U.S. SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549





FORM 10-Q




(Mark one)




x
            Quarterly ReportUnder Section 13 or 15(d) of
      the Securities Exchange Act of
1934




For the Quarterly Period EndedSeptember 30, 2010


Or




 ̈
            Transition Report Under
      Section 13 or 15(d) of the Securities Exchange Act of
      1934




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




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.  xYes ̈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      ̈Yes  ̈No




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 small 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
Exchange Act) ̈YesxNo




As of October 26, 2010 there were
46,472,694shares of common stock, $.01 par value, issued and
outstanding.










Neuralstem, Inc.




Table of Contents


PagePART I -
                    
                    FINANCIAL
      INFORMATION
                    3Item 1.
                    
                    Financial
      Statements
                    3Balance Sheetsas ofSeptember 30, 2010 (Unaudited) and December 31,
      2009
                    3Statements of
      Operations(Unaudited)Three and ninemonths endedSeptember 30, 2010and 2009
                    4Statements ofCash Flows
      (Unaudited)For the nine months ended
      September 30, 2010 and 2009
                    5Statement ofChanges in Stockholders’ Equity
      (Deficit) (Unaudited)For the nine months
      endedSeptember 30,
      2010
                    6Notes toFinancial Statements
      (Unaudited)
                    7Item 2.
                    
                    Management's Discussion andAnalysis
      of Financial Condition andResults
      of Operations
                    13Item 3.
                    
                    Quantitative and Qualitative
      Disclosures about Market Risk
                    24Item 4.
                    
                    Controls and
      Procedures
                    25PART II -
                    
                    OTHER
      INFORMATION
                    25Item 1.
                    
                    Legal
      Proceedings
                    25Item 1A.
                    
                    Risk
Factors
                    26Item 2.
                    
                    Unregistered Sales of Equity
      Securities and Use of Proceeds
                    32Item 3.
                    
                    Defaults Upon Senior
      Securities
                    33Item 4.
                    
                    (Removed and Reserved).
                    33Item 5.
                    
                    Other
      Information
                    34Item 6.
                    
                    Exhibits
                    36




2




PART I


FINANCIAL
INFORMATION





ITEM
1.                      FINANCIAL
STATEMENTS





Neuralstem,
Inc.





Balance
Sheets





September30,
                                
                                
                                December31,2010
                                
                                
                                2009(Unaudited)ASSETSCURRENT
    ASSETSCash and cash
      equivalents
                                
                                $
                                11,588,824
                                
                                
                                $
                                2,309,774Prepaid
      expenses
                                
                                
                                302,334
                                
                                
                                
                                143,600Total
      current assets
                                
                                
                                11,891,158
                                
                                
                                
                                2,453,374Property and equipment,
      net
                                
                                
                                163,007
                                
                                
                                
                                196,755Intangible assets,
      net
                                
                                
                                440,195
                                
                                
                                
                                301,560Other
assets
                                
                                
                                49,409
                                
                                
                                
                                55,716Total
assets
                                
                                $
                                12,543,769
                                
                                
                                $
                                3,007,405LIABILITIES AND STOCKHOLDERS'
      EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts payable and accrued
      expenses
                                
                                $
                                1,214,275
                                
                                
                                $
                                791,607Accrued bonus
      expense
                                
                                
                                509,959
                                
                                
                                
                                769,215Fair value of warrant
      obligations
                                
                                
                                2,204,157
                                
                                
                                
                                -Total
      current liabilities
                                
                                
                                3,928,391
                                
                                
                                
                                1,560,822LONG-TERM
      LIABILITIESFair value of warrant
      obligations
                                
                                
                                -
                                
                                
                                
                                6,462,039Total
      liabilities
                                
                                
                                3,928,391
                                
                                
                                
                                8,022,861STOCKHOLDERS' EQUITY
      (DEFICIT)Preferred
      stock, 7,000,000 shares authorized, zero shares issued and
      outstanding
                                
                                
                                -
                                
                                
                                
                                -Common stock, $0.01 par value; 150
      million shares authorized, 46,182,178 and 35,743,831 shares outstanding in
      2010 and 2009 respectively
                                
                                
                                461,822
                                
                                
                                
                                357,438Additional paid-in
      capital
                                
                                
                                91,368,927
                                
                                
                                
                                62,193,937Accumulated
      deficit
                                
                                
                                (83,215,371
                                )
                                
                                
                                (67,566,831
                                )Total stockholders' equity
      (deficit)
                                
                                
                                8,615,378
                                
                                
                                
                                (5,015,456
                                )Total liabilities and
      stockholders' equity (deficit)
                                
                                $
                                12,543,769
                                
                                
                                $
                                3,007,405





See accompanying
notes.




3




Statements of
Operations


(Unaudited)





ThreeMonths
                        
                        
                        NineMonthsEndedSeptember30,
                        
                        
                        EndedSeptember30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Revenues
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Operating
      expenses:Research and development
      costs
                        
                        
                        2,112,299
                        
                        
                        
                        1,308,565
                        
                        
                        
                        6,625,939
                        
                        
                        
                        4,195,366General, selling and
      administrative expenses
                        
                        
                        1,769,013
                        
                        
                        
                        1,191,480
                        
                        
                        
                        5,007,662
                        
                        
                        
                        3,898,666Depreciation and
      amortization
                        
                        
                        42,333
                        
                        
                        
                        22,537
                        
                        
                        
                        101,996
                        
                        
                        
                        64,7573,923,645
                        
                        
                        
                        2,522,582
                        
                        
                        
                        11,735,597
                        
                        
                        
                        8,158,789Operating
    loss
                        
                        
                        (3,923,645
                        )
                        
                        
                        (2,522,582
                        )
                        
                        
                        (11,735,597
                        )
                        
                        
                        (8,158,789
                        )Nonoperating
      (expense)income:Interest
    income
                        
                        
                        17,406
                        
                        
                        
                        6,274
                        
                        
                        
                        32,869
                        
                        
                        
                        17,054Interest
      expense
                        
                        
                        (465
                        )
                        
                        
                        (194
                        )
                        
                        
                        (2,585
                        )
                        
                        
                        (194
                        )Warrant issuance and modification
      expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,906,800
                        )
                        
                        
                        -(Loss)
      gain from change in fair value of warrant obligations
                        
                        
                        (23,535
                        )
                        
                        
                        (2,580,481
                        )
                        
                        
                        (2,036,427
                        )
                        
                        
                        761,178(6,594
                        )
                        
                        
                        (2,574,401
                        )
                        
                        
                        (3,912,943
                        )
                        
                        
                        778,038Net loss attributable to common
      shareholders
                        
                        $
                        (3,930,239
                        )
                        
                        $
                        (5,096,983
                        )
                        
                        $
                        (15,648,540
                        )
                        
                        $
                        (7,380,751
                        )Net loss per share - basic and
      diluted
                        
                        $
                        (0.09
                        )
                        
                        $
                        (0.15
                        )
                        
                        $
                        (0.37
                        )
                        
                        $
                        (0.22
                        )Weighted average common shares
      outstanding - basic and diluted
                        
                        
                        46,163,905
                        
                        
                        
                        34,562,322
                        
                        
                        
                        42,412,419
                        
                        
                        
                        34,027,542





See
accompanying notes.




4




Statements
of Cash Flows


(Unaudited)





Nine MonthsEndedSeptember30,2010
                                              
                                              
                                              2009Cash
      flows from operating activities:Net loss
                                              
                                              $
                                              (15,648,540
                                              )
                                              
                                              $
                                              (7,380,751
                                              )Adjustments to reconcile net loss
      to cash used in operating activities:Depreciation and
      amortization
                                              
                                              
                                              101,996
                                              
                                              
                                              
                                              64,757Share based compensation
      expenses
                                              
                                              
                                              3,942,609
                                              
                                              
                                              
                                              3,417,790Warrant issuance and modification
      expense
                                              
                                              
                                              1,906,800
                                              
                                              
                                              
                                              -Loss/(gain)
      from change in fair value of warrant obligations
                                              
                                              
                                              2,036,427
                                              
                                              
                                              
                                              (761,178
                                              )Changes
      in operating assets and liabilities:Prepaid
      expenses
                                              
                                              
                                              (38,733
                                              )
                                              
                                              
                                              (23,917
                                              )Other
assets
                                              
                                              
                                              6,307
                                              
                                              
                                              
                                              (17,553
                                              )Accounts payable and accrued
      expenses
                                              
                                              
                                              472,415
                                              
                                              
                                              
                                              495,845Accrued bonus
      expenses
                                              
                                              
                                              (10,890
                                              )
                                              
                                              
                                              591,923Net cash used in operating
      activities
                                              
                                              
                                              (7,231,609
                                              )
                                              
                                              
                                              (3,613,084
                                              )Cash
      flows from investing activities:Acquisition of intangible
      assets
                                              
                                              
                                              (178,903
                                              )
                                              
                                              
                                              (75,576
                                              )Purchase of property and
      equipment
                                              
                                              
                                              (27,981
                                              )
                                              
                                              
                                              (13,413
                                              )Net cash used in investing
      activities
                                              
                                              
                                              (206,884
                                              )
                                              
                                              
                                              (88,989
                                              )Cash
      flows From financing activities:Proceeds from issuance of common stock from
      warrants exercised
                                              
                                              
                                              7,446,023
                                              
                                              
                                              
                                              -Proceeds from issuance of common stock from
      private placement
                                              
                                              
                                              9,271,520
                                              
                                              
                                              
                                              1,219,509Net cash provided by financing
      activities
                                              
                                              
                                              16,717,543
                                              
                                              
                                              
                                              1,219,509Net increase (decrease)in cash and
      cash equivalents
                                              
                                              
                                              9,279,050
                                              
                                              
                                              
                                              (2,482,564
                                              )Cash and cash equivalents,
      beginning of period
                                              
                                              
                                              2,309,774
                                              
                                              
                                              
                                              4,903,279Cash and cash equivalents, end of
      period
                                              
                                              $
                                              11,588,824
                                              
                                              
                                              $
                                              2,420,715Supplemental
      disclosure of cash flows information:Cash paid for
      interest
                                              
                                              $
                                              465
                                              
                                              
                                              $
                                              194Cash paid for income
      taxes
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Supplemental
      schedule of non cash investing and financing activities:Extinguishment of warrant
      obligations through exercise, expiration and modification of common stock
      warrants
                                              
                                              
                                              (6,294,055
                                              )
                                              
                                              
                                              -Prepayment of services through
      common stock issuance
                                              
                                              
                                              (240,000
                                              )
                                              
                                              
                                              -Payment of contract services
      through common stock issuance
                                              
                                              
                                              (50,000
                                              )
                                              
                                              
                                              -Issuance of common stock from
      executive bonuses
                                              
                                              
                                              (248,367
                                              )
                                              
                                              
                                              -





See accompanying
notes.




5




STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY(DEFICIT)


For
the nine months ended September 30, 2010


(Unaudited)





Common
                            
                            
                            Common
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            TotalStock
                            
                            
                            Stock
                            
                            
                            Paid-In
                            
                            
                            Accumulated
                            
                            
                            Stockholders'Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Deficit
                            
                            
                            Equity (Deficit)Balance
      at January 1, 2010
                            
                            
                            35,743,831
                            
                            
                            $
                            357,438
                            
                            
                            $
                            62,193,937
                            
                            
                            $
                            (67,566,831
                            )
                            
                            $
                            (5,015,456
                            )Share
      based payments
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,822,609
                            
                            
                            
                            
                            
                            
                            
                            3,822,609Issuance
      of common stock through Private Placement ($2.80 per share), net of
      financing costs of $728,501.
                            
                            
                            3,571,436
                            
                            
                            
                            35,714
                            
                            
                            
                            9,235,806
                            
                            
                            
                            
                            
                            
                            
                            9,271,520Issuance
      of common stock for prepaid consulting services.
                            
                            
                            140,000
                            
                            
                            
                            1,400
                            
                            
                            
                            238,600
                            
                            
                            
                            
                            
                            
                            
                            240,000Issuance
      of common stock for consulting services.
                            
                            
                            45,000
                            
                            
                            
                            450
                            
                            
                            
                            49,550
                            
                            
                            
                            
                            
                            
                            
                            50,000Issuance
      of common stock from warrants exercised ($1.25 and $1.10 per share), net
      of issuance costs of $638,644.
                            
                            
                            6,560,757
                            
                            
                            
                            65,608
                            
                            
                            
                            7,380,415
                            
                            
                            
                            
                            
                            
                            
                            7,446,023Warrant issuances and
      modifications
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,176,184
                            
                            
                            
                            
                            
                            
                            
                            8,176,184Extinguishment of fair value of
      warrant obligations from warrant expiration
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            24,671
                            
                            
                            
                            
                            
                            
                            
                            24,671Issuance of restricted common
      stock in payment for 2009 executive bonuses ($2.05 per
      share)
                            
                            
                            121,154
                            
                            
                            
                            1,212
                            
                            
                            
                            247,155
                            
                            
                            
                            
                            
                            
                            
                            248,367Net
      loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (15,648,540
                            )
                            
                            
                            (15,648,540
                            )Balance
      at September 30, 2010
                            
                            
                            46,182,178
                            
                            
                            $
                            461,822
                            
                            
                            $
                            91,368,927
                            
                            
                            $
                            (83,215,371
                            )
                            
                            $
                            8,615,378




See accompanying
notes.




6




Note 1.Basis of
Presentation




The accompanying
unaudited financial statements of Neuralstem, Inc. (the “Company”) have been
prepared in accordance with generally accepted accounting principles in the
United States and the rules and regulations of the Securities and Exchange
Commission (the “SEC”),  for interim financial information. Therefore, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.





The interim financial statements are
unaudited, but in the opinion of management all adjustments, consisting only of
normal recurring accruals, considered necessary to present fairly the results of
these interim periods have been included. The results of the Company’s
operations for any interim period are not necessarily indicative of results that
may be expected for any other interim period or for the full
year.





Note 2.  Significant Accounting
Policies and Recent Accounting Pronouncements





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 third quarter of 2011.




7




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.





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 basic and 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.




Loss per
Common Share




Basic and diluted loss per common share
is calculated by dividing the net loss by the weighted average number of common
shares outstanding during the period.





For The Nine MonthsEnded September 30,2010
                    
                    
                    2009Basic:Net loss attributable to common
      shareholders
                    
                    $
                    (15,648,540
                    )
                    
                    $
                    (7,380,751
                    )Weighted average common shares
      outstanding
                    
                    
                    42,412,419
                    
                    
                    
                    34,027,542Basic and diluted loss per common
      share
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.22
                    )





Share Based
Payments





We have granted stock-based compensation
awards to employees, board members and service providers.  Awards may
consist of common stock, warrants, or stock options.  Our stock options and
warrants have lives of up to ten years.  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.




We granted 215,000 options during the
nine months ended September 30, 2010.  We granted 366,000 options in
the similar period ended September 30, 2009. We recorded related compensation
expenses as our options vest in accordance with guidance issued by the FASB
related to share based payments.We recognized $3,942,609 and
$3,417,790 in share-based compensation expense during the nine months ended
September 30, 2010 and 2009, respectively.  Included in the expense
for the nine months ended September 30, 2010, is $120,000 in expense related to
the amortization of prepaid consulting expense paid with the issuance of
$240,000 in common stock.  During the nine month period ended
September 30, 2010, there were 62,042 options that expired.  There
were no options that expired during the same period in 2009.





A summary of stock option activity
during the nine months ended September 30, 2010 and related information is
included in the table below:




8




Number of
                                    Options
                                  
                                  
                                  Weighted-Average
                                    Exercise
                                    Price
                                  
                                  
                                  Weighted-Average
                                    Remaining
                                    Contractual
                                    Life (inyears)
                                  
                                  
                                  Aggregate
                                    Intrinsic
                                    ValueOutstanding
      at January 1, 2010
                                  
                                  
                                  9,070,659
                                  
                                  
                                  $
                                  2.52
                                  
                                  
                                  
                                  7.0
                                  
                                  
                                  $
                                  -Granted
                                  
                                  
                                  215,000
                                  
                                  
                                  
                                  2.44
                                  
                                  
                                  
                                  6.0
                                  
                                  
                                  $
                                  -Exercised
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Forfeited
                                  
                                  
                                  (62,042
                                  )
                                  
                                  
                                  4.98
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Outstanding
      at September 30, 2010
                                  
                                  
                                  9,223,617
                                  
                                  
                                  $
                                  2.50
                                  
                                  
                                  
                                  6.5
                                  
                                  
                                  $
                                  5,502,800Exercisable
      at September 30, 2010
                                  
                                  
                                  7,086,950
                                  
                                  
                                  $
                                  2.21
                                  
                                  
                                  
                                  6.2
                                  
                                  
                                  $
                                  5,414,550





Share-based compensation
expense included in the statements of operations for the three months and
nine months ended September 30, 2010 and 2009 was as
follows:





Three Months Ended Sept. 30,2010
                  
                  
                  2009Research and development
      costs
                  
                  $
                  703,299
                  
                  
                  $
                  703,300General, selling and
      administrative expenses
                  
                  
                  608,568
                  
                  
                  
                  365,834Total
                  
                  $
                  1,311,867
                  
                  
                  $
                  1,069,134





Nine Months Ended Sept. 30,2010
                
                
                2009Research and development
      costs
                
                $
                2,242,794
                
                
                $
                2,183,702General, selling and
      administrative expenses
                
                
                1,699,815
                
                
                
                1,234,088Total
                
                $
                3,942,609
                
                
                $
                3,417,790





Warrants to purchase common stock were
issued to certain officers, directors, stockholders and service
providers.




9




Weighted-Weighted-
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateNumber
                
                
                Exercise
                
                
                Contractual
                
                
                Intrinsicof Warrants
                
                
                Price
                
                
                Life (in years)
                
                
                ValueOutstanding
      at January 1, 2010
                
                
                15,295,257
                
                
                $
                1.82
                
                
                
                2.0
                
                
                
                -Granted
                
                
                7,509,983
                
                
                
                2.55
                
                
                
                3.9
                
                
                
                -Exercised
                
                
                (6,560,757
                )
                
                
                1.23
                
                
                
                -
                
                
                
                -Forfeited
                
                
                (25,355
                )
                
                
                1.25
                
                
                
                -
                
                
                
                -Outstanding
      at September 30, 2010
                
                
                16,219,128
                
                
                $
                2.40
                
                
                
                3.3
                
                
                
                4,765,198Exercisable
      at September 30, 2010
                
                
                12,969,127
                
                
                $
                2.24
                
                
                
                2.7
                
                
                
                4,765,198





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
                      
                      Date
                      
                      Date
                      
                      WarrantsPrice
                      
                      of Issue
                      
                      of Expiration
                      
                      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 at January 1,
    2009
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,547,762




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.  In the first
nine months of 2010, 6,586,112 of the common stock purchase warrants were
exercised or forfeited.  The fair value of the remaining warrants
increased, due to a higher stock price, resulting in a $2,036,427 expense for
the nine months ended September 30, 2010.





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:





September 30,
                
                
                September 30,2010
                
                
                2009Annual
      dividend yield
                
                
                -
                
                
                
                -Expected
      life (years)
                
                
                0.21
                
                
                
                0.75-2.00Risk
      free interest rate
                
                
                0.16
                %
                
                
                0.18%-0.95
                %Expected
      volatility
                
                
                56
                %
                
                
                85%-97
                %




10




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.





Warrant
Issuance and Modification Expense





In
February 2010 we extended the lives of warrants for 706,752 shares of common
stock with a strike price of $1.25 for two years.  The warrants had
been issued earlier in exchange for extinguishment of debt.  The
warrants were due to expire in March 2012.  As a result of the term
change, we recorded a Warrant Issuance Modification Expense charge of
$171,531for the nine months ended September 30, 2010.  In addition, as
a fulfillment of agreements with certain vendors, 3,881,005 warrants were
reissued in January and March 2010 to replace warrants that had been exercised
during the period.  As a result of the reissue of these warrants, the
Company recognized a Warrant Modification Expense charge of
$1,735,269.  The total expense for the nine months ended September 30,
2010 was $1,906,800.





Significant New Accounting
Pronouncements




The
following accounting pronouncements, if implemented, would have no effect on the
financial statements of the company.




ASU
2010-01, “Equity (Topic 505) – Accounting for Distributions to Shareholders with
Components of Stock and Cash.”


ASU
2010-01 was issued January 2010 and clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock
dividend.  ASU 2010-01 is effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a retrospective
basis.  ASU 2010-01 had no impact on our financial
statements.





ASU
2010-06, “Improving Disclosure about Fair Value Measurements,” was issued
January 2010 and requires additional disclosures regarding fair value
measurements, amends disclosures about post-retirement benefit plan assets and
provides clarification regarding the level of disaggregation of fair value
disclosures by investment class.  The ASU is effective for interim and
annual reporting periods beginning after December 15, 2009, except for certain
Level 3 activity disclosure requirements that will be effective for reporting
periods beginning after December 15, 2010.  Adoption of ASU 2010-06
had no impact on our financial statements.




Note
3.  Fair Value




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 items.




11




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





Fair value measurements at September 30, 2010 usingSept. 30, 2010
                  
                  
                  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
                  
                  $
                  11,588,824
                  
                  
                  $
                  11,588,824
                  
                  
                  $
                  -
                  
                  
                  $
                  -Liabilities:Fair
      value of warrant obligations
                  
                  
                  2,204,157
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,204,157





Three months ended
                  Sept. 30, 2010
                
                
                Nine months ended
                  Sept. 30, 2010Fair
      value of warrant obligations at beginning of period
                
                $
                2,189,064
                
                
                $
                6,462,039Extinguishment
      through warrant exercises and modifications
                
                
                (8,442
                )
                
                
                (6,294,055
                )Extinguishment
      through warrant expirations
                
                
                
                
                
                
                (254
                )Net
      loss for change in fair value included in the statement of operations for
      period
                
                
                23,535
                
                
                
                2,036,427Fair
      value of warrant obligations at end of period
                
                $
                2,204,157
                
                
                $
                2,204,157





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




12




Note 4.   Stockholders’ Equity
(Deficit)




During the first nine months ended
September 30, 2010, various warrant holders exercised 6,560,757 warrants at
$1.25 and $1.10 per warrant increasing equity by approximately $7.45 million,
net of $638,644 in related financing costs.  The exercise of these
warrants reduced the Company’s derivative liability and increased equity by
$6,294,055.





The Company also completed a private
placement of 3,571,436 common shares at $2.80 per share increasing equity in the
amount of $10,000,020, at June 30, 2010, less $728,501in related placement and
closing costs.





Note 5.Subsequent
Events





In
October 2010, Neuralstem completed the formation of a wholly owned subsidiary in
the People’s Republic of China, Suzhou Neuralstem Biopharmaceutical Co. , Ltd..
The company was established to conduct stem cell research and is opening a
laboratory facility in  the city of Suzhou in the province of
Jiangsu.




In
November2010,Neuralstem was awarded
three Federal grants, totaling $733,438 through the Patient Protection and
Affordable Care Act, which supports investments in qualifying therapeutic
discovery projects. The funding will help us move our small molecule treatment
for depression into the clinic, and advance our ongoing trial to treat ALS with
our spinal cord stem cells. The third grant will go to developing our
IGF1-expressing neural stem cell therapy product, which could also target ALS.
In this program, we are focused on engineering our spinal cord neurons to
over-express molecules of interest, such as IGF1 (insulin-like growth factor 1).
Neuralstem expects to receive the funds in fourth quarter of 2010 and the first
quarter of 2011.





ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





ADVISEMENT





We urge you to read this entire
Quarterly Report on Form 10-Q, including the” Risk Factors” section, the
financial statements, and related notes.  As used in this Quarterly
Report, unless the context otherwise requires, the words “we,” “us,”“our,” “the
Company,” “Neuralstem” and “Registrant” refers to Neuralstem,
Inc.  Also, any reference to “common shares,” or “common stock,”
refers to our $.01 par value common stock.   The information
contained herein is current as of the date of this Quarterly Report (September
30, 2010), unless another date is specified.





We prepare our interim financial
statements in accordance with United States generally accepted accounting
principles.  Our financials and results of operations for the three and
nine month periods ended September 30, 2010 are not necessarily indicative of
our prospective financial condition and results of operations for the pending
full fiscal year ending December 31, 2010. The interim financial statements
presented in this Quarterly Report as well as other information relating to our
company contained in this Quarterly Report should be read in conjunction and
together with the reports, statements and information filed by us with the
United States Securities and Exchange Commission (“SEC”).





NOTE
REGARDING FORWARD-LOOKING STATEMENTS




This
Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These forward-looking statements include, but are
not limited to, statements about:




·
            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;




13




·
            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 secure additional
      financing to fund our short-term and long-term financial
      needs;





·
            changes in our business plan and
      corporate strategies; and





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




These
statements are often, but not always, made through the use of words or phrases
such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend” and similar words or phrases. Accordingly, these
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in them. Discussions
containing these forward-looking statements may be found throughout this
Form 10-Q, including Part I, the section entitled “Item 2: Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” These
forward-looking statements involve risks and uncertainties, including the risks
discussed in Part II, Item 1A of this Report, under the caption “Risk Factors”,
that could cause our actual results to differ materially from those in the
forward-looking statements. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document. The risks discussed in this report should be
considered in evaluating our prospects and future financial
performance.





ITEM 2.
            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 financial statements and notes to assist readers in
understanding our results of operations, financial condition and cash
flows.  Our 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
      2010.


•
              Critical
      Accounting Policies—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 the three and nine months ended September 30, 2010 to
      the comparable periods of 2009.


•
            Liquidity and
      Capital Resources—An analysis of changes in
      our balance sheet and cash flows and discussion of our financial condition
      and future liquidity needs.





The various sections of this MD&A
contain a number of 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 II, Item 1A of this Quarterly Report). Our actual results
may differ materially.





Overview





We are
focused on the development and commercialization of treatments based on
transplanting human neural stem cells and small molecule compounds.




14




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 fourteen (14) issued
patents and twenty-two (22) 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, provide a competitive advantage and will facilitate the
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. Regenerative medicine is the process of
creating living, functional tissues to repair or replace tissue or organ
function lost due to age, disease, damage, or congenital defects. 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
products 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 and our facilities, to advance our
technologies. In addition, we are pursuing strategic collaborations with members
of academia.




Clinical
Trials





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 in our
study was dosed on January 21, 2010 at Emory University in Atlanta Georgia.
 In May of 2010, we announced that, after reviewing the safety data from
the first cohort of three patients, the Safety Monitoring Board has approved
moving to the next cohort and transplantation of the fourth patient. The first
cohort of patients received five injections of the Company's spinal cord stem
cells on one side of the spinal cord. The second cohort of three patients will
receive ten injections, five on each side of the cord.  The trial will
ultimately consist of up to 18 ALS patients, who will be examined at regular
intervals post-surgery, with final review of the data to come six months after
the last patient is treated.  To date, we have treated 7
patients.  It is still too early in the trials to make any
determination as to its level of success, if any.




On August
22, 2010, we filed our second IND with the FDA in connection with
our proposed Phase I clinical trials for chronic spinal cord
injury.  In October of 2010, we were notified that our IND for spinal
cord injury had been placed on clinical hold.  At the time, the FDA
provided us with specific comments, questions and recommendations for
modifications to our trial protocol as contained in our IND
application.  We anticipate the study, if approved and commenced, will
be a multi-site study in the U.S.





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 Cells from 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 as well as 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 our 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
we have focused our efforts on applications involving spinal cord stem cells. We
believe we have 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). Of these applications, we have commenced Phase I trials with
regard to ALS.





We intend
to treat both chronic and acute spinal cord injury with the same spinal cord
stem cells, utilizing the same injection devices we are using for
ALS.  The treatment for spinal cord injury will, however, likely only
involve a few injections as opposed to the fifteen injection dosage that is
ultimately planned for the ALS trial.  We, therefore, add to our
knowledge about the surgical route of entry for both the ALS patients and the
spinal cord injury patients with each patient we treat in the ALS
trial.





15




Small-molecule
Compounds





We have
performed tests on cultured neural stem cells as well as in animal models in
order to validate the performance of small molecule compounds for
hippocampal neurogenesis. As a result of those tests, we feel that our small
molecule compound may have an application with regard to the treatment of
depression.  We expect to file an IND to commence human safety trials
of our lead small molecule compound to treat major depression in early
2011.  In anticipation of filing the IND, we have contracted for a
production run of our compound using Good Manufacturing Practice (“GMP”) methods
which will be large enough to complete safety testing and Phase I clinical
trials.





In
July of 2009, the U.S. Patent and Trademark Office (“USPTO”) issued the
patent covered by patent application 12/049,922, entitled “Use of Fused Nicotinamides to
Promote Neurogenesis,” which 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 our 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 internally, through the use of third party laboratories
and consulting companies under our direct supervision, and through collaboration
with academic institutes.





Operating
Strategy





We employ
an outsourcing strategy where we outsource all of our Good Laboratory
Practices (“GLP”) preclinical development activities and GMP manufacturing and
clinical development activities to contract research organizations (“CRO”) and
contract manufacturing organizations (“CMO”) as well as all non critical
corporate functions.  Manufacturing is also outsourced to
organizations with approved facilities and manufacturing
practices.  This outsource model allows us to better manage cash on
hand and eliminates non-vital expenditures.  It also allows for us to
operate with relatively fewer employees and lower fixed costs than that required
by our competitors.





Employees





As of
September 30, 2010, we had 8 full-time employees and 11 full time independent
contractors.  Of these full-time employees, 3 work on research and
development and 5 in administration. We also use the services of numerous
outside consultants in business and scientific matters.




Trends
& Outlook





Revenue





We
had no revenue for the year ended December 31, 2009 and three and nine month
periods ended September 30, 2010.  Our focus is now on: (i)
successfully managing the clinical trial for ALS commenced earlier this year,
(ii) preparing for the initiation of our second IND relating to Chronic Spinal
Cord injury, and (iii) preparing for the anticipated clinical trials relating to
our small molecule compound. 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 revenues.





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




As noted
in subsequent events, in November2010,Neuralstem was awarded
three Federal grants, totaling $733,438 through the Patient Protection and
Affordable Care Act, which supports investments in qualifying therapeutic
discovery projects. The funding will help us move our small molecule treatment
for depression into the clinic, and advance our ongoing trial to treat ALS with
our spinal cord stem cells. The third grant will go to developing our
IGF1-expressing neural stem cell therapy product, which could also target ALS.
In this program, we are focused on engineering our spinal cord neurons to
over-express molecules of interest, such as IGF1 (insulin-like growth factor 1).
Neuralstem expects to receive the funds in fourth quarter of 2010 and the first
quarter of 2011.  These grants are one-time only grants and not
recurring.




16




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.





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 applications. This approach allows us
to use the best expertise available for each task and permits staging new
research projects to fit available cash resources.





We have
also begun the process of forming a wholly owned subsidiary in the People’s
Republic of China.  We anticipate the formation will be complete
during the fourth quarter of 2010.  This subsidiary will primarily
conduct research with regard to stem cells.





Clinical
Trials





Stem
Cells





Our top
development priority is our ongoing clinical trial for ALS at Emory University
in Atlanta. We estimate that the Phase I trial for ALS will require 18 patients
at an estimated cost of $130,000 per patient. The per patient cost 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 decrease to $100,000 per month after a number of patients have been
treated.  To date, we have treated 7 patients.  It
is still too early in the trials to make any determination as to its level of
success, if any.





On August
22, 2010, we filed our second IND with the FDA. The IND is being filed in
connection with our proposed Phase I clinical trials for Chronic Spinal
Cord injury.  As of the date of this report, the FDA has not approved our
IND.  We anticipate the study will be a multi-site study in the
U.S.  In the event the study is approved by the FDA, we estimate that
the Phase I trial will require 12 to 18 patients at an estimated cost of
$130,000 per patient.  We expect trial spending to gradually decrease
to $100,000 per month after a number of patients have been treated.





Small
Molecule Compounds





We
believe we have successfully demonstrated proof of principle to support
advancement of our lead small molecule compound for the treatment of
depression.  We have completed planning for toxicology,
tumorigenicity, dosing rationale, and development of the clinical protocol. If
the remaining preclinical testing results are successful, we will file an IND.
We hope to begin clinical trials for this indication in early 2011. It is still
too early to determine the costs and expenses associated with such trial in the
event our IND is approved by the FDA.





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 a pre-clinical to clinical phase of
development.  Additionally, commencing with our fiscal year 2011, we
will no longer qualify as a smaller reporting company.  As a result,
we will incur additional costs and expenses with regard to our legal and
financial compliance, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.




17




We
anticipate that as a result of our outsource model, our G&A expenses related
to our core business will increase at a slower rate than that of similar
companies.




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 2 of 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.




Revenue
Recognition—We had no revenues for the year ended December 31, 2009 and
the three and nine months ended September 30, 2010 and 2009.  Our
revenues, to date, have been 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 three and nine months ended September 30, 2010 and
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.




18




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.





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.





RESULTS OF
OPERATIONS





Third
Quarter of 2010 Compared to the third Quarter of 2009





Three Months Ended September 30,2010
                      
                      
                      2009Revenues
                      
                      $
                      -
                      
                      
                      $
                      -Operating
      expenses
                      
                      
                      3,923,645
                      
                      
                      
                      2,522,582Operating
    loss
                      
                      
                      (3,923,645
                      )
                      
                      
                      (2,522,582
                      )Non-operating (expense)
      income
                      
                      
                      (6,594
                      )
                      
                      
                      (2,574,401
                      )Net loss
                      
                      $
                      (3,930,239
                      )
                      
                      $
                      (5,096,983
                      )





For the
third quarter of 2010, we reported a net loss of $3,930,239, or $0.09 per share,
compared to a net loss of 5,096,983, or $0.15 per share, for the three month
period ended September 30, 2010 and 2009, respectively.  The decrease
in net loss from year to year was due to decreases in non cash charges for
changes in the value of our warrant liability of  $2,591,480 offset by
operating expense increases of $1,401, 063. This increase in operating expense
was comprised of non-cash stock-based compensation expense and from increases in
R&D and legal fee expense.





Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future.





Revenue





We did
not have revenues for the three months ended September 30, 2010 and
2009.  .




Operating
Expenses





Operating
expenses totaled $3,923,645 and $2,522,582 for the three months ended September
30, 2010 and 2009, respectively.





ThreeMonthsEndedSept.30,2010
                        
                        
                        2009Operating
      ExpensesResearch &
      development
                        
                        $
                        2,112,299
                        
                        
                        $
                        1,308,565General, selling &
      administrative expense
                        
                        
                        1,769,013
                        
                        
                        
                        1,191,480Depreciation and
      amortization
                        
                        
                        42,333
                        
                        
                        
                        22,537Total
    expense
                        
                        $
                        3,923,645
                        
                        
                        $
                        2,522,582




19




Research
and Development Expenses




Research
and development expenses totaled $2,112,299 and $1,308,565 for the three months
ended September 30, 2010 and 2009, respectively.  The increase of
$803,734 or 61% for the three months ended September 30, 2010 compared to the
same period in 2009 was primarily attributable to costs associated with the
continuing ALS clinical trials initiated in January of 2010, preclinical
research on our small molecule program and preparation for the spinal cord
injury trial.





General
and Administrative Expenses




General
and administrative expenses totaled $1,769,013 and $1,191,480 for the three
months ended September 30, 2010 and 2009, respectively.  The increase
of $577,533 or 48% for the three months ended September 30, 2010 compared to the
same period in 2009, was primarily attributable to increased legal expenses and
increased non-cash stock based compensation expenses.





Depreciation
and Amortization





Depreciation
and amortization expenses totaled $42,333 and $22,537 for the three months ended
September 30, 2010 and 2009, respectively.   The increase of
$19,796 or 88% for the three months ended September 30, 2010 compared to the
same period in 2009 was primarily attributable to fixed asset and patent filing
fee additions over the quarter.





Nonoperating
( expense) income




Nonoperating
expense totaled $6,594 for the three months ended September 30, 2010 and an
expense of $2,574,401 for the three months ended September 30, 2009. The
decrease in nonoperating expense was due to the Company’s warrant
accounting.





Three Months Ended September 30,2010
                              
                              
                              2009Nonoperating
      income:Interest
    income
                              
                              $
                              17,406
                              
                              
                              $
                              6,274Interest
      expense
                              
                              
                              (465
                              )
                              
                              
                              (194
                              )Warrant modification
      expense
                              
                              
                              -
                              
                              
                              
                              -Loss on change in fair value of
      warrant obligations
                              
                              
                              (23,535
                              )
                              
                              
                              (2,580,481
                              )Total nonoperating (expense)
      income
                              
                              $
                              (6,594
                              )
                              
                              $
                              (2,574,401
                              )





Interest
income totaled $17,406 and $6,274 for the three months ended September 30, 2010
and 2009 respectively.  The increase for the three months ended
September 30, 2010 compared to the same period in 2009 was attributable to
higher cash balances.




20




Loss
from change in fair value of warrant obligations





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 status as if these warrants were treated as a
derivative liability since their date of issue.  We established a
long-term warrant liability of $6.6 million to recognize the fair value of such
warrants. In the three months ended September 30, 2010, the fair value of these
common stock purchase warrants increased because of an increase in the stock
price, resulting in an expense for the quarter.  In the third quarter
of 2010, ended September 30, 2010, we redeemed 8,000 of the warrants outstanding
at the beginning of the period which had price protection features. These
changes removed the price protection features.  These changes reduced
our derivative liability by $8,442 for the three month period ended September
30, 2010.  An increase in stock price resulted in an expense for the
three month period of $23,535 on the remaining outstanding warrants, and a
liability of $2,204,157 as of September 30, 2010.





Nine
Months Ending September 30, 2010 Compared to the Same Period of
2009





NineMonthsEndedSeptember30,2010
                        
                        
                        2009Revenues
                        
                        
                        -
                        
                        
                        
                        -Operating
      expenses
                        
                        $
                        11,735,597
                        
                        
                        $
                        8,158,789Operating
      loss
                        
                        
                        (11,735,597
                        )
                        
                        
                        (8,158,789
                        )Non-operating
      (expense) income
                        
                        
                        (3,912,943
                        )
                        
                        
                        778,038Net
      loss
                        
                        $
                        (15,648,540
                        )
                        
                        $
                        (7,380,751
                        )





For the
nine months ended September 30, 2010, we reported a net loss of $15,648,540 or
$0.37 per share, compared to a net loss of $7,380,751, or $0.22 per share, for
the comparable period in 2009.  The increase in net loss from year to
year was due to a non-cash  increase in warrant accounting charges of
$2,763,071, an increase of $524,819 in non cash stock-based compensation
expense, and increases in R&D and legal fee expense.





Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future.





Revenue





We did
not have revenues for the nine months ended September 30, 2010 and
2009.





Operating
Expenses





Operating
expenses totaled $11,735,597 and $8,158,789 for the nine months ended September
30, 2010 and 2009, respectively.





Nine Months Ended Sept. 30,2010
                                  
                                  
                                  2009Operating
      ExpensesResearch &
      development
                                  
                                  $
                                  6,625,939
                                  
                                  
                                  $
                                  4,195,366General,
      selling & administrative expense
                                  
                                  
                                  5,007,662
                                  
                                  
                                  
                                  3,898,666Depreciation
      and amortization
                                  
                                  
                                  101,996
                                  
                                  
                                  
                                  64,757Total
      expense
                                  
                                  $
                                  11,735,597
                                  
                                  
                                  $
                                  8,158,789


21





Research
and Development Expenses





Research
and development expenses totaled $6,625,939 and $4,195,366 for the nine months
ended September 30, 2010 and 2009, respectively.  The increase of
$2,430,573 or 58% for the nine months ended September 30, 2010 compared to the
same period in 2009 was primarily attributable to costs associated with the
continuing ALS clinical trials initiated in January of 2010, preclinical
research on our small molecule program and preparation for the spinal cord
injury trial.





General
and Administrative Expenses





General
and administrative expenses totaled $5,007,662 and $3,898,666 for the nine
months ended September 30, 2010 and 2009, respectively.  The increase
of $1,108,996 or 28% for the nine months ended September 30, 2010 compared to
the same period in 2009, was primarily attributable to increase in non-cash
stock based compensation expense of $465,727 and increased legal
expenses.





Depreciation
and Amortization





Depreciation
and amortization expenses totaled $101,996 and $64,757 for the nine months ended
September 30, 2010 and 2009, respectively.   The increase of
$37,239 or 58% for the nine months ended September 30, 2010 compared to the same
period in 2009 was primarily attributable to fixed asset and patent filing fee
additions over the period.





Nonoperating
(expense) income





Nonoperating
(expense) income totaled $(3,912,943) and $778,038 for the nine months
ended September 30, 2010 and 2009, respectively. The increase in nonoperating
expense was due to a $4,704,405 increase in expenses associated with the
Company’s warrant accounting.





Nine Months Ended September 30,2010
                    
                    
                    2009Nonoperating
      income:Interest
      income
                    
                    $
                    32,869
                    
                    
                    $
                    17,054Interest
      expense
                    
                    
                    (2,585
                    )
                    
                    
                    (194
                    )Warrant
      modification expense
                    
                    
                    (1,906,800
                    )
                    
                    
                    -(Loss)
      Gain on change in fair value of warrant obligations
                    
                    
                    (2,036,427
                    )
                    
                    
                    761,178Total
      nonoperating (expense) income
                    
                    $
                    (3,912,943
                    )
                    
                    $
                    778,038





Interest
income totaled $32,869 and $17,054 for the nine months ended September 30, 2010
and 2009 respectively.  The increase for the nine months ended
September 30, 2010 compared to the same period in 2009 was attributable to
higher cash balances and slightly higher interest rates.


22


(Loss)
gain from change in fair value of warrant obligations





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 status as if these warrants were treated as a
derivative liability since their date of issue.  We established a
long-term warrant liability of $6.6 million to recognize the fair value of such
warrants. In the nine months ended September 30, 2009, the fair value of these
common stock purchase warrants decreased.  In the nine months ended
September 30, 2010, we converted, redeemed or modified more than 80% of the
warrants outstanding at the beginning of the year which had price protection
features. These changes removed the price protection features.  These
changes reduced the Company’s derivative liability from $6,462,039 at December
31, 2009 to $2,204,157 at September 30, 2010.   An increase in the
Company’s stock price resulted in an expense for the period of $2,036,427 on the
remaining outstanding warrants.





Liquidity
and Capital Resources





Since our
inception, we have financed our operations through the sale of our securities,
the exercise of investor warrants, and to a lesser degree from grants. Our
currently monthly cash burn rate is approximately $800,000.  In the
event our second IND is accepted by the FDA and we elect to commence the trials,
we expect our monthly cash burn rate will increase to approximately
$900,000.  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 September 30, 2010 assuming we do not commence our
second IND.  We cannot assure you that we will be able to secure
additional financing after such time.  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.





Nine Months Ended September 30,2010
                  
                  
                  2009Cash and
      cash equivalents
                  
                  $
                  11,588,824
                  
                  
                  $
                  2,420,715Net
      cash used in operating activities
                  
                  $
                  (7,231,609
                  )
                  
                  $
                  (3,613,084
                  )Net
      cash used in investing activities
                  
                  $
                  (206,884
                  )
                  
                  $
                  (88,989
                  )Net
      cash provided by financing activities
                  
                  $
                  16,717,543
                  
                  
                  $
                  1,219,509





Total
cash and cash equivalents was $11,588,824 and $2,420,715 on September 30, 2010 and 2009
respectively.  The increasein our cash and cash equivalents of
$9,168,109 or 379% for the nine months ended September 30, 2010 compared to the
same period in 2009 was primarily attributable to the exercise of outstanding
warrants and the registered offering of our securities during the nine months
ending September 30, 2010.  As a result of the foregoing, we received
net proceeds of approximately $16.7 million.





Net
Cash Used in Operating Activities





We used
$7,231,609 and $3,613,084 of cash in our operating activities for the nine
months ended September 30, 2010 and 2009, respectively.  The increase
in our cash used of $3,618,525 or 100% for the nine months ended September 30,
2010 compared to the same period in 2009 was primarily attributed to the
initiation of our clinical trials and increase in legal expenses





Net
Cash Used in Investing Activities





We used
$206,884 and $88,989 of cash in connection with investment activities for the
nine months ended September 30, 2010 and 2009, respectively.  The
increase in our use of cash of $117,895 or 132% for the nine months ended
September 30, 2010 compared to the same period in 2009 was primarily attributed
to the purchase of equipment in the three quarters of the year, as well as
additional patents work.





Net
Cash Provided by Financing Activities





We raised
$16,717,543 and $1,219,509 in net proceeds from the issuance of our securities
during the nine months ended September 30, 2010 and 2009.





Listed
below are key financing transactions entered into by us during
2010:





·
            On
      January 29, 2010, we received gross proceeds of $1,000,000 as a result of
      the exercise of 800,000 $1.25 Series D warrant exercises. We issued the
      holder of the D warrants 400,000 additional warrants with an exercise
      price of $1.85 in conjunction with the exercise. The new warrants have a
      life of one year.


23





·
            In
      February of 2010, we called our $1.25 Series B Warrants. Gross exercise
      proceeds totaled $2,492,345.





·
            In
      March of 2010, holders of 2,699,400 Series C warrants exercised their
      option to purchase our common stock for 1.25 per share.  Gross
      proceeds totaled $3,374,250.  We issued the holders of the
      exercised C Warrants 2,699,400 additional warrants with an exercise price
      of $2.13 and a life of 5 years in conjunction with the
      exercise.





·
            The
      holder of 782,005 $1.10 placement agent warrants exercised them in March
      of 2010.  Gross consideration totaled $860,205. We issued the
      holder of the exercised placement agent warrants 782,005 additional
      warrants with an exercise price of $2.13 and a life of 5 years in
      conjunction with the exercise.





·
            In
      June of 2010, we sold approximately 3,571,436 units, through a registered
      direct offering.  Each unit consists of one common share and
      0.75 common share purchase warrant.   Each unit was sold
      for $2.80.  Each warrant has an exercise price of $3.25 per
      share, and is exercisable for a period of three years.  As a
      result of the offering, we received gross proceeds of approximately $10
      million.





·
            In
      the period January through September 2010, Series A warrant holders
      exercised an aggregate of 285,476 warrants.  The exercise price
      of the Series A warrants is $1.25 per share.  As a result of the
      exercises, we received gross proceeds of
  $356,845.





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.  In September of 2009, we met the conditions of the call
and as a result, we elected to exercise the call feature in February of
2010.  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 $2,492,345.





Future
Liquidity & Needs





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.  On October 8,
2010 we filed a shelf registration statement registering the sale of up to $50
million of our securities.  The registration statement was declared
effective on October 14, 2010.  We anticipate conducting financing in
the future based on our shelf registration statement when and if financing
opportunities arise.





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
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





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


24


ITEM
      4.
            CONTROLS
      AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act are recorded,
processed, summarized and reported, within the time period specified in the
SEC’s rules and forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), as appropriate, to allow timely decisions
regarding required disclosure.





Based on
management’s evaluation (with the participation of our CEO and 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.





PART
II


OTHER
INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS





As of the
date of this 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.


25


ITEM
      1A.
            RISK
      FACTORS





Investing
in our common stock involves a high degree of risk. We have described below a
number of uncertainties and risks which, in addition to uncertainties and risks
presented elsewhere in this Quarterly 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 Quarterly Report
should be considered carefully in evaluating our company and our business and
the value of our securities.





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 September 30, 2010, we have raised $91,830,749 of
capital and recorded accumulated losses totaling $83,215,371.   On
September 30, 2010, we had a working capital surplus of $7,962,767 and
stockholders’ equity of $8,615,378.  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 or the nine months ended September 30, 2010.





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.  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 our
securities.  As of September 30, 2010, we had cash and cash
equivalents on hand of $11,588,824.   Presently, we have a monthly
cash burn rate of approximately $800,000.  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
January 21, 2010 we commenced our Phase I clinical trials for ALS.  On
August 22, 2010, we filed our second IND with the FDA in connection with
our proposed Phase I clinical trials for chronic spinal cord
injury.  In October of 2010, we were notified that our IND for spinal
cord injury had been placed on clinical hold.  At the time, the FDA
provided us with specific comments, questions and recommendations for
modifications to our trial protocol as contained in our IND
application.  As a result of our ongoing, as well as proposed trials,
we will need additional capital in order to pay for expenses associated with
these trials as well as fund our general operations.





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.  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 our
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 issue our securities in
order to secure additional financing.  The issuance of additional
securities 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.


26


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 in 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 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
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 our 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
application.  We commenced the trials on January 21, 2010, with the
dosing of our first patient.  As of September 30, 2010, we have
treated 7  patients.  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 our
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, that 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.


27


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





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.


28





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:





·
            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 key employees for our continued operations and future
success.





We are
highly dependent on our chief executive officer, chief scientific officer and
outside consultants.  Although we have entered into employment and
consulting agreements with these parties, these agreements can be terminated at
anytime.  The loss of any of these key employee or consultant could
adversely affect our opportunities and materially harm our future
prospects.  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.


29


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.





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 “thinly” traded.





Our
common shares have historically been “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 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.





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, there is limited
liquidity in the market for our common shares. 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.


30


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.  Since the
enactment the Sarbanes-Oxley Act, we have been classified as a smaller reporting
company and as a result, we have been exempt from Section 404(b).  As
of June 30, 2010, the market value of our securities exceeded the threshold for
a smaller reporting company.  As a result, commencing in 2011, we will
be subject to Section 404(b).  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 September 30, 2010, we have issued and outstanding 46,182,178 common shares,
25,442,745 common shares reserved for issuance upon the exercise of current
outstanding options, warrants and convertible securities, 236,383 common shares
reserved for issuance of additional grants under our 2005 incentive stock plan,
464,525 shares reserved for issuance of grants under our 2007 stock plan, and
7,000,000 shares reserved for issuance of grants under our 2010 stock plan.
Accordingly, we will be entitled to issue up to 70,674,169 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, or securities convertible into 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.





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 USPTO. 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
including through our subsidiary, currently being formed, in the Peoples
Republic of China.  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.


31





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 January 21, 2010 we commenced our Phase I clinical trials
for ALS with the dosing of our first patient.  As of September 30, 2010, we
have treated 7 patients in the study.  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 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.





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, if any, will be materially
and negatively impacted.





ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





The
following information is given with regard to unregistered securities sold
during the nine months ended September 30, 2010.  The unregistered
securities were issued pursuant to section 4(2) of the Securities
Act:


32





·
            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.





·
            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; (iii) is callable by the
      company in the event our common stock trades above $5.00 and certain other
      conditions are met, and (iv) 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 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.





·
            On May 14, 2010, as consideration
      for amending a consulting agreement for investor relations and business
      development services, we issued Market Development Consulting Group, Inc.
      a common stock purchase warrant entitling the holder to purchase 200,000
      shares of common stock at $3.17 per share.  The warrant is
      exercisable immediately, shall expire on May 14, 2020, and is freely
      assignable in whole or in part.  The warrant is substantially
      similar to the consultant warrant issued on January 8,
      2010.





·
            In June of 2010, we issued
      Noble International Investment, Inc., D/B/A Noble Financial Capital
      Markets a warrant to purchase 250,001 common shares.  The
      warrant was issued as compensation for placement agent services which
      Noble International Investments, Inc., performed in connection with our
      $10 million registered direct offering of units.  The warrant is
      substantially the same as the investor warrant issued in the offering and
      has: (i) an exercise price of $3.25, and (ii) a term of three
      years.





·
            On October 1, 2010 we granted a
      consultant warrants to purchase 100,000 shares at a price of
      $2.44.  The warrants are fully vested and have a cashless
      exercise provision.  The warrants expire on October 1,
      2017.





ITEM
      3.
            DEFAULT
      UPON SENIOR SECURITIES





None





ITEM
      4.
            (REMOVED
      AND RESERVED)





None


33





ITEM
      5.
            OTHER
      INFORMATION





2009
Long-Term Incentive Awards Grant





On
November 11, 2010, our Compensation Committee (“Committee”) approved the
following awards:





AwardName
                            
                            Position
                            
                            Percentage of
                              Base Salary
                            
                            
                            No. of Restricted
                              StockUnits(1)
                            
                            
                            No. of Stock
                              Options(2)Karl
      Johe
                            
                            Chairman
      & Chief
                              Science
      Officer
                            
                            
                            150
                            %
                            
                            
                            143,247
                            
                            
                            
                            272,909Richard
      Garr
                            
                            Chief
      Executive
                              Officer/General
      Counsel
                            
                            
                            150
                            %
                            
                            
                            138,122
                            
                            
                            
                            263,147John
      Conron
                            
                            Chief
      Financial
                              Officer
                            
                            
                            68
                            %
                            
                            
                            34,615
                            
                            
                            
                            65,948





(1)
            The
      Restricted Stock Units vest quarterly over 3 years and cannot be sold for
      5 years unless the employee ceases to be employed by the Company or there
      is a change in control.


(2)
            The
      Stock Options have an exercise price of $2.21, vest quarterly over 3
      years, have a term of 10 years and vest immediately upon a change in
      control.  .





Amendment
to Executive Compensation Program





On
November 15, 2010, the Committee approved an amendment of our executive
compensation program in order to better achieve the following four primary
objectives:





·
            Ensure
      base pay is competitive for the role or job to be performed and to retain
      the executive for succession planning while providing reasonable and
      responsible pay arrangements in order to maintain a sustainable cost
      framework.





·
            Recognize
      performance of annual goals and milestones achieved through annual
      incentives.





·
            Reward
      achievement of long-term goals and enhancement of shareholder wealth
      through the long-term incentive
program.





·
            Provide
      a cost effective but competitive benefits package that promotes a positive
      work environment fostering teamwork among and high morale within the
      executive team.





In order
to achieve these objectives, executive compensation shall be comprised
of:





·
            Base
      salary: Compensation for ongoing performance throughout the
      year.





·
            Annual
      incentive awards: Awarded to recognize and reward performance, in the
      context of individual, team and Company performance, in the fiscal year
      just ended.





·
            Long-term
      incentive awards: Equity compensation to provide an incentive to manage
      the Company from the perspective of an owner with an equity stake in the
      business.





·
            Other
      benefits: Employee benefit plans in which executives and all employees
      participate.





·
            Severance
      and change in control benefits: Remuneration paid to executives in the
      event of a change in control of the Company or involuntary employment
      termination.





Base
Salary





As of
November 15, 2010, no changes were made to any of the executives’ base
salaries.  We anticipate that the Committee will review base salaries
during the first quarter of 2011 and make any adjustments, as it deems
necessary, to achieve the objectives of our executive compensation program at
such time.


34


Annual
Incentive Awards





Annual
incentive awards are awarded on a discretionary basis usually following our
fiscal year-end.   The Committee established the following annual
incentive cash bonus targets:





Name
                            
                            Position
                            
                            Percentage of
                              Base SalaryKarl
      Johe
                            
                            Chairman
      & Chief Science Officer
                            
                            
                            60
                            %Richard
      Garr
                            
                            Chief
      Executive Officer/General Counsel
                            
                            
                            60
                            %John
      Conron
                            
                            Chief
      Financial Officer
                            
                            
                            25
                            %





Long-term
incentive awards





Long-term
incentive awards, in the form of stock option grants and restricted stock
grants, encourage employee ownership in Neuralstem, link pay with performance
and align interests of stockholders and employees.  The Committee
established the following Long-term incentive awards targets:





Name
                            
                            Position
                            
                            Percentage of
                              Base SalaryKarl
      Johe
                            
                            Chairman
      & Chief Science Officer
                            
                            
                            200
                            %Richard
      Garr
                            
                            Chief
      Executive Officer/General Counsel
                            
                            
                            200
                            %John
      Conron
                            
                            Chief
      Financial Officer
                            
                            
                            90
                            %





All
long-term incentive awards will be divided equally between restricted stock
grants and common stock option grants.  The awards will vest quarterly
over three years and have a ten year term.  The awards will be made
pursuant to our incentive stock option plans and contain any other rights and
restrictions as allowed under such plans and as determined by the plan
administrator and our board to be appropriate, including provisions for
accelerated vesting in the event of a change in control.





Other
benefits





As of
November 15, 2010, no changes were made to any of the executives’ other benefits
such as automobile reimbursement or health insurance.





Amendment
to Outside Director Compensation Plan





On
November 15, 2010, the Committee amended our outside director compensation plan
effective January 1, 2010.  Under our amended plan, each eligible
director shall receive:





Option
Grants





First
Year Grant.  Upon joining the
board, individual will receive a restricted stock grant equal to 25,000. The
restricted shares shall vest as follows: (i) 12,500 shall vest on the one month
anniversary of joining the Board; and (ii) 12,500 shall vest quarterly over a
one year period commencing on the date such Director joins the Board. All
current eligible directors will receive, in addition to their Annual Grant,
15,000 shares of restricted stock;





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





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


35





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 incentive stock option plans, or as directed by the Board of
Directors.





All
restricted stock grants will contain a restriction prohibiting the sale of the
shares until the earlier of 5 years from the Grant Date, until such time as the
director ceases to provide services to the company, or upon a change in
control.





Cash
Compensation





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





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.





Meeting
Fees.  Each director shall receive a meeting fee equal to: (i) $1,500
for in person attendance, and (ii) $750 for telephonic attendance.





ITEM
      6.
            EXHIBITS





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





SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed by the undersigned hereunto duly
authorized.





NEURALSTEM,
      INC.Date: 
      November 15, 2010
              
              /s/ I. Richard GarrChief
      Executive Officer/s/ John ConronChief
      Financial Officer(Principal
      Accounting Officer)


36





INDEX
TO EXHIBITS




IncorporatedbyReferenceExhibit
                                                            No.
                                                          
                                                          Description
                                                          
                                                          Filed
                                                            Herewith
                                                          
                                                          Form
                                                          
                                                          Exhibit
                                                            No.
                                                          
                                                          File No.
                                                          
                                                          Filing Date1.01
                                                          
                                                          Form of Placement Agent Agreement
      dated June 28, 2010
                                                          
                                                          
                                                          
                                                          8-K
                                                          
                                                          1.01
                                                          
                                                          001-33672
                                                          
                                                          6/29/101.02
                                                          
                                                          Form of Amendment to Placement
      Agent Agreement dated June 28, 2010
                                                          
                                                          
                                                          
                                                          8-K
                                                          
                                                          1.02
                                                          
                                                          001-33672
                                                          
                                                          6/29/103.01(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
                                                          
                                                          3/16/07
  37
  4.11
                                                          
                                                          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
                                                          
                                                          8/14/074.13
                                                          
                                                          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 andCJ 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
                                                          
                                                          
                                                          
                                                          10-K
                                                          
                                                          4.19
                                                          
                                                          001-33672
                                                          
                                                          3/31/104.20
                                                          
                                                          Form of Consultant Warrant Issued
      January 8, 2010
                                                          
                                                          
                                                          
                                                          10-K
                                                          
                                                          4.20
                                                          
                                                          001-33672
                                                          
                                                          3/31/104.21
                                                          
                                                          Form of Replacement Warrant Issued
      January 29, 2010
                                                          
                                                          
                                                          
                                                          10-K
                                                          
                                                          4.21
                                                          
                                                          001-33672
                                                          
                                                          3/31/104.22
                                                          
                                                          Form of Replacement Warrant Issued
      March of 2010
                                                          
                                                          
                                                          
                                                          10-K
                                                          
                                                          4.22
                                                          
                                                          001-33672
                                                          
                                                          3/31/104.23
                                                          
                                                          Form of employee and consultant
      option grant
                                                          
                                                          
                                                          
                                                          10-K
                                                          
                                                          4.23
                                                          
                                                          001-33672
                                                          
                                                          3/31/104.24
                                                          
                                                          Form of Warrants dated June 29,
      2010
                                                          
                                                          
                                                          
                                                          8-K
                                                          
                                                          4.01
                                                          
                                                          001-33672
                                                          
                                                          6/29/104.25**
                                                          
                                                          Neuralstem 2010 Equity
      Compensation Plan
                                                          
                                                          
                                                          
                                                          8-K
                                                          
                                                          10.01
                                                          
                                                          001-33672
                                                          
                                                          7/14/104.26
                                                          
                                                          Form of Consultant Warrant issued
      October 1, 2009 and 2010
                                                          
                                                          
                                                          
                                                          S-3
                                                          
                                                          4.07
                                                          
                                                          333-169847
                                                          
                                                          10/8/1010.01**
                                                          
                                                          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
                                                          
                                                          3/31/09
  38
  10.03**
                                    
                                    Employment Agreement with Karl
      Johe dated January 1, 2007 and amended as of November 1,
      2005
                                    
                                    
                                    
                                    SB-2
                                    
                                    10.2
                                    
                                    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
                                    
                                    3/31/0910.05
                                    
                                    Form of Securities Purchase
      Agreement dated June 29, 2010
                                    
                                    
                                    
                                    8-K
                                    
                                    10.01
                                    
                                    001-33672
                                    
                                    6/29/1010.06
                                    
                                    Employment Agreement with Thomas
      Hazel, Ph.D dated August 11, 2008
                                    
                                    
                                    
                                    10-K/A
                                    
                                    10.05
                                    
                                    001-33672
                                    
                                    10/5/1014.01
                                    
                                    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
                                    
                                    6/6/0731.1
                                    
                                    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.


39