board of directors and
      related committees.  For a further description of the
      transaction, please refer to the section of this Annual Report entitled
      “Executive Compensation
      – Director Compensation” contained in Item
  11.





·
            On
      October 1, 2009 we granted a consultant warrants to purchase100,000 shares
      at a price of $1.49.  The warrants are fully vested and have a
      cashless exercise provision.  The warrants expire on
      10/1/2016.





·
            On
      December 29, 2009, we completed a private placement of 646,551 common
      shares resulting in gross proceeds of $1,500,000.  The shares
      were sold to 1 accredited investor at a price per share of
      $2.32.





·
            On
      December 30, 2009, we issued Richard Garr and John Conron, our Chief
      Executive Officer and Chief Financial Officer, respectively, an aggregate
      of 225,475 common shares as consideration for the cancelation of certain
      obligations owed to such executives.  For a further description
      of the transaction, please refer to the section of this Annual Report
      entitled “Transactions
      with Related Persons, Promoters and Certain Control Person’s”
      contained in Item 13.





·
            On
      January 8, 2010, pursuant to a consulting agreement for investor relations
      and business development services, we issued Market Development Consulting
      Group, Inc.: (i) 140,000 common shares; and (ii) a common stock purchase
      warrant entitling the holder to purchase 400,000 shares of common stock at
      $1.70 per share.  The warrant is exercisable immediately, shall
      expire on December 31, 2019, and is freely assignable in whole or in
      part.   We also agreed to register the shares underlying
      the warrant for resale.  In connection with the registration of
      the shares underlying the warrant, we agreed to pay consultant a penalty
      of 1% additional warrants per each 30 days in the event: (i) a
      registration statement covering the shares is not filed by March 21, 2009,
      and (ii) the registration statement covering the shares is not declared
      effective within 90 days of filing.  The date for registration
      has been extended to the earlier of: (a) the day following such day as we
      file our Annual Report for 2009 ; or (b) April 15,
  2010.





·
            On
      January 15, 2010, we issued a consultant options to purchase an aggregate
      of 45,000 common shares at $2.40 per share.  The options vest as
      follows: (i) 25,000 upon grant; and (ii) 20,000 on December 31,
      2010.  The options have a term of 5
  years.





·
            On
      January 15, 2010, we issued a consultant options to purchase an aggregate
      of 100,000 common shares at $2.40 per share.  The options are
      100% vested upon grant and have a term of 7
  years.





·
            On
      January 29, 2010, as an inducement to exercise 800,000 Series D Warrants,
      we issued Vicis Capital Master Fund a replacement warrant.  As a
      result of the exercise, we received gross proceeds in the amount of
      $1,000,000.  The replacement warrant entitles the holder to
      purchase 400,000 common shares at price of $1.85 per share.  The
      warrant has a term of 1 year.





·
            In
      March of 2010, in connection with the exercise of 2,699,400 Series C
      Warrants, we issued the prior warrant holders an aggregate of 2,699,400
      replacement warrants.  As a result of the exercise, we received
      gross proceeds in the amount of $3,374,250.   The
      replacement warrant is substantially the same as the prior Series C
      warrants except that: (i) the exercise price is $2.13; (ii) the
      replacement warrants expire 5 years from the date they were issued; and
      (iii) the replacement warrants do not provide for any anti-dilution
      rights.




·
            In
      March of 2010, in connection with the exercise of 782,005 placement agent
      warrants, we issued T.R. Winston & Company, LLC, a replacement warrant
      to purchase 782,005.   As a result of the exercise, we
      received gross proceeds in the amount
      of  $860,205.  The replacement warrant is
      substantially the same as the prior replacement warrants issued to our
      Series C Warrant holders except that: (i) the exercise price is $2.13;
      (ii) the replacement warrants expire 5 years from the date they were
      issued; and (iii) the replacement warrants do not provide for any
      anti-dilution rights.




·
            In
      March of  2010, we amended 706,752 placement agent warrants held
      by TR Winston & Company, LLC.  Pursuant to the amendment, we
      agreed to extend the expiration date of the placement agent warrants from
      March 15, 2012 to March 15, 2014 in exchange for the removal of the
      anti-dilution provisions from said warrants.  We did not receive
      any additional consideration in connection with the
    amendment.


23




ITEM
      6.
            SELECTED
      FINANCIAL DATA





We are
not required to provide the information as to selected financial data as we are
considered a smaller reporting company.





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is provided in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations, financial condition, and cash flows. MD&A is organized as
follows:





•
            Overview. Discussion
      of our business and overall analysis of financial and other highlights
      affecting the company in order to provide context for the remainder of
      MD&A.




•
            Trends &
      Outlook. Discussion of
      what we view as the overall trends affecting our business and the strategy
      for our operating segments and outlook for
2010.




•
            Critical AccountingPolicies. Accounting
      policies that we believe are important to understanding the assumptions
      and judgments incorporated in our reported financial results and
      forecasts.





•
            Results of
      Operations. Analysis of our financial results comparing 2009
      to 2008.




•
            Liquidity and Capital
      Resources. An analysis of changes in our balance sheets and
      cash flows, and discussion of our financial condition including potential
      sources of liquidity.




The
various sections of this MD&A contain forward-looking statements. Words such
as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations
of such words and similar expressions are intended to identify such
forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, our anticipated growth and
trends in our businesses, and other characterizations of future events or
circumstances are forward-looking statements. Such statements are based on our
current expectations and could be affected by the uncertainties and risk factors
described throughout this filing and particularly in the “Overview” and “Trends
& Outlook” section (see also “Risk Factors” in Part I, Item 1A of this Form
10-K). Our actual results may differ materially.




Overview





Neuralstem
is focused on the development and commercialization of treatments based on
transplanting human neural stem cells.





We have
developed and maintain a portfolio of patents and patent applications that form
the proprietary base for our research and development efforts in the area of
neural stem cell research. We own or exclusively license four (4) issued patents
and twelve (12) patent pending applications in the field of regenerative
medicine and related technologies. We believe our technology base, in
combination with our know-how, and collaborative projects with major research
institutions provides a competitive advantage and will facilitate the successful
development and commercialization of products for use in the treatment of a wide
array of neurodegenerative conditions and in regenerative repair of acute
disease.





Regenerative
medicine is a young and emerging field. There can be no assurances that our
intellectual property portfolio will ultimately produce viable commercialized
products and processes. Even if we are able to produce a commercially viable
product, there are strong competitors in this field and our product may not be
able to successfully compete against them.




All of
our research efforts to date are at the pre-clinical or clinical stage of
development. We are focused on leveraging our key assets, including our
intellectual property, our scientific team, our facilities and our capital, to
accelerate the advancement of our stem cell technologies. In addition, we are
pursuing strategic collaborations with members of academia. We are headquartered
in Rockville, Maryland.





In
addition to our core tissue based technology, we have begun developing a
neurogenic and neuroprotective Small-Molecule compound.  The patent
covering this new class of drugs was issued June 10, 2009.





24




Technology





Stem
Cells




Our
technology enables the isolation and large-scale expansion of human neural stem
cells from all areas of the developing human brain and spinal cord, thus
enabling the generation of physiologically relevant human neurons of all types.
Our two issued core patents entitled: (i)Isolation, Propagation,
and Directed Differentiation of Stem Cellsfrom Embryonic and Adult Central
Nervous System of Mammals ; and (ii)In Vitro Generation of
Differentiated Neurons from Cultures of Mammalian Multipotential CNS Stem
Cell  contain claims which cover the process of deriving the
cells and the cells created from this process.




What
differentiates our stem cell technology from others is that our patented
processes do not require us to direct the cells towards a certain fate by adding
specific growth factors. Our cells actually “become” the type of cell they are
fated to be. This process and the resulting cells comprise a technology platform
that allows for the efficient isolation and production, in commercially
reasonable quantities, of neural stem cells from the human brain and spinal
cord.





To date
the Company has focused its efforts on applications involving spinal cord stem
cells. It has completed preclinical efficacy and safety studies on these cells
sufficient to gain FDA approval for human clinical trials. The company believes
it has established “proof of principle” for two important spinal cord
applications: ALS, or Lou Gehrig’s disease, and Ischemic Spastic Paraplegia (a
painful form of spasticity that may arise as a complication of surgery to repair
aortic aneurysms). In anticipation of Phase I trials, the Company has created
spinal cord cell banks using GMP.





We have
developed and we maintain a portfolio of patents and patent applications that
form the proprietary basis for our research and development efforts in the area
of neural stem cell research.  We own or exclusively license four (4)
issued patents and thirteen (13) patent pending applications in the field of
regenerative medicine and related technologies.





Small-molecule
Compounds





The
Company has performed tests using cultured neural stem cells and in animals to
validate the performance of small molecule compounds for hippocampal
neurogenesis. The Company has successfully contracted for the manufacture of
small batches of the compound. It expects to contract for a production run using
Good Manufacturing Practice (GMP) methods which will be large enough to complete
safety testing and Phase I clinical trials.





In
June the company received a notice of allowance from the U.S. Patent and
Trademark Office (USPTO) for a patent on these compounds. Patent application
12/049,922, entitled “Use of Fused Nicotinamides to Promote Neurogenesis,”
claims four chemical entities and any pharmaceutical composition including
them.


.


Research





We have
devoted substantial resources to our research programs in order to isolate and
develop a series of neural stem cell banks that we believe can serve as a basis
for therapeutic products. Our efforts to date have been directed at methods to
identify, isolate and culture large varieties of stem cells of the human nervous
system, and to develop therapies utilizing these stem cells. This research is
conducted both internally and through the use of third party laboratory
consulting companies under our direct supervision.




Trends
& Outlook





Revenue





We
had no revenue for the years ended December 31, 2009 and 2008.  Our
focus is now on initiating and successfully managing the clinical trial for ALS
authorized by the FDA in September of this year.  We are also pursuing
pre-clinical studies on other central nervous system indications in preparation
for additional clinical trials. We are not focused at this time on generating
revenue.





Long-term,
we anticipate our revenue will be derived primarily from licensing fees and
sales of our cell therapy and small molecule compounds. Because we are at such
an early stage in the clinical trials process for our first application, ALS, we
are not yet able to accurately predict when we will have a product ready for
commercialization.





Research
& Development Expenses





Our
research and development costs consist of expenses incurred in identifying,
developing and testing treatments for central nervous system diseases. These
expenses consist primarily of salaries and related expenses for personnel, fees
paid to professional service providers and academic collaborators for research,
testing, contract manufacturing, costs of facilities, and the preparation of
regulatory applications and reports.





We focus
on the development of treatment candidates with potential uses in multiple
indications, and use employee and infrastructure resources across several
projects. Accordingly, many of our costs are not attributable to a specifically
identified product and we do not account for internal research and development
costs on a project-by-project basis.


25


We expect
that research and development expenses will increase in the future, as funding
allows. To the extent that it is practical, we will continue to outsource much
of our efforts, including product manufacture, proof of principle and
preclinical testing, toxicology, tumorigenicity, dosing rationale, and
development of clinical protocol and IND packages. This approach allows the
Company to use the best expertise available for each task and keep its spending
inside available cash resources.





Stem
Cells





Our top
development priority is the ALS clinical trial at Emory University in Atlanta.
We estimate that the Phase I trial for ALS will require 12 to 18 patients at an
estimated cost of $130,000 per patient. The per- patient number includes the
costs of the operation to administer our spinal cord cells, post operation
treatment for the patient, Emory University’s charges for running the trial and
third party trial monitoring and data collection. Our spending on an individual
patient will be spread over the life of the trial as the majority of our costs
are incurred after the patient has been operated on. We expect trial spending to
gradually increase to $100,000 per month after a number of patients have been
treated.





In the
strategy section we outlined a number of additional indications for which our
spinal cord stem cells have potential therapeutic value.  We will work
on proof of principle testing, dosing rationale, and the development of clinical
protocols for the most promising indications. We intend to submit IND
applications to the FDA to initiate clinical trials for the most promising
treatment candidates.  The Company expects to submit an IND to treat
Spinal Cord Injury in 2010.





Small
Molecule Compounds





We
believe we have successfully demonstrated proof of principle to support
advancement of our lead small molecule compound for treatment of
depression.  We have completed planning for toxicology,
tumorigenicity, dosing rationale, and development of the clinical protocol. We
will issue work orders to contractors for these efforts when funding is
available. If the remaining preclinical testing results are successful we will
file an IND with the FDA. We hope to begin clinical trials for this indication
in late 2010 or early 2011.





General
and Administrative Expenses





Our
general and administrative (“G&A”) expenses consist of the general costs,
expenses and salaries for the operation and maintenance of our business. We
anticipate that general and administrative expenses will increase as we progress
from pre-clinical to a clinical phase.





We
anticipate G&A expenses related to our core business will increase at a
slower rate than that of similar companies making such transition due in large
part to our outsourcing model.




Critical 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 1of the Notes to 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.





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
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—Our 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.


26


Revenue
Recognition—We had no revenues for the years ended December 31, 2009 and
2008.  Our revenues, to date, have been previously derived primarily
from providing treated samples for gene expression data from stem cell
experiments and from providing services as a subcontractor under federal grant
programs. Revenue is recognized when there is persuasive evidence that an
arrangement exists, delivery of goods and services has occurred, the price is
fixed and determinable, and collection is reasonably assured.





Intangible and
Long-Lived Assets—We follow FASB guidelines related to the accounting for
impairment 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 December 31, 2009 no impairment losses
were recognized.





Accounting for
Warrants–We
have adopted FASB guidance related to determining whether an instrument or
embedded feature is indexed to an entity’s own stock.  This guidance
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative, as defined by the FASB, and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock.  As a result, certain of our warrants are considered
to be derivatives and must be valued using various assumptions as they are
recorded as liabilities.





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




Stock Based
Compensation—The Company accounts for equity instruments issued to
non-employees in accordance with guidance issued by
FASB.  Accordingly, the estimated fair value of the equity instrument
is recorded on the earlier of the performance commitment date or the date the
services required are completed.





Beginning
in 2006, we adopted the guidance issued by the FASB related to share based
payments.  This guidance requires compensation costs related to
share-based payment transactions to be recognized in the financial
statements.  We recognized $4,556,916   and
$4,632,847 in stock-based compensation expense for the years ended December 31,
2009 and 2008, respectively.





Results
of Operations




Revenue





The
company did not have revenues for the twelve months ended December 31, 2009 and
2008, respectively.





We do not
anticipate any revenues for 2010.





Operating
Expenses




Operating
expenses totaled $10,466,549 in 2009 and $11,831,973 in 2008.





Change in2009Versus 20082009
                
                2008
                
                $
                
                %Operating
      ExpensesResearch &
      development
                
                $
                5,346,904
                
                
                $
                6,513,349
                
                
                $
                (1,166,445
                )
                
                
                18
                %General,
      selling & administrative expense
                
                
                5,030,981
                
                
                
                5,252,863
                
                
                
                (221,882
                )
                
                
                4
                %Depreciation
      and amortization
                
                
                88,664
                
                
                
                65,761
                
                
                
                22,903
                
                
                
                35
                %Total
      expense
                
                $
                10,466,549
                
                
                $
                11,831,973
                
                
                $
                (1,365,424
                )
                
                
                12
                %





27




Research
and Development Expenses





Research
and development expenses totaled $5,346,904 in 2009, as compared to $6,513,349
in 2008.  The decrease of $1,166,445, or 18%, from 2008 to 2009 was
primarily attributable to the costs in 2008 of completing the application to the
FDA to move our cell based product into clinical trials and a reduction in
non-cash stock-based compensation expense.





General
and Administrative Expenses




G&A
expenses totaled $5,030,981 in 2009, compared with $5,252,863 in
2008.  The decrease of $221,882, or 4%, from 2008 to 2009 was
primarily attributable to increased litigation expenses offset by expense
decreases spread over a wide range of categories, including non-cash stock-based
compensation expense, and reflects management’s ongoing efforts to manage cash
consumption.





Depreciation
and Amortization





Depreciation
and amortization expenses totaled $88,664 in 2009, compared with $65,761 in
2008.  The increase of $29,203 or 35% from 2008 to 2009 was primarily
attributed to fixed asset and patent filing fee additions over the past
year.





Nonoperating
(expense) income




Nonoperating
(expense) income totaled $102,186 and $1,175 for the twelve months ended
December 31, 2009 and 2008, respectively.  The nonoperating income or
expense is discussed below.




Interest
income totaled $19,614 in 2009 compared to $39,806 in 2008. The decrease of
$20,192 for the twelve months ended December 31, 2009 compared to the comparable
period in 2008 was attributable to lower cash balances and much reduced interest
rates on short term savings.




Interest
expense was $776 in 2009 and $0 in 2008. The increase in 2009 as compared to
2008 was attributable to the short term financing of some insurance
costs.





The
Company had a warrant modification expense of $38,631 in
2008.  Details of the transaction are in Note 2 to the financial
statements.





On
January 1, 2009 we reclassified the fair value of  common stock
purchase warrants, which have exercise price reset and anti-liquidation
features, from equity to liability classification as if these warrants were
treated as a derivative liability since their date of issue.  We
established a long-term warrant liability of $6.8 million to recognize the fair
value of such warrants. In the first quarter ended March 30, 2009, the fair
value of these common stock purchase warrants decreased because of a decrease in
the stock price, resulting in a gain for the quarter.  In the three
months ended June 30, 2009, the fair value of these common stock purchase
warrants increased to $3.2 million because of an increase in the stock price. We
recognized a $473,799 non-cash expense from the change in fair value of these
warrants for the three months ended June 30, 2009.  In the three
months ended September 30, 2009, the fair value of these common stock purchase
warrants increased to $5.6 million due to an increase in the stock price. We
recognized a $2.6 million non-cash expense from the change in fair value of
these warrants for the three months ended September 30, 2009.  In the
three months ended December 31, 2009, the fair value of these common stock
purchase warrants increased to $6.5 million due to an increase in the stock
price.  We recognized a $677,830 non-cash expense from the change in
fair value of the warrants for the three months ended December 31, 2009.The net
gain for the twelve month period ended December 31, 2009 is
$83,348.





Liquidity
and Capital Resources




Since our
inception, we have financed our operations through the private placement of our
securities, the exercise of investor warrants, and to a lesser degree from
grants. Currently, our monthly cash burn rate is $600,000.   We
anticipate that our available cash and expected income will be sufficient to
finance our current activities for at least the next 12 months from December 31,
2009, although certain activities and related personnel may need to be
reduced.





On
December 18, 2008, we filed our first IND with the FDA.  We estimate
that we will have sufficient cash and cash equivalents to finance our current
operations, pre-clinical and clinical work for at least 12 months from December
31, 2009. 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 shares and general market conditions.




Change
      in 2008Versus 20072009
                
                
                2008
                
                
                $
                
                
                %Cash and
      cash equivalents
                
                $
                2,309,774
                
                
                $
                4,903,279
                
                
                $
                (2,593,505
                )
                
                
                (53
                )%Net
      cash used in operating activities
                
                $
                (5,144,820
                )
                
                $
                (6,860,039
                )
                
                $
                (1,715,219
                )
                
                
                (25
                )%Net
      cash used in investing activities
                
                $
                (210,784
                )
                
                $
                (193,630
                )
                
                $
                17,154
                
                
                
                (9
                )%Net
      cash provided by financing activities
                
                $
                2,762,099
                
                
                $
                4,553,211
                
                
                $
                (1,791,112
                )
                
                
                (39
                )%


28


Total
cash and cash equivalents was $2,309,774 at December 31, 2009, compared
with $4,903,279 at December 31, 2008.  The decrease in our cash
and cash equivalents of $2,593,505 or 53%, from December 31, 2008 to
December 31, 2009 was do to the postponement of new financing until the
first quarter of 2010 when the company raised an additional $7M.





Net
Cash Used in Operating Activities




Operating
activities required $5,144,820 for the twelve months ended December 31, 2009
compared to $6,860,039 for the same period  in 2008. The decrease of
$1,715,219 in cash consumption, or 25%, for the twelve months ended December 31,
2009 compared to the same period in 2008 was primarily attributable to an
increase of $295,334 in short term financing by vendors, employees and other
service providers for the year and a reduction in spending, particularly in
research of $969,506 and $325,112 in management incentive bonuses.
..





Net
Cash Used in Investing Activities




In our
investment activities we used $210,784 in cash in 2009 and $193,630 in cash in
2008.  The increase in our cash use of $17,154, or 9%, for the twelve
months ended December 31, 2009 compared to the same period in 2008 was primarily
attributable to an increase in purchases of property and equipment.




Net
Cash Provided by Financing Activities




Net cash
provided by financing activities was $2,762,099 in 2009 as compared to
$4,553,211 in 2008 as $7M of new financing activity was postponed to the first
quarter of 2010 when better terms where available.




Subsequent
Financing Activities





During
the first quarter of 2010, and subsequent to the date of the balance sheet
included in this Annual Report, we completed a series of transactions resulting
in us receiving gross proceeds for the exercise of our Series A, B, C and D
warrants of $7.3 million.  On March 16, 2010 we had cash on hand of
$7.8 million.





Listed
below are key financing transactions entered into by us in the last two
years.  Also, please refer to the section of this Annual Report
entitled “Recent Sale of
Unregistered Securities” for a further description of the following
transactions:




In
February of 2008, we sold a strategic purchaser $2,500,000 of our common
stock.





•
            On
      December 18, 2008, we sold $2,000,000 of common stock pursuant to our
      shelf registration statement on Form
S-3.





•
            On
      June 30, 2009, we sold $1,000,000 of common stock and warrants to purchase
      an additional 2,440,000 common shares pursuant to our shelf registration
      statement on Form S-3.





•
            In
      September 2009, we received $347,418 as a result of warrant
      exercises.





•
            In
      October and December 2009, we received $53,214 as a result of warrant
      exercises.





•
            On
      December 29, 2009 we sold $1,500,000 of common stock pursuant to a private
      placement.





Transactions
Subsequent to December 31, 2009





·
            On
      January 29, 2010, we received $1,000,000 as a result of Series D warrant
      exercises.




·
            In
      February of 2010, we exercised the call provision related to our Series B
      Warrants which resulted in $2,460,918from the exercise
      thereof.




29





·
            In
      March of 2010, we received $3,374,250 as a result of Series C warrant
      exercises.




·
            In
      March of 2010, we received $860,205 as a result of placement agent warrant
      exercises.




Call
of Series B Warrants





During
the first quarter of 2006, we issued an aggregate of 2,019,231 Series B warrants
in connection with a private placement of our securities. The Series B warrants
contained a call provision allowing us to redeem the warrants for $.01 per
warrant share, upon 30 days notice, provided the following two conditions were
met:  (a) we receive approval of our IND, and (b) a registration
statement covering the resale of the warrant shares shall be
effective.  As a result, Series B warrant holders exercised their
respective warrants which resulted in us issuing 1,993,876 common shares and
receiving gross proceeds in the amount of $2,460,918.




We have
incurred significant operating losses and negative cash flows since inception.
We have not achieved profitability and may not be able to realize sufficient
revenue to achieve or sustain profitability in the future. We do not expect to
be profitable in the next several years, but rather expect to incur additional
operating losses. We have limited liquidity and capital resources and must
obtain significant additional capital resources in order to sustain our product
development efforts, for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated products,
pursuit of regulatory approvals, acquisition of capital equipment, laboratory
and office facilities, establishment of production capabilities, for general and
administrative expenses and other working capital requirements. We rely on cash
balances and the proceeds from the offering of our securities, exercise of
outstanding warrants and grants to fund our operations.





We intend
to pursue opportunities to obtain additional financing in the future through the
sale of our securities and additional research grants. We have a shelf
registration statement which was declared effective on September 29, 2008 and
covers up to approximately $25,000,000 of our securities that could be available
for financings. On December 18, 2008 and June 30, 2009, we filed Prospectus
Supplements under which we sold securities with an aggregate market value
pursuant to General Instruction I.B.6. of Form S-3, of
$6,167,520.  Accordingly, depending on our market capitalization and
other restrictions and conditions contained in General Instruction I.B.6. of
Form S-3, we may be able to sell up to an additional $18,832,420 pursuant to our
shelf registration statement.





The
source, timing and availability of any future financing will depend principally
upon market conditions, interest rates and, more specifically, on our progress
in our exploratory, preclinical and future clinical development programs.
Funding may not be available when needed — at all, or on terms acceptable
to us. Lack of necessary funds may require us, among other things, to delay,
scale back or eliminate some or all of our research and product development
programs, planned clinical trials, and/or our capital expenditures or to license
our potential products or technologies to third parties.





ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET
  RISK





We are
not required to provide the information as to selected financial data as we are
considered a smaller reporting company, as defined by Rule
229.10(f)(1).




ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





INDEX
TO FINANCIAL STATEMENTS


PageReport of Independent Registered
      Public Accounting Firm
                      
                      31Balance
      Sheets
                      
                      32Statements
      of Operations
                      
                      33Statements
      of Cash Flows
                      
                      34Statements
      of Stockholders’ Equity
                      
                      35Notes
      to Financial Statements
                      
                      36




30





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Neuralstem,
Inc.


Rockville,
Maryland





We have audited the accompanying
balance sheets of Neuralstem, Inc. as of December 31, 2009 and 2008, and
the related statements of operations, stockholders’ equity and cash flows for
the years ended December 31, 2009 and 2008.  Neuralstem, Inc.’s
management is responsible for these financial statements.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards required that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  Neuralstem, Inc. is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Neuralstem, Inc.’s internal control over
financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of Neuralstem, Inc. as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for the years ended December 31,
2009 and 2008 in conformity with accounting principles generally accepted in the
United States of America.





As discussed in Note 8 to the financial
statements, in 2009 Neuralstem, Inc. adopted the guidance issued by the
Financial Accounting Standards Board regarding whether an instrument or embedded
feature is indexed to an entity’s own stock.  This resulted in the
recharacterization of certain warrants as liabilities.





/s/
      Stegman & Company





Baltimore,
Maryland


March 30,
2010


31





Neuralstem,
Inc.




Balance
Sheets





December 31,
                              
                              
                              December 31,2009
                              
                              
                              2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                              
                              $
                              2,309,774
                              
                              
                              $
                              4,903,279Prepaid
      expenses
                              
                              
                              143,600
                              
                              
                              
                              136,287Total
      current assets
                              
                              
                              2,453,374
                              
                              
                              
                              5,039,566Property
      and equipment, net
                              
                              
                              196,755
                              
                              
                              
                              163,930Intangible
      assets, net
                              
                              
                              301,560
                              
                              
                              
                              212,265Other
      assets
                              
                              
                              55,716
                              
                              
                              
                              52,972Total
      assets
                              
                              $
                              3,007,405
                              
                              
                              $
                              5,468,733LIABILITIES
      AND STOCKHOLDERS' (DEFICIT) EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                              
                              $
                              791,607
                              
                              
                              $
                              547,950Accrued
      bonus expense
                              
                              
                              769,215
                              
                              
                              
                              717,538Total
      current liabilities
                              
                              
                              1,560,822
                              
                              
                              
                              1,265,488LONG-TERM
      LIABILITIESFair
      value of warrant obligations
                              
                              
                              6,462,039
                              
                              
                              
                              -Total
      liabilities
                              
                              
                              8,022,861
                              
                              
                              
                              1,265,488STOCKHOLDERS'
      (DEFICIT) EQUITYPreferred
      stock, 7,000,000 shares authorized, zero shares issued and
      outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $0.01 par value; 150 million shares authorized, 35,743,831 and
      33,751,300 shares outstanding in 2009 and 2008,
    respectively
                              
                              
                              357,438
                              
                              
                              
                              337,513Additional
      paid-in capital
                              
                              
                              62,193,937
                              
                              
                              
                              61,352,527Accumulated
      deficit
                              
                              
                              (67,566,831
                              )
                              
                              
                              (57,486,795
                              )Total
      stockholders' (deficit) equity
                              
                              
                              (5,015,456
                              )
                              
                              
                              4,203,245Total
      liabilities and stockholders' (deficit) equity
                              
                              $
                              3,007,405
                              
                              
                              $
                              5,468,733





See notes
to financial statements.




32




Neuralstem,
Inc.





Statements
of Operations





YearsEnded December 31,2009
                    
                    
                    2008Revenues
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      expenses:Research
      and development costs
                    
                    
                    5,346,904
                    
                    
                    
                    6,513,349General,
      selling and administrative expenses
                    
                    
                    5,030,981
                    
                    
                    
                    5,252,863Depreciation
      and amortization
                    
                    
                    88,664
                    
                    
                    
                    65,761Total
      operating expenses
                    
                    
                    10,466,549
                    
                    
                    
                    11,831,973Operating
      loss
                    
                    
                    (10,466,549
                    )
                    
                    
                    (11,831,973
                    )Nonoperating
      (expense) income:Interest
      income
                    
                    
                    19,614
                    
                    
                    
                    39,806Interest
      expense
                    
                    
                    (776
                    )
                    
                    
                    -Warrant
      modification expense
                    
                    
                    -
                    
                    
                    
                    (38,631
                    )Gain
      from change in fair value of warrant obligations
                    
                    
                    83,348
                    
                    
                    
                    -Total
      nonoperating income
                    
                    
                    102,186
                    
                    
                    
                    1,175Net
      loss attributable to common shareholders
                    
                    $
                    (10,364,363
                    )
                    
                    $
                    (11,830,798
                    )Net
      loss per share, basic and diluted
                    
                    $
                    (0.30
                    )
                    
                    $
                    (0.37
                    )Weighted
      average common shares outstanding, basic and diluted
                    
                    
                    34,280,882
                    
                    
                    
                    32,114,365





See notes
to financial statements.




33





Neuralstem,
Inc.




Statements
of Cash Flows





Twelve MonthsEnded December 31,2009
                              
                              
                              2008Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (10,364,363
                              )
                              
                              $
                              (11,830,798
                              )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                              
                              
                              88,664
                              
                              
                              
                              65,761Share
      based compensation expenses
                              
                              
                              4,556,916
                              
                              
                              
                              4,632,847Warrant
      modification expense
                              
                              
                              -
                              
                              
                              
                              38,631Gain
      from change in fair value of warrant obligations
                              
                              
                              (83,348
                              )
                              
                              
                              -Changes
      in operating assets and liabilities:Prepaid
      expenses
                              
                              
                              (7,313
                              )
                              
                              
                              (5,568
                              )Other
      assets
                              
                              
                              (2,744
                              )
                              
                              
                              (9,701
                              )Accounts
      payable and accrued expenses
                              
                              
                              243,657
                              
                              
                              
                              127,301Accrued
      bonus expenses
                              
                              
                              423,711
                              
                              
                              
                              121,488Net
      cash used in operating activities
                              
                              
                              (5,144,820
                              )
                              
                              
                              (6,860,039
                              )Cash
      flows from investing activities:Acquisition
      of intangible assets
                              
                              
                              (122,406
                              )
                              
                              
                              (116,921
                              )Purchase
      of property and equipment
                              
                              
                              (88,378
                              )
                              
                              
                              (76,709
                              )Net
      cash used in investing activities
                              
                              
                              (210,784
                              )
                              
                              
                              (193,630
                              )Cash
      flows From financing activities:Issuance
      of common stock
                              
                              
                              2,762,099
                              
                              
                              
                              4,553,211Net
      cash provided by financing activities
                              
                              
                              2,762,099
                              
                              
                              
                              4,553,211Net
      decrease in cash
                              
                              
                              (2,593,505
                              )
                              
                              
                              (2,500,458
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              4,903,279
                              
                              
                              
                              7,403,737Cash
      and cash equivalents, end of period
                              
                              $
                              2,309,774
                              
                              
                              $
                              4,903,279Supplemental
      disclosure of cash flows information:Cash
      paid for interest
                              
                              
                              776
                              
                              
                              
                              -Cash
      paid for income taxes
                              
                              
                              -
                              
                              
                              
                              -Supplemental
      schedule of non cash investing and financing activities:Common
      stock issued to pay accrued employee bonuses
                              
                              
                              372,033
                              
                              
                              
                              -





See notes
to financial statements.


34





Neuralstem,
Inc.





Statements


of
Shareholders' Equity (Deficit)





For
the years ended December 31, 2009 and 2008





Common
                
                
                Common
                
                
                Additional
                
                
                
                
                
                TotalStock
                
                
                Stock
                
                
                Paid-In
                
                
                Accumulated
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Equity (Deficit)Balance
      at January 1, 2008
                
                
                31,410,566
                
                
                $
                314,106
                
                
                $
                52,151,245
                
                
                $
                (45,655,997
                )
                
                $
                6,809,354Exercise
      of Warrants to purchase Common Stock ($1.50 to $2.00 per share), net of
      offering costs of $20,889
                
                
                125,425
                
                
                
                1,254
                
                
                
                209,957
                
                
                
                
                
                
                
                211,211Issuance
      of common stock though private placement ($4.06 per
share).
                
                
                615,309
                
                
                
                6,153
                
                
                
                2,493,847
                
                
                
                
                
                
                
                2,500,000Issuance
      of common stock though private placement ($1.25 per share) , net of
      offering costs of $158,000
                
                
                1,600,000
                
                
                
                16,000
                
                
                
                1,826,000
                
                
                
                
                
                
                
                1,842,000Share
      Based Payments - Employee Compensation
                
                
                
                
                
                
                
                
                
                
                4,632,847
                
                
                
                
                
                
                
                4,632,847Warrant
      Modification Expense
                
                
                
                
                
                
                
                
                
                
                38,631
                
                
                
                
                
                
                
                38,631Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (11,830,798
                )
                
                
                (11,830,798
                )Balance
      at December 31, 2008
                
                
                33,751,300
                
                
                
                337,513
                
                
                
                61,352,527
                
                
                
                (57,486,795
                )
                
                
                4,203,245Cumulative
      effect of reclassification of warrants to liabilities
                
                
                
                
                
                
                
                
                
                
                (7,044,118
                )
                
                
                284,327
                
                
                
                (6,759,791
                )Balance,
      January 1, 2009 as adjusted
                
                
                33,751,300
                
                
                
                337,513
                
                
                
                54,308,409
                
                
                
                (57,202,468
                )
                
                
                (2,556,546
                )Share
      based payment - employee compensation
                
                
                
                
                
                
                
                
                
                
                4,556,916
                
                
                
                
                
                
                
                4,556,916Issuance
      of common stock through Private Placement ($1.25 per share), net of
      financing costs of $96,608.
                
                
                800,000
                
                
                
                8,000
                
                
                
                895,392
                
                
                
                
                
                
                
                903,392Issuance
      of common stock from warrants exercised ($1.25 per share), net of
      financing costs of $31,300.
                
                
                320,505
                
                
                
                3,205
                
                
                
                575,741
                
                
                
                
                
                
                
                578,946Issuance
      of common stock in settlement of outstanding 2008 bonus due to officers
      (225,475 shares at $1.65 per share)
                
                
                225,475
                
                
                
                2,255
                
                
                
                369,778
                
                
                
                
                
                
                
                372,033Issuance
      of common stock through Private Placement ($2.32 per share), net of
      financing costs of $5,833
                
                
                646,551
                
                
                
                6,465
                
                
                
                1,487,701
                
                
                
                
                
                
                
                1,494,166Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (10,364,363
                )
                
                
                (10,364,363
                )Balance
      at December 31, 2009
                
                
                35,743,831
                
                
                $
                357,438
                
                
                $
                62,193,937
                
                
                $
                (67,566,831
                )
                
                $
                (5,015,456
                )





See notes
to financial statements.


35





NEURALSTEM,
INC.





NOTES
TO FINANCIAL STATEMENTS




Note 1.  Nature of Business and Significant
Accounting Policies




Nature of
business:





Neuralstem,
Inc. (“Company”) is a biopharmaceuticals company that is utilizing its
proprietary human neural stem cell technology to create a comprehensive platform
for the treatment of central nervous system diseases. The Company will
commercialize this technology as a tool for use in the next generation of
small-molecule drug discovery and to create cell therapy biotherapeutics to
treat central nervous system diseases for which there are no cures. The Company
was founded in 1997 and currently occupies lab and office space in Rockville,
Maryland.





Inherent
in the Company’s business are various risks and uncertainties, including its
limited operating history, the fact that Neuralstem’s technologies are new and
may not allow the Company or its customers to develop commercial products,
regulatory requirements associated with drug development efforts and the intense
competition in the genomics industry. The Company’s success depends, in part,
upon successfully raising additional capital, prospective product development
efforts, the acceptance of the Company’s solutions by the marketplace, and
approval of the Company’s solutions by various governmental
agencies.





A summary of the Company’s
significant accounting policies is as follows:





Basis of
Presentation





These
financial statements have been prepared on the basis that the Company will
continue as a going concern.  Such assertion contemplates the
significant losses recognized to date and the challenges we anticipate with
respect to obtaining near-term funding under prevailing and forecasted economic
conditions.  The Company continues to be fully committed and has the
capacity to continue to provide necessary capital and liquidity to fund
continuing operations.





Use of
Estimates





The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Because of the use of estimates inherent in the financial reporting process,
actual results could differ significantly from those estimates.




The
Company's business currently does not generate cash. The Company's management
does not know when this will change. The Company has expended and will continue
to expend substantial funds in the research, development and clinical and
pre-clinical testing of the Company's stem cell technologies and products with
the goal of ultimately obtaining approval from the United States Food and Drug
Administration ("FDA") to market and sell our products. We believe our long-term
cash position is inadequate to fund all of the costs associated with the full
range of testing and clinical trials required by the FDA for our core products.
Based on our current operating levels, we believe that we have sufficient levels
of cash and cash equivalents to fund operations into the first quarter of
2011.





No
assurance can be given that (i) we will be able to expand our operations
prior to FDA approval of our products, or (ii) that FDA approval will ever
be granted for our products.





Cash and Cash
Equivalents





For the
Statements of Cash Flows, all highly liquid investments with maturity of three
months or less are considered to be cash equivalents.





Property and
Equipment





Property
and equipment is stated at cost and depreciated on a straight-line basis over
the estimated useful lives ranging from three to eight years. Expenditures for
maintenance and repairs are charged to operations as incurred.





Recoverability of Long-Lived
Assets and Identifiable Intangible Assets





Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. In the event
that such cash flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their estimated fair
values. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less cost
to sell.




36




Fair Value of Financial
Instruments





The fair
values of financial instruments are estimated based on market rates based upon
certain market assumptions and information available to management. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
accounts payable and notes payable. Fair values were assumed to approximate
carrying values for cash and payables due to the short-term nature or that they
are payable on demand.





Revenue
Recognition


Our
revenue recognition policies are in accordance with guidance issued by the SEC
and Financial Accounting Standards Board (FASB).  Historically, our
revenue has been derived primarily from providing treated samples for gene
expression data from stem cell experiments, from providing services under
various grant programs and through the licensing of the use of our intellectual
property.  Revenue is recognized when there is persuasive evidence that an
arrangement exists, delivery of goods and services has occurred, the price is
fixed and determinable, and collection is reasonably assured.





Research and
Development





Research
and development expenses consist primarily of costs associated with pre-clinical
research, exclusively in the field of human neural stem cell therapies and
regenerative medicine, related to our clinical cell therapy candidates. These
expenses represent both pre-clinical development costs and costs associated with
non-clinical support activities such as quality control and regulatory
processes. Research and development costs are expensed as they are
incurred.





Income
taxes





Income
taxes are provided for using the liability method of accounting in accordance
with accepted accounting standards.  A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effect of changes in
tax laws and rates on the date of enactment.





Significant New Accounting
Pronouncements





On July
1, 2009, the Accounting Standards codification became FASB’s officially
recognized source of authoritative U.S. generally accepted accounting principles
applicable to all public and non-public non-governmental entities, superseding
existing FASB, AICPA, EITF and related literature.  Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants.  All other
accounting literature is considered non-authoritative.  The switch to
the ASC affects the way companies refer to U.S. GAAP in financial statements and
accounting policies.  Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic,
Section and Paragraph structure.





In June
2008, the FASB ratified consensus reached on determining whether an instrument
is indexed to an entity’s own stock. The FASB provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity's own stock. The guidance applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative,
as defined by the FASB. The guidance also applies to any freestanding financial
instrument that is potentially settled in an entity's own stock, regardless of
whether the instrument has all the characteristics of a derivative, for purposes
of determining whether the instrument is subject to accounting guidance for
instruments that are indexed to, and potentially settled in, the issuer's own
stock. This guidance is effective for fiscal years beginning after December 15,
2008.  See Note 5 for a discussion of the effect of this standard that
was adopted on January 1, 2009.





In May
2009, the FASB issued new accounting guidance related to the accounting and
disclosures of subsequent events.  This guidance incorporates the
subsequent events guidance contained in the auditing standards literature into
authoritative accounting literature. This guidance is effective for financial
statements issued for interim or annual periods ending after June 15,
2009.  We adopted this guidance upon its issuance and it had no
material impact on our financial statements.


In June
2009, the FASB issued new accounting guidance to improve financial reporting by
companies involved with variable interest entities and to provide more relevant
and reliable information to users of financial statements.  This
guidance is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited.  We adopted
this guidance upon its issuance and it had no material impact on the Company’s
financial statements.


Share Based
Payments





We have
granted stock-based compensation awards to employees and board members. 
Awards may consist of common stock, warrants, or stock options.  Our stock
options and warrants have up to a ten year life.  The stock options or
warrants vest either upon the grant date or over varying periods of time. The
stock options we grant provide for option exercise prices equal to or greater
than the fair market value of the common stock at the date of the
grant.




37




During
the twelve months ended December 31, 2009, we granted 270,000 options, and in
the similar period ended December 31, 2008, we granted 5,650,000 options. We
recorded related compensation expenses as our options vest in accordance with
guidance issued by the FASB related to share based payments.  We recognized
$4,556,916 and $4,632,847 in share-based compensation expense during the twelve
months ended December 31, 2009 and 2008, respectively, from the vesting of stock
options or warrants.





Note
2. Stockholders’ (Deficit) Equity





Preferred and Common
Stock





The
authorized stock of the Company consists of 7,000,000 shares of blank check
preferred stock with a par value of $0.01 and 150,000,000 shares of common stock
with par value of $0.01.  None of these shares have been
issued.




The
Company completed a registered offering of 800,000 common shares at $1.25 per
share increasing equity by approximately $1,000,000 in June 2009, less
approximately $97,000 in related placement and closing costs.  In
September 2009 and December 2009, several warrant holders exercised 320,505
warrants at $1.25 per warrant increasing equity by approximately $401,000 less
$31,300 in related financing costs.  In December 2009, the Company
completed a private placement of 646,551 common shares at $2.32 per share
increasing equity by approximately $1,500,000 less approximately $6,000 in
related costs.





During
the year ended December 31, 2008, the Company sold 2,215,309 shares of common
stock for a total consideration of $4,342,000 (net of offering expenses of
$158,000). During the year ended December 31, 2008 the Company also converted
125,425 warrants to purchase Common Stock into common shares, raising $211,211
net of $20,889 in expenses.




Stock
Options





In 1997,
the Company adopted a stock incentive plan (the Plan) to provide for the
granting of stock awards, such as stock options and restricted common stock to
employees, directors and other individuals as determined by the Board of
Directors. The Company reserved 2.7 million shares of common stock for issuance
under the Plan. At December 31, 2002, 816,084 options were outstanding with
216,040 options exercisable. During 2003, the Company reduced operations and
terminated employment with all employees. The Plan was discontinued, terminating
all options outstanding.





·
            On
      January 21, 2008, we granted the following options pursuant to our 2007
      Stock Plan:




Karl Johe, Chairman and Chief
Science Officer - options to purchase 2.1 million common shares at a
price of $3.66 per share. The options vest over 3.5 years with the vesting
period commencing on January 1, 2008 with 700,000 options vesting on each of
February 28, 2009, April 30, 2010, and June 30, 2011. The options expire on
January 1, 2018. Additionally, the options will become immediately exercisable
upon an event which would result in an acceleration of Mr. Johe’s stock options
granted under his employment agreement.





Richard Garr, Chief Executive
Officer and General Council - options to purchase 2.1 million common
shares at a price of $3.66 per share. The options vest over 3.5 years with the
vesting period commencing on January 1, 2008 with 700,000 options vesting on
each of February 28, 2009, April 30, 2010, and June 30, 2011. The options expire
on January 1, 2018.  Additionally, the options will become immediately
exercisable upon an event which would result in an acceleration of Mr. Garr’s
stock options granted under his employment agreement.





·
            On
      April 1, 2008, we granted an officer compensatory options to purchase an
      aggregate of 1,050,000 common shares at an exercise price of $2.60. The
      options vest as follows: (i) 50,000 vest immediately; and (ii) 1,000,000
      vest annually over the next three years so that 100% of the options will
      be vested on April 1, 2011. The options were issued pursuant to our two
      stock plans as follows: (x) the option to purchase 1,000,000 common shares
      was issued pursuant to our 2007 Stock Plan; and (y) option to purchase
      50,000 common shares was issued pursuant to our 2005 Stock
      Plan.





·
            On
      May 28, 2008, we granted independent directors options to purchase an
      aggregate of 120,000 common shares at an exercise price of $1.32. The
      grant was made pursuant to our 2007 Stock Plan and in compliance with our
      non-executive compensation arrangement. The grant consists of: (i) an
      option purchase 90,000 common shares as compensation for serving on the
      board of directors; (ii) an option to purchase 10,000 common shares as
      compensation for serving on our Audit Committee; (iii) an option to
      purchase 10,000 common shares as compensation for serving on our
      Compensation Committee; and (iv) an option to purchase 10,000 common
      shares as compensation for serving on our Governance and Nominating
      Committee. The options vest quarterly over the grant year and expire 7
      years from the date of grant.




38




·
            On
      August 14, 2008, we granted options to purchase an aggregate of 30,000
      common shares at an exercise price of $1.88 to two employees (15,000
      each). The grants were made pursuant to our 2005 Stock Plan. The options
      vest as follows: (i) 15,000 on the granted date; and (ii) 15,000 on August
      14, 2009. The options expire on August 14,
2018.





·
            On
      August 14, 2008, we granted one of our employees options to purchase
      200,000. The grant is effective as of August 11, 2008, the employee’s
      start date. The options vest as follows: (i) 40,000 on the effective date;
      and (ii) 40,000 on each of August 11, 2009, 2010, 2011 and 2012. The grant
      was made pursuant to the 2005 Stock Plan. The options have an exercise
      price of $1.89 and expire on August 14,
2018.





·
            On
      November 14, 2008 we granted a consultant 50,000 warrants to purchase
      common shares at a price of $2.75, which were reclassed in 2009 to options
      with the same terms. The grant was made pursuant to our 2005 Stock
      Plan.  The options are fully vested.  The options were
      issued as partial compensation for services rendered.  The
      options expire on November 13,
2013.





·
            On
      January 5, 2009 we granted a consultant 100,000 options to purchase common
      shares at a price of $1.64.  The options were issued as
      compensation for services rendered. The grant was made pursuant to our
      2005 Stock Plan.  The options are fully vested and have a
      cashless exercise provision.  The options expire on January 5,
      2016.





·
            On
      June 3, 2009 we granted a consultant100,000 options to purchase common
      shares at a price of $1.13.  The options were issued as
      compensation for services rendered.  The grant was made pursuant
      to our 2005 Stock Plan.  The options vest as
      follows:  25,000 vested immediately; 25,000 vest at the six
      month anniversary; 25,000 vest at the twelve month anniversary; 25,000
      vest at the eighteen month anniversary.  The options expire on
      June 3, 2019.





·
            On
      July 2, 2009 we granted independent directors options to purchase an
      aggregate of 70,000 common shares at an exercise price of
      $1.17.  The grant was made pursuant to our 2007 Stock Plan and
      in compliance with our non-executive compensation
      arrangement.  The grant consists of: (i) options to purchase
      40,000 common shares as compensation for serving on the Board of
      Directors; (ii) options to purchase 10,000 common shares as compensation
      for serving on the Audit Committee; (iii) options to purchase 10,000
      common shares as compensation for serving on the Compensation Committee;
      and (iv) options to purchase 10,000 common shares as compensation for
      serving on the Governance and Nominating Committee.  These
      options vest quarterly over the grant year and expire 7 years from the
      date of grant.




During
the twelve months ended December 31, 2009, we granted 270,000 options and in the
similar period ended December 31, 2008, we granted 5,650,000 options. We
recorded related compensation expenses as our options vest in accordance with
accordance with guidance issued by the FASB related to share based payments.
  We recognized $4,556,916 and $4,632,847 in share-based compensation
expense during the twelve months ended December 31, 2009 and 2008, respectively,
from the vesting of stock options or warrants.





Number of
                              Options
                            
                            
                            Weighted-
                              Average
                              Exercise
                              Price
                            
                            
                            Weighted-
                              Average
                              Remaining
                              Contractual Life
                              (in years)
                            
                            
                            Aggregate
                              Intrinsic ValueOutstanding
      at January 1, 2008
                            
                            
                            3,150,659
                            
                            
                            $
                            1.19
                            
                            
                            
                            6.8
                            
                            
                            $
                            -Granted
                            
                            
                            5,650,000
                            
                            
                            
                            3.34
                            
                            
                            
                            9.3
                            
                            
                            $
                            -Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at January 1, 2009
                            
                            
                            8,800,659
                            
                            
                            $
                            2.55
                            
                            
                            
                            8.2
                            
                            
                            $
                            -Granted
                            
                            
                            270,000
                            
                            
                            
                            1.33
                            
                            
                            
                            8.2
                            
                            
                            $
                            124,400Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at December 31, 2009
                            
                            
                            9,070,659
                            
                            
                            $
                            2.52
                            
                            
                            
                            7.2
                            
                            
                            $
                            3,276,800Exercisable
      at December 31, 2009
                            
                            
                            5,065,659
                            
                            
                            $
                            1.88
                            
                            
                            
                            6.6
                            
                            
                            $
                            3,222,100




39





Range
      ofExercise
                      
                      OutstandingPrice
                      
                      Options
                      
                      
                      Expiration
      Dates$0.50
      - 2.00
                      
                      
                      3,070,000
                      
                      
                      
                      2015
      - 2019$
      2.01 - 3.00
                      
                      
                      1,115,000
                      
                      
                      
                      2013
      - 2018$3.01
      - 4.00
                      
                      
                      4,818,275
                      
                      
                      
                      2012
      - 2018$4..01
      - 8.00
                      
                      
                      62,042
                      
                      
                      
                      2011
      - 2015$8.01
      - higher
                      
                      
                      5,342
                      
                      
                      
                      2010
      - 20119,070,659





Share-based
compensation included in the statements of operations for the twelve months
ended December 31, 2009and 2008 was as follows:





Stock
Compensation Expense





Twelve Months Ended Dec. 31,2009
                    
                    
                    2008Research
      and development costs
                    
                    $
                    2,887,001
                    
                    
                    $
                    3,024,537General,
      selling and administrative expenses
                    
                    
                    1,669,915
                    
                    
                    
                    1,608,310Total
                    
                    $
                    4,556,916
                    
                    
                    $
                    4,632,847





Stock
Warrants





During
the years ended December 31, 2008 and 2009 the company issued the following
warrants:





·
            On
      December 18, 2008, we completed a registered offering of our shares at a
      price per share of $1,25.  As a result of this transaction we
      issued:


o
            112,000
      placement agent warrants to purchase common stock at a price per share of
      $2.52.  The warrants expire December 16,
  2013.


o
            1,884,672
      Series C Warrants to purchase common stock at a price per share of
      $1.25.  The warrants expire October 31,
  2012.




40




·
            On
      March 30, 2009 we granted a consultant warrants to purchase 96,000 shares
      at a price of $1.25.  The warrants shall be fully vested on
      3/20/2010 and expire on 3/30/2015.





·
            On
      June 30, 2009 we completed a registered offering of 800,000 units at a
      price per share of $1.25.  As a result of this transaction we
      issued:


o
            800,000
      fully paid common shares.


o
            800,000
      Series D Warrants to purchase common stock at a price of
      $1.25.  The warrants expire on June 30,
  2010.


o
            800,000
      Series E Warrants to purchase common stock at a price of
      $1.25.  The warrants expire on June 30,
  2012.


o
            800,000
      Series F Warrants to purchase common stock at a price of
      $1.25.  The warrants expire on June 30,
  2014.


o
            40,000
      placement agent warrants to purchase common stock at a price of
      $1.5625.  The warrants expire on June 30,
  2014.




·
            On
      October 1, 2009 we granted a consultant warrants to purchase100,000 shares
      at a price of $1.49.  The warrants are fully vested and have a
      cashless exercise provision.  The warrants expire on
      10/1/2016.




Weighted-Weighted-
                            
                            
                            AverageAverage
                            
                            
                            Remaining
                            
                            
                            AggregateNumber
                            
                            
                            Exercise
                            
                            
                            Contractual
                            
                            
                            Intrinsicof Warrants
                            
                            
                            Price
                            
                            
                            Life (in years)
                            
                            
                            ValueOutstanding
      at January 1, 2008
                            
                            
                            11,208,515
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Issued
                            
                            
                            1,996,672
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            -Exercised
                            
                            
                            (125,425
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            -Forfeited
                            
                            
                            -Outstanding
      at December 31, 2008
                            
                            
                            13,079,762
                            
                            
                            $
                            2.27
                            
                            
                            
                            2.0
                            
                            
                            
                            -Issued
                            
                            
                            2,536,000
                            
                            
                            
                            1.25
                            
                            
                            
                            2.8
                            
                            
                            
                            -Exercised
                            
                            
                            (320,505
                            )
                            
                            
                            1.25
                            
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at December 31, 2009
                            
                            
                            15,295,257
                            
                            
                            $
                            1.82
                            
                            
                            
                            2.0
                            
                            
                            
                            -Exercisable
      at December 31, 2009
                            
                            
                            12,199,257
                            
                            
                            $
                            1.53
                            
                            
                            
                            2.0
                            
                            
                            
                            -





Effective
January 1, 2009 we adopted the provisions of recent accounting guidance,
described below.  As a result of adopting this guidance, 8,547,762 of
our issued and outstanding common stock purchase warrants previously treated as
equity pursuant to the derivative treatment exemption were no longer afforded
equity treatment. These warrants have the following
characteristics:





Strike
                        Price
                      
                      Date
                        of Issue
                      
                      Date
                        of Expiration
                      
                      Warrants
                        OutstandingSeries
      A & B Warrants
                      
                      $
                      1.25
                      
                      February-06
                      
                      February-11
                      
                      
                      4,359,605Series
      A & B Warrants, Placement Agent
                      
                      $
                      1.10
                      
                      February-06
                      
                      February-11
                      
                      
                      782,005Series
      C Warrants
                      
                      $
                      1.25
                      
                      October-07
                      
                      October-12
                      
                      
                      1,227,000Series
      C Warrants, Placement Agent
                      
                      $
                      1.25
                      
                      March-07
                      
                      March-12
                      
                      
                      294,480Series
      C Warrants, anti-dilution awards
                      
                      $
                      1.25
                      
                      December-08
                      
                      October-12
                      
                      
                      1,472,400Series
      C Warrants, Placement Agent, anti-dilution awards
                      
                      $
                      1.25
                      
                      December-08
                      
                      March-12
                      
                      
                      412,272Total
      warrants no longer accounted for as equity
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,547,762




41




In June
2008, the FASB ratified EITF Issue 07-05, Determining Whether an Instrument
(or an Embedded Feature) is indexed to an Entity’s Own Stock, or EITF
0705, codified into FASB ASC Subtopic 815-40, Contracts in Entity’s Own
Equity.  EITF 07-5 provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions.  EITF 07-5
is effective for fiscal years beginning after December 15,
2008.





As
such, effective January 1, 2009 we reclassified the fair value of the common
stock purchase warrants, which were outstanding at January 1, 2009, and which
have exercise price reset and anti-liquidation features, from equity to
liability status as if these warrants were treated as a derivative liability
since their date of issue.  On January 1, 2009, we reduced
additional paid-in capital by $6.9 million and decreased the beginning
retained deficit by $.3 million as a cumulative effect to establish a long-term
warrant liability of $6.6 million to recognize the fair value of such
warrants.  During the three months ended September 30, 2009, 277,934
warrants were exercised. The fair value of the common stock purchase warrants
which remained declined to $5.6 million as of September 30, 2009, and we
recognized a $0.76 million gain from the change in fair value of these
warrants for the nine months ended September 30, 2009, and a $2.6 million loss
for the three months ended September 30, 2009.  In the three months
ended December 31, 2009, the fair value of these common stock purchase warrants
increased to $6.5 million due to an increase in the stock price.  We
recognized a $677,830 non-cash expense from the change in fair value of the
warrants for the three months ended December 31, 2009.  The net gain
for the twelve month period ended December 31, 2009 is $83,348.




These
common stock purchase warrants were initially issued in connection with
placement of the Company’s common stock. The common stock purchase warrants were
not issued with the intent of effectively hedging any future cash flow, fair
value of any asset, liability or any net investment in a foreign operation. The
warrants do not qualify for hedge accounting, and as such, all future changes in
the fair value of these warrants will be recognized currently in earnings until
such time as the warrants are exercised or expire. These common stock purchase
warrants do not trade in an active securities market, and as such, we estimate
the fair value of these warrants using the Black-Scholes option pricing model
using the following assumptions:





December 31,
                
                
                January 1,2009
                
                
                2009Annual
      dividend yield
                
                
                -
                
                
                
                -Expected
      life (years)
                
                
                .60-2.00
                
                
                
                1.0-2.5Risk
      free interest rate
                
                
                .20%-1.14
                %
                
                
                0.40
                %Expected
      volatility
                
                
                62%-98
                %
                
                
                86
                %




Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using daily pricing observations for a group of similar companies
for recent periods that correspond to the expected life of the warrants. We
believe this method produces an estimate that is representative of our
expectations of future volatility over the expected term of these warrants. We
currently have no reason to believe future volatility over the expected
remaining life of these warrants is likely to differ materially from historical
volatility. The expected life is estimated by management based on the remaining
term of the warrants. The risk-free interest rate is based on the rate for U.S.
Treasury securities over the expected life.





WarrantModification
Expense





In
November 2008 we extended the lives of warrants for 320,000 shares of common
stock with a strike price of $.50 for two years. The warrants had been issued
earlier in the decade in exchange for extinguishment of debt. The warrants were
due to expire in November 2008.  As a result of the term change we
recorded a Warrant Modification Expense charge of $38,631 for the warrants that
were modified.





Valuation
and Expense Information for Share-based Compensation





On
January 1, 2006, we adopted accounting guidance which requires the measurement
and recognition of compensation expense for all share-based payment awards made
to employees, service providers, and directors, including employee stock options
and warrant awards.




The
following table summarizes the stock-based compensation expense related to
share-based payment awards under this accounting guidance for the year ended
December 31, 2009 and 2008 which was allocated as follows:




Twelve Months Ended Dec. 31,2009
                  
                  
                  2008Research
      and development costs
                  
                  $
                  2,887,001
                  
                  
                  $
                  3,024,537General,
      selling and administrative expenses
                  
                  
                  1,669,915
                  
                  
                  
                  1,608,310Total
                  
                  $
                  4,556,916
                  
                  
                  $
                  4,632,847




42




The fair
value of options granted in fiscal years 2009 and 2008 reported above have been
estimated at the date of grant using the Black Scholes option-pricing model with
the following assumptions:





2009
                
                
                2008Dividend
      yield
                
                
                0
                %
                
                
                0
                %Expected
      volatility range
                
                46%
      to 85
                %
                
                46%
      to 82
                %Risk-free
      interest rate range
                
                .74%
      to 4.96
                %
                
                1.22%
      to 4.96
                %Expected
      life
                
                2
      to 6.5 yrs
                
                
                2
      to 6.5 yrs





We have
not used the historical volatility of our stock since we began public trading in
December 2006 and consequently do not have sufficient trading history to
forecast volatility for the expected life of our options. Instead to estimate
expected volatility we use a market capitalization weighted average of the
historical trading of other companies in our industry. The expected term of
options is two years beyond the vesting date. This is an estimate based on
management‘s judgment and corresponds with its experience with Equity Warrants.
The risk-free interest rate is based on the Daily Treasury Yield Curve Rates as
published by the US Treasury for the expected term in effect on the date of
grant. We grant options under our equity plans to employees, non-employee
directors, and consultants for whom the vesting period is between
immediate and 4.5 years.





As
stock-based compensation expense recognized in the statements of operations for
the years ended December 31, 2009 and December 31, 2008 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures but
at a minimum, reflects the grant-date fair value of those awards that actually
vested in the period. Accounting guidance requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on
management judgment.




Based on
the Black Scholes option-pricing model, the weighted average estimated fair
value of employee stock options granted during the year ended December 31, 2009
was $1.33 per share.  The weighted average estimated fair value of
employee stock options granted during the year ended December 31, 2008 was
$3.34.




Loss per Common
Share




Basic
loss per common share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share adjusts basic loss per share for the potentially dilutive effects
of shares issuable under our stock option plan, using the treasury stock method.
All of the Company’s options and warrants, which are common stock equivalents,
have been excluded from the calculation of diluted loss per share, as their
effect would have been anti-dilutive.




Note
3. Property and Equipment




The major
classes of property and equipmentconsist of the
following:




2009
                      
                      
                      2008Furniture
      and Fixtures
                      
                      $
                      14,400
                      
                      
                      $
                      14,400Computers
      and office equipment
                      
                      
                      47,109
                      
                      
                      
                      43,273Lab
      equipment
                      
                      
                      280,579
                      
                      
                      
                      196,036$
                      342,088
                      
                      
                      $
                      253,709Less
      accumulated depreciation and amortization
                      
                      
                      (145,333
                      )
                      
                      
                      (89,779
                      )Property
      and equipment, net
                      
                      $
                      196,755
                      
                      
                      $
                      163,930




Depreciation
expense for the years ended December 31, 2009 and 2008 was $55,554 and $49,699,
respectively.





Note
4. Intangible Assets




The
Company holds patents related to its stem cell research. Patent filing costs
were capitalized and are being amortized over the life of the patents. The
company has determined that the intangibles purchased have a seventeen year
useful life. The Company follows FASB guidelines in determining if there is any
impairment. The Company determined that no impairment to the assigned values had
occurred. The Company’s intangible assets and accumulated amortization consisted
of the following at December 31, 2009 and 2008:




43




2009
                      
                      
                      2008Accumulated
                      
                      
                      
                      
                      
                      AccumulatedGross
                      
                      
                      Amortization
                      
                      
                      Gross
                      
                      
                      AmortizationPatent
      filing fees
                      
                      $
                      365,409
                      
                      
                      $
                      (63,849
                      )
                      
                      $
                      243,004
                      
                      
                      $
                      (30,739
                      )





Amortization
expense for the years ended December 31, 2009 and 2008 was $33,110 and $16,062,
respectively.





Note
5. Income Taxes




We did
not provide any current or deferred U.S. federal income tax provision or benefit
for any of the periods presented because we have experienced operating losses
since inception. We provided a full valuation allowance on the net deferred tax
asset, consisting of net operating loss carryforwards, because management has
determined that it is more likely than not that we will not earn income
sufficient to realize the deferred tax assets during the carryforward
period.




The tax
effects of significant temporary differences representing deferred tax
assets as of December 31, 2009 and 2008:




2009
                        
                        
                        2008Net
      operating loss carry-forwards
                        
                        $
                        17,842,957
                        
                        
                        $
                        15,563,878Valuation
      allowance
                        
                        
                        (17,842,957
                        )
                        
                        
                        (15,563,878
                        )Net
      deferred tax asset
                        
                        $
                        -
                        
                        
                        $
                        -





At
December 31, 2009, the Company has net operating loss carryforwards of
approximately $44.6 million. The Company has also reported certain other tax
credits, the benefit of which has been deferred. The Company’s NOL carryforwards
and credits will begin to expire in the tax year 2012. The timing and manner in
which these net operating loss carryforwards and credits may be utilized in any
year by the Company will be limited to the Company’s ability to generate future
earnings and also may be limited by certain provision of the U.S. tax
code.




Note
6. Commitments and Contingencies





We
currently lease two facilities. Our executive offices and primary research
facilities are located at 9700 Great Seneca Highway, Rockville MD, 20850. We
lease these facilities consisting of approximately 2,500 square feet for $8,220
per month. The term of our lease expires on January 31, 2011





We
entered into a lease in 2007 to secure approximately 900 square feet of research
space in San Diego, California at a monthly lease rate of $3,278. The
lease expired in August of 2009.





We
entered into a lease in February 2008 to secure an additional two rooms for
research purposes in San Diego, California at a monthly lease rate of
$6,000.  The lease expired in February of 2009.  The Company
then extended the lease an additional year for one room at $4,000 per
month.  The lease was terminated in September 2009.





We
entered into a lease in September 2009 consisting of approximately 2,375 square
feet of research space in San Diego, California, at a monthly lease rate of
$4,806.  The lease terminates in August of 2011.





The
Company recognized $217,386 and $180,356 in rent expense for the years ended
December 31, 2009 and December 31, 2008, respectively.





On
November 1, 2005, the Company amended and extended its employment agreements
dated January 1, 1997 with Richard Garr and Karl Johe for an additional seven
(7) years which includes a base salary of $240,000 per year for each officer. On
July 28, 2005, the Company granted both Mr. Garr and Mr. Johe stock options for
1,200,000 shares of the Company’s common stock each vesting annually over a four
year period with an exercise price of $0.50 per share. Termination prior to full
term on the contracts would cost the Company $240,000 per year unserved, or as
much as $1,213,000 per contract, and immediate vesting of all outstanding
options.





In May of
2008, the Company filed a complaint against StemCells Inc., alleging that U.S.
Patent No. 7,361,505 (the “‘505 patent”), allegedly exclusively licensed to
StemCells, Inc., is invalid, not infringed and unenforceable. On the same day,
StemCells, Inc. filed a complaint alleging that we had infringed, contributed to
the infringement of, and or induced the infringement of two patents owned by or
exclusively licensed to StemCells relating to stem cell culture compositions. At
present, the litigation is in its initial stages and any likely outcome is
difficult to predict.




44




Note
7.  Fair Value





In
September 2006, the FASB issued new accounting guidance related to fair value
measurements and related disclosures.  This new guidance establishes a
standard framework for measuring fair value in generally accepted accounting
principles, clarifies the definition of "fair value" within that framework, and
expands disclosures about the use of fair value measurements. We adopted this
new guidance in the first quarter of 2008 with regard to all financial assets
and liabilities in our financial statements going forward.  However,
the FASB deferred the effective date of this new guidance for one year as it
relates to fair value measurement requirements for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value on a
recurring basis.  We adopted these remaining provisions on January 1,
2009.  The adoption of this accounting guidance had no material impact
on our financial statements.





Fair
value is defined as the price at which an asset could be exchanged or a
liability transferred (an exit price) in an orderly transaction between
knowledgeable, willing parties in the principal or most advantageous market for
the asset or liability. Where available, fair value is based on observable
market prices or parameters or derived from such prices or parameters. Where
observable prices or inputs are not available, valuation models are
applied.




Financial
assets recorded at fair value in the accompanying financial statements are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, as defined by the new guidance
related to fair value measurements and disclosures, and directly related to the
amount of subjectivity associated with the inputs to fair valuation of these
assets and liabilities, are as follows:





Level 1 —
            Inputs
      are unadjusted, quoted prices in active markets for identical assets at
      the reporting date. Active markets are those in which transactions for the
      asset or liability occur in sufficient frequency and volume to provide
      pricing information on an ongoing
basis.





The fair
valued assets we hold that are generally included in this category are money
market securities where fair value is based on publicly quoted prices and
included in cash equivalents.





Level 2 —
            Inputs
      are other than quoted prices included in Level 1, which are either
      directly or indirectly observable for the asset or liability through
      correlation with market data at the reporting date and for the duration of
      the instrument's anticipated life.





We carry
no investments classified as Level 2.





Level 3 —
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities and which
      reflect management's best estimate of what market participants would use
      in pricing the asset or liability at the reporting date. Consideration is
      given to the risk inherent in the valuation technique and the risk
      inherent in the inputs to the model.  Our warranty obligations
      are considered Level 3.




Financial
assets and liabilities measured at fair value on a recurring basis are
summarized below:





Fair value measurements at December 31, 2009 usingFair Value on
                      Balance
                      Sheet
                      2009
                    
                    
                    Quoted prices in
                      active markets for
                      identical assets
                      (Level 1)
                    
                    
                    Significant
                      other
                      observable
                      inputs
                      (Level 2)
                    
                    
                    Significant
                      unobservable
                      inputs
                      (Level 3)Assets:Cash
      and cash equivalents
                    
                    $
                    2,309,774
                    
                    
                    $
                    2,309,774
                    
                    
                    $
                    -
                    
                    
                    $
                    -Liabilities:Fair
      value of warrant obligations
                    
                    
                    6,462,039
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,462,039




45




Three months ended
                        December 31, 2009
                      
                      
                      Twelve months ended
                        December 31, 2009Fair
      value of warrant obligations at beginning of period
                      
                      $
                      5,622,339
                      
                      
                      $
                      -Cumulative
      effect of reclassification of warrants to liabilities at beginning
      period
                      
                      
                      181,498
                      
                      
                      
                      6,759,791Net
      loss (gain) for change in fair value included in the statement of
      operations for period
                      
                      
                      677,830
                      
                      
                      
                      (83,348
                      )Decrease
      in value from warrant exercises
                      
                      
                      (19,628
                      )
                      
                      
                      (214,404
                      )Fair
      value of warrant obligations at end of period
                      
                      $
                      6,462,039
                      
                      
                      $
                      6,462,039





The fair
value of the warrant obligations was determined using the Black Scholes
option pricing model with inputs which are described in Note
2.





Note
8.  Change in Accounting Principle:  Recharacterization of
Warrants





In June 2008, the FASB ratified the
consensus reached on whether an instrument or embedded feature is indexed to an
entity’s own stock.  FASB guidance clarifies the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which would qualify as a scope exception.




We
adopted the FASB guidance as of January 1, 2009.  As is discussed
in Note 1 and 2 above, as of that date we had 8,547,762 warrants which were
reassessed under the new guidance. Because of certain price adjustment
provisions contained in the warrants, they were no longer deemed to be indexed
to our stock and therefore, no longer meet the scope
exception.  Hence, these warrants were determined to be derivatives
and were reclassified from equity to liabilities.  As a result of this
change in accounting principle, on January 1, 2009 we recorded these liabilities
at their value of $6,759,791.  At that date we also recorded a
cumulative catch up adjustment of $284,327 to reduce the accumulated deficit and
a $7,044,118 decrease to additional paid-in capital.  The adjustment
to the accumulated deficit (the cumulative income effect of the accounting
change) was calculated for the decrease in the fair value of the warrants from
the date of their issuance through January 1, 2009.




These
warrant liabilities will be marked to fair value from January 1, 2009 going
forward resulting in the recognition of gain or loss in our statement of
operations for changes in their fair value.   In the twelve
months ended December 31, 2009 we recognized a gain from the change in the fair
value of these warrant obligations of $83,348.





In the first quarter the
Company converted, redeemed or modified more than 70% of the warrants
outstanding at the beginning of the year which had price protection features.
These changes removed the price protection features. In 2009 we were not able to
account for these as equity and so treated as long term
liabilities.  The Company expects these changes to significantly
reduce its derivative liability.





Note
9.  Subsequent Events





During
the first quarter of 2010, the Company entered into a series of transactions
resulting in securing what management believes provides sufficient financing to
fund operations through the first quarter of 2011.  On March 16, 2010, the
Company had cash on hand of $7.5 million and working capital of $6.4
million.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




Not
applicable.




46




ITEM 9A.
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




Based on
management’s evaluation (with the participation of our CEO and Chief Financial
Officer (CFO)), as of the end of the period covered by this report, our CEO and
CFO have concluded that 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)), are effective to provide reasonable assurance 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 within
the time periods specified in SEC rules and forms, and is accumulated and
communicated to management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.




Changes
in Internal Control Over Financial Reporting




There
were no changes to our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Management
Report on Internal Control Over Financial Reporting




Management
of Neuralstem, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over
financial reporting is a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers to provide
reasonable assurance to the Company’s management and board of directors
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that:




·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and





·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. A control system, no matter how well
designed and operated, can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be met. The design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth inInternal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) as a guide. The Company
sought in its evaluation to determine whether there were any “significant
deficiencies” or “material weakness” in its internal control over financial
reporting, or whether it had identified any acts of fraud involving management
or other employees. Based on the above evaluation, the Company’s chief executive
officer and chief financial officer have concluded that as of December 31,
2009, the Company’s internal control over financial reporting were
effective.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only the management’s report in this annual
report.




Inherent
Limitations on Effectiveness of Controls




Our
management, including the CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.




47




Item 9B.
            Other
      Information





The
information contained herein is being disclosed in this annual Report as it
either: (i) was not required to be disclosed on Form 8-K at the time of
occurrence, or (ii) has occurred within 4 days of the filing of this Annual
Report.





·
            During
      the first quarter of 2010, and subsequent to the date of the balance sheet
      included in this Annual Report, we completed a series of transactions
      resulting in us receiving gross proceeds for the exercise of our Series A,
      B, C and D warrants of $7.3 million.  For a further description
      of those transactions, please refer to the Sections of this Annual Report
      contained in:




·
            Item
      5. –  Section entitled “Recent Sale of Unregistered
      Securities”




·
            Item
      7. — Section entitled “Management’s Discussion and
      Analysis of Financial Conditions and Results of Operations – Liquidity and
      Capital Resources.”




See also
the notes to our financial statements.





·
            On
      March 31, 2010, our Compensation Committee determined 2009 bonuses for our
      executive officers.  For a further description of the bonuses,
      refer to the section of this Annual Report contained in Item
      11.  Executive
Compensation.




PART III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Directors





Our board
of directors consists of four members. Our bylaws provide for a staggered board
consisting of 3 groups. The following sets forth our current directors,
information concerning their ages and background, and information concerning
their respective groups.





Class
I Directors





The
following directors are Class I directors and will serve until our 2012 annual
meeting:





Name
              
              Principal Occupation
              
              Age
              
              Director
                SinceScott
      Ogilvie(1)
              
              CEO
      and President of Gulf Enterprises International, Ltd.
                Director
      of Neuralstem, Inc.
              
              55
              
              2007





(1)           Mr.
Ogilvie qualifies as an independent director within the meaning of the NYSE Amex
rules and regulations.




Class
II Directors





The
following directors are Class II directors and will serve until our 2011 annual
meeting:





Name
              
              Principal Occupation
              
              Age
              
              Director
                SinceI.
      Richard Garr
              
              Chief
      Executive Officer, President, General Counsel and Director of Neuralstem,
      Inc.
              
              57
              
              1996Karl
      Johe, Ph.D
              
              Chief
      Scientific Officer, Chairman of the Board and Director of Neuralstem,
      Inc.
              
              49
              
              1996




48




Class
III Directors





The
following directors are Class III directors and will serve until our 2010 annual
meeting:





Name
              
              Principal Occupation
              
              Age
              
              Director
                SinceWilliam  Oldaker(1)
              
              Partner
      at Oldaker Group LLC
                Director
      of Neuralstem, Inc.
              
              68
              
              2007





(1)           Mr.
Oldaker qualifies as an independent director within the meaning of the NYSE Amex
rules and regulations.




Mr. I. Richard
Garr, JD, age 57,has been
a director and our Chief Executive Officer since 1996.  Mr. Garr was
previously an attorney with Beli, Weil & Jacobs, the B&G Companies, and
Circle Management Companies. Mr. Garr is a graduate of Drew University (1976)
and the Columbus School of Law, The Catholic University of America (1979).
Additionally, he was a founder and current Board member of the First Star
Foundation, a children’s charity focused on abused children’s issues; a founder
of The Starlight Foundation Mid Atlantic chapter, which focuses on helping
seriously ill children; and is a past Honorary Chairman of the Brain Tumor
Society. In evaluating Mr. Garr’s specific experience, qualifications,
attributes and skills in connection with his appointment to our board, we took
into account his broad experience in Neural Stem Cells.  He is among
the longest serving executives in the field.





Mr. Karl Johe,
Ph.D., age 49, has been a director, Chairman of the Board and our Chief
Scientific Officer since 1996. Dr. Johe has over 15 years of research and
laboratory experience. Dr. Johe is the sole inventor of Neuralstem’s granted
stem cell patents and is responsible for the strategic planning and development
of our therapeutic products. Dr. Johe received his Bachelor of Arts Degree in
Chemistry and a Master’s Degree from the University of Kansas. Dr. Johe received
his doctorate from the Albert Einstein College of Medicine of Yeshiva
University. From 1993 to January 1997, Dr. Johe served as a Staff Scientist at
the Laboratory of Molecular Biology of the National Institute of Neurological
Disease and Stroke in Bethesda, Maryland. While holding this position, Dr. Johe
conducted research on the isolation of neural stem cells, the elucidation of
mechanisms directing cell type specification of central nervous system stem
cells and the establishment of an in vitro model of mammalian neurogenesis. In
evaluating Dr. Johe’s specific experience, qualifications, attributes and skills
in connection with his appointment to our board, we took into account his
extensive experience in international  science and business
communities.  He is also multilingual.





Mr. William
Oldaker, age 68, has served on our board of directors since April
12, 2007. Mr. Oldaker is a founder and partner in the Washington, D.C. law firm
of Oldaker Group LLC. Prior to founding the firm in 1993, Mr. Oldaker was a
partner in the Washington office of the law firm of Manatt, Phelps and Phillips
from 1987 to 1993. In 2004, Mr. Oldaker was a founder of
Washington First Bank in Washington, D.C. and serves as a member of
the board of directors. He previously served as a director of Century National
Bank, from 1982 until its acquisition in 2001. Mr. Oldaker was appointed by
President Clinton to serve as a commissioner on the National Bioethics Advisory
Commission, a post he held until 2001. He is a member of the Colorado, D.C. and
Iowa Bar Associations, the Bar Association for the Court of Appeals, D.C., and
the Bar of the United States Supreme Court. He is also a partner in The National
Group, a consulting firm. In evaluating Mr. Oldaker’s specific experience,
qualifications, attributes and skills in connection with his appointment to our
board, we took into account his extensive experience with managing and
developing federal government regulations and expertise in the legislative
process. He also was a founding member, and has served on the board of directors
of a bank for almost thirty years.





Mr. Scott V.
Ogilvie, age 55, has served on our board of directors since April 12,
2007.  Mr. Ogilvie is President of AFIN International, Inc., a private
equity/business advisory firm, which he founded in 2006.  Prior to
December 31, 2009, he was CEO of Gulf Enterprises International, Ltd, (“Gulf”) a
company that brings strategic partners, expertise and investment capital to the
Middle East and North Africa. He held this position since August of 2006. Mr.
Ogilvie previously served as Chief Operating Officer of CIC Group, Inc., an
investment manager, a position he held from 2001 to 2007. He began his career as
a corporate and securities lawyer with Hill, Farrer & Burrill, and has
extensive public and private corporate board experience in finance, real estate,
and technology companies. Mr. Ogilvie currently serves on the board of directors
of Neuralstem, Inc. (NYSE AMEX:CUR), Innovative Card Technologies, Inc.
(OTCBB:INVC) and Preferred Voice Inc, (OTCBD:PRFV). In evaluating Mr. Ogilvie’s
specific experience, qualifications, attributes and skills in connection with
his appointment to our board, we took into account his prior work in both
public and private organizations regarding corporate finance, securities and
compliance and international business development.





Executive
Officers and Significant Employees





The
following sets forth our current executive officers and information concerning
their age and background:





Name
              
              Position
              
              Age
              
              Position SinceI.
      Richard Garr
              
              Chief
      Executive Officer, President, General Counsel
              
              57
              
              1996Karl
      Johe, Ph.D.
              
              Chief
      Scientific Officer
              
              49
              
              1996John
      Conron
              
              Chief
      Financial Officer
              
              59
              
              4/1/2007





I. Richard
Garr – See Bio in the “Directors”
section




49




Karl Johe,
Ph.D.  – See Bio in the “Directors”
section





Mr. John
Conron has served as our Chief Financial Officer since April 1, 2007. Mr.
Conron, a Certified Public Accountant, has over 30 years of experience in the
field of corporate finance. Since 2003, Mr. Conron has been consulting early
stage companies by providing critical outsource CFO functions such as
implementation of accounting systems, creation and monitoring of internal
controls, Sarbanes Oxley compliance, audit preparation, financial modeling and
strategic planning. Prior to his work as a consultant, Mr. Conron worked for
Cyberstar, Inc., a wholly owned subsidiary of Loral Space & Communications,
Inc., where he held the position of CFO from 2000 to 2003. Mr. Conron joined
Cyberstar from Transworld Telecommunications, Inc., a Qualcom spin-off which
offered telecommunication services in Russia, where he served as
CFO.  Mr. Conron also served as CFO and on the board of directors of
Mercury Communications in London. Mercury was the European subsidiary of Cable
& Wireless.





Family
Relationships





There are
no family relationships between any director, executive officer, or person
nominated or chosen by the registrant to become a director or executive
officer.





Compliance
with Section 16(a) of the Exchange Act





Section
16(a) of the Exchange Act requires our officers, directors, and stockholders
owning more than ten percent of our common stock, to file reports of ownership
and changes in ownership with the SEC and to furnish us with copies of such
reports. Based solely on our review of Form 3, 4 and 5’s, the following table
provides information regarding any of the reports which were filed late during
the fiscal year ended December 31, 2009:





Name
      of Reporting Person
              
              Type
      of Report Filed Late
              
              No. of Transactions
                Reported LateWilliam
      Oldaker
              
              Form
      4 - Statement of Change in Beneficial Ownership
              
              1





Code
of Ethics





We have
adopted a "Code of Ethics” that applies to our officer, directors and
employees.  We have also adopted a “Finance Code of Professional
Conduct” that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, and any persons who participate in our financial reporting
process.  A copy of our codes can be viewed on our website at www.neuralstem.com.





The codes
incorporate our guidelines designed to deter wrongdoing and to promote honest
and ethical conduct and compliance with applicable laws and regulations. The
codes also incorporate our expectations of our officers, directors and employees
that enable us to provide accurate and timely disclosure in our filings with the
SEC and other public communications. In addition, the codes incorporate
guidelines pertaining to topics such as complying with applicable laws, rules,
and regulations; reporting violations; and maintaining accountability for
adherence to the codes.




We intend
to disclose future amendments to certain provisions of our codes, or waivers of
such provisions on our web site within four business days following the date of
such amendment or waiver.





Committees





We have
established 3 corporate governance committees comprising of the: (i) Audit
Committee; (ii) Compensation Committee; and (iii) Nomination and Corporate
Governance Committee. The committee membership and the function of each of the
committees are described below.




Director
                
                Audit Committee
                
                Nomination
                  and Corporate
                  Governance
                  Committee
                
                Compensation
                  CommitteeWilliam
      Oldaker
                
                Chair
                
                Member
                
                MemberScott
      Ogilvie
                
                Member
                
                Chair
                
                Chair




50




Audit
Committee




We have a
designated audit committee in accordance with section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are Messrs Ogilvie and Oldaker.
The Audit Committee assists our board in fulfilling its responsibility for the
oversight of the quality and integrity of our accounting, auditing, and
reporting practices, and such other duties as directed by the board. The
committee's purpose is to oversee our accounting and financial reporting
processes, the audits of our financial statements, the qualifications of our
public accounting firm engaged by us as our independent auditor to prepare or
issue an audit report on our financial statements, and the performance of our
internal audit function and independent auditor. The committee reviews and
assesses the qualitative aspects of financial reporting to shareholders, our
processes to manage business and financial risk, and compliance with significant
applicable legal, ethical, and regulatory requirements. The committee is
directly responsible for the appointment (subject to shareholder ratification),
compensation, retention, and oversight of our independent auditor.





Our board
of directors has determined that Mr. Ogilvie is an “audit committee financial
expert” within the meaning of SEC rules.  An audit committee financial
expert is a person who can demonstrate the following
attributes:  (1) an understanding of generally accepted
accounting principles and financial statements; (2) the ability to assess
the general application of such principles in connection with the accounting for
estimates, accruals and reserves; (3) experience preparing, auditing,
analyzing or evaluating financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by the
company’s financial statements, or experience actively supervising one or more
persons engaged in such activities; (4) an understanding of internal
controls and procedures for financial reporting; and (5) an understanding
of audit committee functions.




Nomination
and Corporate Governance Committee





The
Nomination and Corporate Governance Committee reviews and evaluates the
effectiveness of our executive development and succession planning processes, as
well as provides active leadership and oversight of these processes, and
oversight of our corporate governance policies. The Nomination and Corporate
Governance Committee also evaluates and recommends nominees for membership on
our board of directors and its committees. Messrs Ogilvie and Oldaker are the
members of the Nomination Committee.





There has
been no material change to the procedures by which security holders may
recommend nominees to our board of directors since we last provided such
disclosure in our definitive proxy statement filed with the SEC in connection
with our 2008 annual meeting.





We
do not have a formal policy with regard to the consideration of diversity in
identifying Director nominees, but the Nominating and Corporate Governance
Committee strives to nominate Directors with a variety of complementary skills
so that, as a group, the Board will possess the appropriate talent, skills, and
expertise to oversee our businesses.





Compensation
Committee




The
Compensation Committee's role is to discharge our board’s responsibilities
relating to compensation of our executives and to oversee and advise the board
of directors on the adoption of policies that govern our compensation and
benefit programs. Messrs Ogilvie and Oldaker are the members of the Compensation
Committee.





Leadership
Structure




The Board
does not have a policy regarding the separation of the roles of Chief Executive
Officer and Chairman of the Board as the Board believes it is in the best
interests of the Company to make that determination based on the position and
direction of the Company and the membership of the Board. At present, the
positions of Chairman and Chief Executive Officer are held by different
individuals.  This structure makes the best use of the Chief Executive
Officer's and Chairman’s respective knowledge of the Company and its industry,
as well as fostering greater communication between the Company's management and
the Board.




Risk
Oversight




The
Company has a risk management program overseen by the Chief Executive Officer.
Material risks are identified and prioritized by management, and each
prioritized risk is referred to a Board Committee or the full Board for
oversight. For example, strategic risks are referred to the full Board while
financial risks are referred to the Audit Committees. The Board regularly
reviews information regarding the Company's liquidity and operations, as well as
the risks associated with each, and annually reviews the Company's risk
management program as a whole. Also, the Compensation Committee periodically
reviews the most important risks to the Company to ensure that compensation
programs do not encourage excessive risk-taking.




Independent
Directors




Our board
of directors has determined that Messrs Ogilvie and Oldaker are each
“independent” as that term is defined by the NYSE Amex.   Messrs Ogilvie
and Oldaker are the sole members of our: (i) Audit Committee; (ii) Compensation
Committee; and (iii) Nomination and Corporate Governance Committee.




51




ITEM 11.
            EXECUTIVE
      COMPENSATION





Executive
Compensation





Summary
Compensation





The
following table sets forth information for our most recently completed fiscal
year concerning the compensation of (i) the Principal Executive Officer
(PEO) and (ii) all other executive officers of Neuralstem, Inc. who earned
over $100,000 in salary and bonus during the last most recently completed fiscal
year ended December 31, 2009(together the “Named Executive Officers”).




Nonequity
                                    
                                    
                                    Non-
                                      qualifiedStock
                                    
                                    
                                    
                                    
                                    
                                    Incentive
                                    
                                    
                                    deferredName and
                                    
                                    
                                    
                                    
                                    
                                    
                                    Bonus
                                    
                                    
                                    Awards
                                    
                                    
                                    Option
                                    
                                    
                                    Plan
                                    
                                    
                                    compensation
                                    
                                    
                                    All otherprincipal
                                    
                                    
                                    
                                    Salary
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)
                                    
                                    
                                    Award
                                    
                                    
                                    compensation
                                    
                                    
                                    earning
                                    
                                    
                                    Compensation
                                    
                                    
                                    Totalposition
                                    
                                    Year
                                    
                                    ($)
                                    
                                    
                                    (d)
                                    
                                    
                                    (e)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)(a)
                                    
                                    (b)
                                    
                                    (c)
                                    
                                    
                                    (3)
                                    
                                    
                                    (3)
                                    
                                    
                                    (f)(2)
                                    
                                    
                                    (g)
                                    
                                    
                                    (h)
                                    
                                    
                                    (i)(1)
                                    
                                    
                                    (j)I.
      Richard Garr
                                    
                                    2009
                                    
                                    $
                                    407,000
                                    
                                    
                                    
                                    52,584
                                    
                                    
                                    
                                    157,754
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    48,688
                                    
                                    
                                    $
                                    666,026Chief
      Executive
                                    
                                    2008
                                    
                                    $
                                    436,750
                                    
                                    
                                    
                                    33,917
                                    
                                    
                                    
                                    312,033
                                    
                                    
                                    
                                    3,437,056
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    88,523
                                    
                                    
                                    $
                                    4,308,279President,
      General Counsel (“PEO”)Karl
      Johe
                                    
                                    2009
                                    
                                    $
                                    422,100
                                    
                                    
                                    
                                    204,508
                                    
                                    
                                    
                                    68,169
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    6,000
                                    
                                    
                                    $
                                    700,777Chief
      Scientific Officer
                                    
                                    2008
                                    
                                    $
                                    427,250
                                    
                                    
                                    
                                    341,700
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,437,056
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    6,000
                                    
                                    
                                    $
                                    4,212,006John
      Conron
                                    
                                    2009
                                    
                                    $
                                    225,000
                                    
                                    
                                    
                                    7,481
                                    
                                    
                                    
                                    22,444
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    6,000
                                    
                                    
                                    $
                                    260,925Chief
      Financial Officer
                                    
                                    2008
                                    
                                    $
                                    208,750
                                    
                                    
                                    
                                    18,750
                                    
                                    
                                    
                                    60,000
                                    
                                    
                                    
                                    1,125,581
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    4,500
                                    
                                    
                                    $
                                    1,417,581Thomas
      Hazel
                                    
                                    2009
                                    
                                    $
                                    180,000
                                    
                                    
                                    
                                    15,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    195,000Senior
      Vice President of Research
                                    
                                    2008
                                    
                                    $
                                    100,000
                                    
                                    
                                    
                                    7,500
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    179,411
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    286,911


(1)           Includes
automobile allowance, perquisites and other personal
benefits.





(2)           For
additional information regarding the valuation of Option Awards, refer to Note 2
of our financial statements in the section captioned “Stock Options





(3)           On
March 30, 2010 the Compensation Committee made incentive bonus awards for 2009.
The 2009 incentive bonus plan awards will made in both fully paid, fully vested
common stock and cash. The common stock proportion of 2009 executive management
bonuses will be awarded in the form of 253,931 fully paid; fully vested; shares
of common stock. The stock award will be restricted. The shares will not be
tradable by the recipients for five years unless there is a “change of control”
or termination of employment.  The share awards will be based on the
closing price of the shares on March 29, 2010. The shares awarded will be
provided by the 2007 Stock Option Plan. The restricted common shares will be
awarded as follows (assuming $2.05 per share):




52




2009 Equity Award CalculationBonus
                    
                    
                    EquityPresent Value
                    
                    
                    Proportion
                    
                    
                    Equity Pool
                    
                    
                    SharesChairman
      and Chief Science Officer
                    
                    $
                    272,677
                    
                    
                    
                    25
                    %
                    
                    $
                    68,169
                    
                    
                    
                    33,253Chief
      Executive Officer
                    
                    $
                    210,338
                    
                    
                    
                    75
                    %
                    
                    $
                    157,754
                    
                    
                    
                    76,953Chief
      Financial Officer
                    
                    $
                    29,925
                    
                    
                    
                    75
                    %
                    
                    $
                    22,444
                    
                    
                    
                    10,948





2009 Cash Award CalculationBase
                          
                          
                          Cash
                          
                          
                          CashSalary
                          
                          
                          Proportion
                          
                          
                          AwardChairman
      and Chief Science Officer
                          
                          $
                          272,677
                          
                          
                          
                          75
                          %
                          
                          
                          204,508Chief
      Executive Officer
                          
                          $
                          210,338
                          
                          
                          
                          25
                          %
                          
                          
                          52,585Chief
      Financial Officer
                          
                          $
                          29,925
                          
                          
                          
                          25
                          %
                          
                          
                          7,481





Employment
Agreements and Arrangements and Change-In-Control Arrangements





Employment
Agreement with I. Richard Garr





We have a
written employment agreement with Mr. Garr, our Chief Executive Officer and
General Counsel. Pursuant to the agreement, as in effective, Mr. Garr is
entitled to an annual salary of $407,000 paid semi-monthly of which $30,000 is
paid in connection with Mr. Garr’s duties as general
counsel.   In addition, the agreement provides for certain
performance bonuses as determined from time to time by our Compensation
Committee. Mr. Garr’s employment agreement also provides for a $500 monthly
automobile allowance and the reimbursement of reasonable business expenses. The
term of the agreement is until October 31, 2012.





Mr.
Garr’s employment agreement also provides for severance (“Termination
Provisions”) in an amount equal to the greater of: (i) the aggregate
compensation remaining on his contract; or (ii) $1,000,000, in the event Mr.
Garr is terminated for any reason. In the event of termination, the agreement
also provides for the immediate vesting of 100% of stock options granted to Mr.
Garr during his term of employment. These termination provisions apply whether
employee is terminated for “cause” or “without cause.” Additionally, in the
event employee voluntarily terminates his employment following a change in
control and material reassignment of duties, he will also be entitled to the
termination provisions under the contract. In the event of early termination,
the Termination Provisions will require us to make a substantial payment to the
employee. By way of example, such payments would be approximately as
follows:





Officer
                                        
                                        Termination
                                          Date
                                        
                                        Salary(1)
                                        
                                        
                                        Auto (2)
                                        
                                        
                                        Accelerated Vesting
                                          of Options(3)
                                        
                                        
                                        TotalI
      Richard Garr12/31/09
                                        
                                        $
                                        1,153,170
                                        
                                        
                                        $
                                        17,000
                                        
                                        
                                        $
                                        1,548,000
                                        
                                        
                                        $
                                        2,718,17003/31/10
                                        
                                        $
                                        1,051,419
                                        
                                        
                                        $
                                        15,500
                                        
                                        
                                        $
                                        1,548,000
                                        
                                        
                                        $
                                        2,614,9196/30/10
                                        
                                        $
                                        1,000,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        $
                                        1,548,000
                                        
                                        
                                        $
                                        2,548,000After
      7/1/10
                                        
                                        $
                                        1,000,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        $
                                        1,548,000
                                        
                                        
                                        $
                                        2,548,000




(1)
            Assumes
      an annual salary of $407,000.  Does not include annual bonus or
      salary increase.


(2)
            Executive
      is entitled to a $500 per month automobile
  allowance.


(3)
            Derived
      from in the money stock options as of 12/31/09 using a market value of
      $1.79 for the Company’s common
stock.




Mr.
Garr’s agreement contains non-solicitation, and confidentiality and
non-competition covenants. The agreement may be terminated by either party with
or without cause and without prior notice subject to the termination provisions
as discussed.




Employment
Agreement with Karl Johe, Ph.D.





We have a
written employment agreement with Mr. Johe, our Chief Scientific Officer.
Pursuant to the agreement, as in effective, Mr. Johe is entitled to an annual
salary of $422,100 paid semi-monthly.  In additional, the agreement
provides for certain performance bonuses as determined from time to time by our
Compensation Committee.  Mr. Johe’s employment agreement also provides
for a $500 monthly automobile allowance and the reimbursement of reasonable
business expenses. The term of the agreement is until October 31,
2012.




53




Mr.
Johe’s employment agreement also provides for severance (“Termination
Provisions”) in an amount equal to the greater of: (i) the aggregate
compensation remaining on his contract; or (ii) $1,000,000, in the event Mr.
Johe is terminated for any reason. In the event of termination, the agreement
also provides for the immediate vesting of 100% of stock options granted to Mr.
Johe during his term of employment. These termination provisions apply whether
employee is terminated for “cause” or “without cause.” Additionally, in the
event employee voluntarily terminates his employment following a change in
control and material reassignment of duties, he will also be entitled to the
termination provisions under the contract. In the event of early termination,
the Termination Provisions will require us to make a substantial payment to the
employee. By way of example, such payments would be approximately as
follows:




Officer
                                            
                                            Termination
                                              Date
                                            
                                            Salary(1)
                                            
                                            
                                            Auto (2)
                                            
                                            
                                            Accelerated Vesting
                                              of Options(3)
                                            
                                            
                                            TotalKarl
      Johe, Ph.D12/31/09
                                            
                                            $
                                            1,195,950
                                            
                                            
                                            $
                                            17,000
                                            
                                            
                                            $
                                            1,548,000
                                            
                                            
                                            $
                                            2,760,95003/31/10
                                            
                                            $
                                            1,090,425
                                            
                                            
                                            $
                                            15,500
                                            
                                            
                                            $
                                            1,548,000
                                            
                                            
                                            $
                                            2,653,4256/30/10
                                            
                                            $
                                            1,000,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            1,548,000
                                            
                                            
                                            $
                                            2,548,000After
      7/1/10
                                            
                                            $
                                            1,000,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            1,548,000
                                            
                                            
                                            $
                                            2,548,000




(1)
            Assumes
      an annual salary of $422,100.  Does not include annual bonus or
      salary increase.


(2)
            Executive
      is entitled to a $500 per month automobile
  allowance.


(3)
            Derived
      from in the money stock options as of 12/31/09 using a market value of
      $1.79 for the Company’s common
stock.




Mr.
Johe’s agreement contains non-solicitation, and confidentiality and
non-competition covenants. The agreement may be terminated by either party with
or without cause and without prior notice subject to the termination provisions
as discussed.





Employment
Agreement with John Conron.





We have a
written employment agreement with Mr. Conron, our Chief Financial
Officer.   Pursuant to the agreement, as in effect, Mr. Conron is
entitled to an annual salary of $225,000.  In addition, the agreement
provides for certain performance bonuses as determined from time to time by our
Compensation Committee.    Mr. Conron’s employment agreement
also provides for a $500 monthly automobile allowance.




Employment
Arrangement with Thomas Hazel





We have a
written employee agreement with Mr. Hazel, our Senior Vice President of
Research.   We pay Mr. Hazel an annual salary of $180,000 in
connection with his employment.




Outstanding
Equity Awards at Fiscal Year-End





The
following table provides information concerning unexercised options; stock that
has not vested; equity incentive; and awards for each Named Executive Officer
outstanding as of the end of the last completed fiscal year ending December 31,
2009.




54




Name
                                                                      (a)
                                                                    
                                                                    
                                                                    
                                                                    Number of
                                                                      securities
                                                                      underlying
                                                                      unexercised
                                                                      options
                                                                      (#)
                                                                      exercisable
                                                                      (b)
                                                                    
                                                                    
                                                                    Number of
                                                                      securities
                                                                      underlying
                                                                      unexercised
                                                                      options
                                                                      (#)
                                                                      unexercisable
                                                                      (c)
                                                                    
                                                                    
                                                                    Equity
                                                                      incentive
                                                                      plan
                                                                      awards:
                                                                      Number of
                                                                      securities
                                                                      underlying
                                                                      unexercised
                                                                      unearned
                                                                      options
                                                                      (#)
                                                                      (d)
                                                                    
                                                                    
                                                                    Option
                                                                      exercise
                                                                      price
                                                                      ($)
                                                                      (e)
                                                                    
                                                                    Option
                                                                      expiration
                                                                      date
                                                                      (f)
                                                                    
                                                                    Number
                                                                      of shares
                                                                      or units
                                                                      of stock
                                                                      that have
                                                                      not
                                                                      vested
                                                                      (#)
                                                                      (g)
                                                                    
                                                                    
                                                                    Market
                                                                      value of
                                                                      shares of
                                                                      units of
                                                                      stock that
                                                                      have not
                                                                      vested
                                                                      ($)
                                                                      (h)
                                                                    
                                                                    
                                                                    Equity
                                                                      incentive
                                                                      plan
                                                                      award:
                                                                      Number
                                                                      of un-
                                                                      earned
                                                                      shares,
                                                                      units or
                                                                      other
                                                                      rights that
                                                                      have not
                                                                      vested
                                                                      (#)
                                                                      (i)
                                                                    
                                                                    
                                                                    Equity
                                                                      incentive
                                                                      plan
                                                                      awards:
                                                                      Market or
                                                                      payout
                                                                      value of
                                                                      unearned
                                                                      shares,
                                                                      units or
                                                                      other
                                                                      rights that
                                                                      have not
                                                                      vested
                                                                      ($)
                                                                      (j)I.
      Richard Garr
                                                                    
                                                                    (1)
                                                                    
                                                                    
                                                                    1,200,000
                                                                    
                                                                    
                                                                    
                                                                    0
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    0.50
                                                                    
                                                                    7/28/15(2)
                                                                    
                                                                    
                                                                    700,000
                                                                    
                                                                    
                                                                    
                                                                    1,400,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    3.66
                                                                    
                                                                    1/1/18Karl
      Johe (3)
                                                                    
                                                                    (4)
                                                                    
                                                                    
                                                                    1,200,000
                                                                    
                                                                    
                                                                    
                                                                    0
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    0.50
                                                                    
                                                                    7/28/15(5)
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    333,333
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    3.01
                                                                    
                                                                    10/31/15(6)
                                                                    
                                                                    
                                                                    700,000
                                                                    
                                                                    
                                                                    
                                                                    1,400,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    3.66
                                                                    
                                                                    1/1/18John
      Conron
                                                                    
                                                                    (7)
                                                                    
                                                                    
                                                                    100,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    3.15
                                                                    
                                                                    4/1/15(8)
                                                                    
                                                                    
                                                                    50,000
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    2.60
                                                                    
                                                                    4/1/18(9)
                                                                    
                                                                    
                                                                    333,333
                                                                    
                                                                    
                                                                    
                                                                    666,667
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    2.60
                                                                    
                                                                    4/1/18





(1)
            On
      July 28, 2005, we granted our CEO an option to purchase 1,200,000 common
      shares.  The option was granted under our 2005 Stock
      Plan.  The option vests annually over 4 years at a rate of
      300,000 per year.  The applicable vesting dates are July 28,
      2006, 2007, 2008 and 2009.  The only vesting condition is Mr.
      Garr’s continued employment.





(2)
            On
      January 21, 2008, we granted our CEO an option to purchase 2,100,000
      common shares.  The grant has an effective date of January 1,
      2008.  The option was granted under our 2007 Stock
      Plan.  The option vests at a rate of 700,000 per 14 month
      period.  The applicable vesting dates are February 28, 2009,
      April 30, 2010, and June 30, 2011.  The only vesting condition
      is Mr. Garr’s continued employment.





(3)
            Outstanding
      equity awards for Mr. Johe do not include warrants to purchase an
      aggregate of 3,000,000 common shares that were issued on June 5,
      2007.  For a further description of the transaction, please
      refer to the section of this report entitled “Transactions with Related
      Persons, Promoters and Certain Control
  Persons.”





(4)
            On
      July 28, 2005, we granted our CSO an option to purchase 1,200,000 common
      shares.  The option was granted under our 2005 Stock
      Plan.  The option vests annually over 4 years at a rate of
      300,000 per year.  The applicable vesting dates are July 28,
      2006, 2007, 2008 and 2009.  The only vesting condition is Mr.
      Johe’s continued employment.





(5)
            On
      September 20, 2007, we granted our Chairman and Chief Scientific Officer,
      an option to purchase an aggregate of 333,333 shares of our common stock
      at a price per share of $3.01 pursuant to our 2005 Stock Plan. The option
      expires 5 years from the date when they become
      exercisable.   The option vests on October 31,
      2010.  The option is immediately exercisable upon an event which
      would result in an acceleration of Mr. Johe’s stock option grants under
      his employment agreement.





(6)
            On
      January 21, 2008, we granted our CSO an option to purchase 2,100,000
      common shares.  The grant has an effective date of January 1,
      2008.  The option was granted under our 2007 Stock
      Plan.  The option vests at a rate of 700,000 per 14 month
      period.  The applicable vesting dates are February 28, 2009,
      April 30, 2010, and June 30, 2011.  The only vesting condition
      is Mr. Johe’s continued employment.





(7)
            In
      April of 2007, we granted our CFO an option to purchase 100,000 common
      shares pursuant to his employment contract.  The option is fully
      vested as of December 31, 2008.





(8)
            On
      April 1, 2008, we granted our CFO an option to purchase 50,000 common
      shares.  The grant was made pursuant to Mr. Conron’s employment
      agreement.  The option was fully vested at the grant
      date.




(9)
            On
      April 1, 2008, we granted our CFO an option to purchase 1,000,000 common
      shares.  The option vests at an annual rate of 333,333 per
      year.  The vesting dates are April 1, 2009, 2010 and
      2011.  The only vesting condition is Mr. Conron’s continued
      employment.




55




Director
Compensation





The
following table summarizes the compensation for our board of directors for the
fiscal year ended December 31, 2009:





Name
                                              
                                              Fees Earned
                                                or Paid in
                                                Cash
                                                ($)
                                              
                                              
                                              Stock
                                                Awards
                                                ($)
                                              
                                              
                                              Option
                                                Awards
                                                ($)
                                              
                                              
                                              Non-Equity
                                                Incentive Plan
                                                Compensation
                                                ($)
                                              
                                              
                                              Nonqualified
                                                Deferred
                                                Compensation
                                                Earnings
                                                ($)
                                              
                                              
                                              All Other
                                                Compensation
                                                ($)
                                              
                                              
                                              Total
                                                ($)(a)
                                              
                                              (b)
                                              
                                              
                                              (c)
                                              
                                              
                                              (d)
                                              
                                              
                                              (e)
                                              
                                              
                                              (f)
                                              
                                              
                                              (g)
                                              
                                              
                                              (h)William
      OldakerIndependent
      Director(1)
                                              
                                              
                                              20,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              10,959
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              30,959Audit
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740Compensation
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740Nomination
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740Scott
      OgilvieIndependent
      Director(1)
                                              
                                              
                                              20,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              10,959
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              30,959Audit
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740Compensation
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740Nomination
      Committee(2)
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              2,740
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              7,740





(1)
            On
      July 2, 2009, pursuant to our adopted director compensation plan, we
      issued to each of Messrs Ogilvie and Oldaker options to purchase 20,000
      shares of our common stock.  The options were issued pursuant to our
      2007 Stock Plan.  The exercise price per share is $1.17 and will
      expire 10 years from the date of grant.  The individual grants vest
      on July 2, 2010.





(2)
            On
      July 2, 2009, pursuant to our adopted director compensation plan, we
      issued to each of Messrs Ogilvie and Oldaker, options to purchase 15.000
      shares of our common stock (5,000 shares per each committee on which they
      serve). The options were issued pursuant to our 2007 Stock Plan. The
      exercise price per share is $1.17 and the options vest on July 2,
      2010.





Director
Compensation Plan





Our
Compensation Committee has adopted a formal outside director compensation plan
to assist us in attracting and retaining qualified directors.  Under
our plan, each eligible director shall receive:





Option
Grants





First
Year Grant.  Upon joining the
board, individual will receive options to purchase 45,000 common shares. The
options shall vest as follows: (i) 25,000 shall vest on the one month
anniversary of joining the Board; and (ii) 20,000 shall vest quarterly over a
one year period commencing on the date such Director joins the Board. For
purpose of the First Year option grant, all current eligible directors will be
considered “First Year” directors and be eligible for such grant;





Annual
Grant.  Starting on the
first year anniversary of service, and each subsequent anniversary thereafter,
each eligible director will be granted options to purchase 20,000 shares of
common stock. These Annual Grants will vest quarterly during the year;
and





Committee
Grant.  Each Director
will receive options to purchase an additional 5,000 shares for each committee
on which he or she serves. These Committee Grants will vest quarterly during the
year.





The
exercise price for the options to be granted to the independent directors shall
be the market price of the stock on each applicable grant date. The options
shall expire 7 years from the grant date. The option will be granted pursuant to
our 2005 Stock Plan, or as directed by the Board of Directors.





Cash
Compensation





Board
Retention Amount.  Each director
shall receive a $20,000 annual board retainer. The retainer shall be payable
quarterly commencing on January 1, 2008.





Committee
Retainer.  In addition to
the Board Retention Amount, each director serving on a committee shall receive
an additional $5,000 per committee on which he serves.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Securities
Authorized for Issuance Under Equity Compensation Plans





Information
regarding shares authorized for issuance under equity compensation plans
approved and not approved by stockholders required by this Item is incorporated
by reference from Item 5 of this Annual Report from the section entitled
“Equity Compensation Plan
Information.”




56




Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth, as of March 9, 2010, information regarding
beneficial ownership of our capital stock by:





·
            each
      person, or group of affiliated persons, known by us to be the beneficial
      owner of 5% or more of any class of our voting
  securities;





·
            each
      of our current directors and
nominees;





·
            each
      of our current named executive officers;
and





·
            all
      current directors and named executive officers as a
  group.




Beneficial
ownership is determined according to the rules of the SEC. Beneficial ownership
means that a person has or shares voting or investment power of a security and
includes any securities that person or group has the right to acquire within 60
days after the measurement date. This table is based on information supplied by
officers, directors and principal stockholders. Except as otherwise indicated,
we believe that each of the beneficial owners of the common stock listed below,
based on the information such beneficial owner has given to us, has sole
investment and voting power with respect to such beneficial owner’s shares,
except where community property laws may apply.





Common StockName and Address of Beneficial Owner(1)
                          
                          Shares
                          
                          
                          Shares
                            Underlying
                            Convertible
                            Securities(2)
                          
                          
                          Total
                          
                          
                          Percent of
                            Class(2)Directors
      and named executive officersI.
      Richard Garr
                          
                          
                          1,413,195
                          
                          
                          
                          2,600,000
                          
                          
                          
                          4,013,195
                          
                          
                          
                          9.77
                          %Karl
      Johe, Ph.D
                          
                          
                          1,705,484
                          
                          
                          
                          2,600,000
                          
                          
                          
                          4,305,484
                          
                          
                          
                          10.48
                          %Scott
      Ogilvie
                          
                          
                          —
                          
                          
                          
                          121,250
                          
                          
                          
                          121,250
                          
                          
                          
                          *
                          %William
      Oldaker
                          
                          
                          79,300
                          
                          
                          
                          181,250
                          
                          
                          
                          260,550
                          
                          
                          
                          *
                          %John
      Conron
                          
                          
                          51,364
                          
                          
                          
                          816,666
                          
                          
                          
                          868,030
                          
                          
                          
                          2.11
                          %All
      directors and executive officers as a group
    (5 persons)
                          
                          
                          3,249,343
                          
                          
                          
                          6,319,166
                          
                          
                          
                          9,568,509
                          
                          
                          
                          23.29
                          %





*
            Less
      than one percent.





(1)
            Except
      as otherwise indicated, the persons named in this table have sole voting
      and investment power with respect to all shares of common stock shown as
      beneficially owned by them, subject to community property laws where
      applicable and to the information contained in the footnotes to this
      table. Unless otherwise indicated, the address of the beneficial owner is
      c/o Neuralstem, Inc. 9700 Great Seneca Highway, Rockville,
    MD.





(2)
            Pursuant
      to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership
      includes any shares as to which a shareholder has sole or shared voting
      power or investment power, and also any shares which the shareholder has
      the right to acquire within 60 days, including upon exercise of common
      shares purchase options or warrant. There are 33,751,300 shares of common
      stock issued and outstanding as of March 9,
  2009.




57




ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




Transactions
with Related Persons, Promoters and Certain Control Persons





Summarized
below are certain transactions and business relationships between Neuralstem and
persons who are or were an executive officer, director or holder of more than
five percent of any class of our securities since January 1, 2008 or which have
been proposed since December 31, 2009.





Information
regarding disclosure of an employment relationship or transaction involving an
executive officer and any related compensation solely resulting from that
employment relationship or transaction is incorporated by reference from
Item 11 of this Annual Report.





Information
regarding disclosure of compensation to a director is incorporated by reference
from Item 11 of this Annual Report.





Information
regarding the identification of each independent director is incorporated by
reference from Item 10 of this Annual Report





On
February 9, 2009, our compensation committee awarded Messrs Garr and Conron 2008
discretionary cash bonuses in the amount of $312,033 and $60,000,
respectively.  Both individuals voluntarily agreed to defer such
bonuses until such later date as our cash position increased.  On
December 28, 2009, we requested that Messrs Garr and Conron exchange their
respective obligations for restricted common shares in a private
placement.  As a result of the exchange, Mr. Garr received 189,111
restricted shares and Mr. Conron received 36,364 restricted shares as payment in
full of their respective obligations.   The purchase price per
share was $1.65.  The transaction was unanimously approved by our
audit committee as well as our disinterested board members.




Director
Independence





Information
regarding director independence required by this Item is incorporated by
reference from Item. 10 of this Annual Report from the section entitled “Director
Independence.”





ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





The
following table summarizes the approximate aggregate fees billed to us or
expected to be billed to us by our independent auditors for our 2009 and 2008
fiscal years:





Type
      of Fees
                  
                  2009
                  
                  
                  2008Audit
      FeesStegman
      & Company
                  
                  $
                  69,256
                  
                  
                  $
                  66,426Audit
      Related Fees
                  
                  
                  -
                  
                  
                  
                  -Tax
      FeesStegman
      & Company
                  
                  
                  6,000
                  
                  
                  
                  6,000All
      Other FeesTotal
      Fees
                  
                  $
                  75,256
                  
                  
                  $
                  78,426





Pre-Approval
of Independent Auditor Services and Fees




Our audit
committee reviewed and pre-approved all audit and non-audit fees for services
provided by Stegman & Company and has determined that the provision of such
services to us during fiscal 2009 and in connection with the audit of our 2009
fiscal year financials is compatible with and did not impair independence. It is
the practice of the audit committee to consider and approve in advance all
auditing and non-auditing services provided to us by our independent auditors in
accordance with the applicable requirements of the SEC. Stegman & Company
did not provide us with any services, other than those listed
above.





PART IV





ITEM 15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





1.
            Financial
      Statements: See “Index to Financial Statements” in Part II,
      Item 8 of this Form 10-K.




58




2.
            Exhibits:
      The exhibits listed in the accompanying index to exhibits are filed or
      incorporated by reference as part of this
  Form 10-K.




Certain
of the agreements filed as exhibits to this Form 10-K contain
representations and warranties by the parties to the agreements that have been
made solely for the benefit of the parties to the agreement. These
representations and warranties:





·
            may
      have been qualified by disclosures that were made to the other parties in
      connection with the negotiation of the agreements, which disclosures are
      not necessarily reflected in the
agreements;





·
            may
      apply standards of materiality that differ from those of a reasonable
      investor; and





·
            were
      made only as of specified dates contained in the agreements and are
      subject to later developments.





Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time, and investors should
not rely on them as statements of fact.





SIGNATURES




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




NEURALSTEM,
      INCDated:
      March 30, 2010
                By:
                /S/
      I Richard GarrI
      Richard Garr
                  President
      and Chief Executive
Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
following capacities and on the dates indicated.





Name
                      
                      Title
                      
                      Date/s/ I. Richard Garr
                      
                      President,
      Chief Executive Officer, General Counsel and Director
                      
                      March
      30, 2010I.
      Richard Garr
                      
                      (Principal
      executive officer)/s/ John Conron
                      
                      Chief
      Financial Officer (Principal financial and accounting
    officer)
                      
                      March
      30, 2010John
      Conron/s/ Karl Johe
                      
                      Chairman
      of the Board and Director
                      
                      March
      30, 2010Karl
      Johe/s/ William Oldaker
                      
                      Director
                      
                      March
      30, 2010William
      Oldaker/s/ Scott Ogilvie
                      
                      Director
                      
                      March
      30, 2010Scott
      Ogilvie


59




INDEX
TO EXHIBITS




Incorporated by ReferenceExhibit
                                  No.
                                
                                Description
                                
                                Filed
                                  Herewith
                                
                                Form
                                
                                Exhibit
                                  No.
                                
                                File No.
                                
                                Filing Date3.01(i)
                                
                                Amended
      and Restated Certificate of Incorporation of Neuralstem, Inc. filed on
      9/29/05
                                
                                
                                
                                10-K
                                
                                3.01(i)
                                
                                001-33672
                                
                                3/31/093.02(i)
                                
                                Certificate
      of Amendment to Certificate of Incorporation of Neuralstem, Inc. filed on
      5/29/08
                                
                                
                                
                                DEF
      14A
                                
                                Appendix
      I
                                
                                001-33672
                                
                                4/24/083.03(ii)
                                
                                Amended
      and Restated Bylaws of Neuralstem, Inc. adopted on July 16,
      2007
                                
                                
                                
                                10-QSB
                                
                                3.2(i)
                                
                                333-132923
                                
                                8/14/074.01**
                                
                                Amended
      and Restated 2005 Stock Plan adopted on June 28, 2007
                                
                                
                                
                                10-QSB
                                
                                4.2(i)
                                
                                333-132923
                                
                                8/14/074.02**
                                
                                Non-qualified
      Stock Option Agreement between Neuralstem, Inc. and Richard Garr dated
      July 28, 2005
                                
                                
                                
                                SB-2
                                
                                4.4
                                
                                333-132923
                                
                                6/21/064.03**
                                
                                Non-qualified
      Stock Option Agreement between Neuralstem, Inc. and Karl Johe dated July
      28, 2005
                                
                                
                                
                                SB-2
                                
                                4.5
                                
                                333-132923
                                
                                6/21/064.04
                                
                                Private
      Placement Memorandum for March 2006 offering
                                
                                
                                
                                SB-2
                                
                                4.12
                                
                                333-132923
                                
                                6/21/064.05
                                
                                Form
      of Placement Agent Warrant issued in connection with the March 2006
      offering
                                
                                
                                
                                SB-2
                                
                                4.13
                                
                                333-132923
                                
                                6/21/064.06
                                
                                Form
      of Series A Warrant ($1.50) issued in connection with the March 2006
      offering
                                
                                
                                
                                SB-2
                                
                                4.14
                                
                                333-132923
                                
                                6/21/064.07
                                
                                Form
      of Series B Warrant ($2.00) issued in connection with the March 2006
      offering
                                
                                
                                
                                SB-2
                                
                                4.15
                                
                                333-132923
                                
                                6/21/064.08
                                
                                Form
      of Subscription Agreement for March 2006 offering
                                
                                
                                
                                SB-2
                                
                                4.16
                                
                                333-132923
                                
                                7/26/064.09
                                
                                Form
      of Securities Purchase Agreement dated March 15, 2007
                                
                                
                                
                                8-K
                                
                                4.1
                                
                                333-132923
                                
                                3/16/074.10
                                
                                Form
      of Common Stock Purchase Warrant dated March 15, 2007 (Series
      C)
                                
                                
                                
                                8-K
                                
                                4.2
                                
                                333-132923
                                
                                3/16/074.11
                                
                                Form
      of Registration Rights Agreement dated March 15, 2007
                                
                                
                                
                                8-K
                                
                                4.3
                                
                                333-132923
                                
                                3/16/074.12**
                                
                                Neuralstem,
      Inc. 2007 Stock Plan
                                
                                
                                
                                10-QSB
                                
                                4.21
                                
                                333-132923
                                
                                8/14/07




60




4.13
                
                Form
      of Common Stock Purchase Warrant Issued to Karl Johe on June 5,
      2007
                
                
                
                10-KSB
                
                4.22
                
                333-132923
                
                3/27/084.14
                
                Form
      of Registration Rights Agreement entered into on February 19, 2008 between
      the Company and CJ CheilJedang Corporation
                
                
                
                8-K
                
                10.20
                
                001-33672
                
                2/25/084.15
                
                Form
      of Placement Agent Warrant Issued to Midtown Partners & Company on
      December 18, 2008
                
                
                
                8-K
                
                4.1
                
                001-33672
                
                12/18/084.16
                
                Form
      of Consultant Common Stock Purchase Warrant issued on January 5,
      2009
                
                
                
                S-3/A
                
                10.1
                
                333-157079
                
                02/3/094.17
                
                Form
      of Series D, E and F Warrants
                
                
                
                8-K
                
                4.01
                
                001-33672
                
                7/1/094.18
                
                Form
      of Placement Agent Warrant
                
                
                
                8-K
                
                4.02
                
                001-33672
                
                7/1/094.19
                
                Form
      of December 29, 2009 Securities Purchase Agreement
                
                *4.20
                
                Form
      of Consultant Warrant Issued January 8, 2010
                
                *4.21
                
                Form
      of Replacement Warrant Issued January 29, 2010
                
                *4.22
                
                Form
      of Replacement Warrant Issued March of 2010
                
                *4.23
                
                Form
      of employee and consultant option grant
                
                *10.01**
                
                Employment
      Agreement with I. Richard Garr dated January 1, 2007 and amended as of
      November 1, 2005
                
                
                
                SB-2
                
                10.1
                
                333-132923
                
                6/21/0610.02**
                
                Amended
      terms to the Employment Agreement of I Richard Garr dated January 1,
      2008
                
                
                
                10-K
                
                10.02
                
                001-33672
                
                3/31/0910.03**
                
                Employment
      Agreement with Karl Johe dated January 1, 2007 and amended as of November
      1, 2005
                
                
                
                SB-2
                
                10.1
                
                333-132923
                
                6/21/0610.04**
                
                Amended
      terms to the Employment Agreement of Karl Johe dated January 1,
      2009
                
                
                
                10-K
                
                10.04
                
                001-33672
                
                3/31/0914.01
                
                Neuralstem
      Code of Ethics
                
                
                
                SB-2
                
                14.1
                
                333-132923
                
                6/21/0614.02
                
                Neuralstem
      Financial Code of Profession Conduct adopted on May 16,
    2007
                
                
                
                8-K
                
                14.2
                
                333-132923
                
                6/6/0723
                
                Consent
      of Stegman & Company
                
                *




61




31.1
                
                Certification
      of the Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                
                *31.2
                
                Certification
      of the Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                
                *32.1
                
                Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. §
1350
                
                *32.2
                
                Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. §
1350
                
                *




**Management
contracts or compensation plans or arrangements in which directors or executive
officers are eligible to participate.




62