U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-Q




(Mark
one)




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




For
the Quarterly Period Ended June 30, 2009




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.   Yes x
    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) Yes  ̈  No x




As of
July 27 2009 there were 34,551,300 shares of common stock, $.01 par value,
issued and outstanding.





SUBSEQUENT
EVENTS





On June
4, 2009, we received notification from the NYSE AMEX that we were not in
compliance with the continued listing requirements contained in Section 1003(i)
of the NYSE AMEX company guide and that our common stock may be
delisted.  In order to maintain our listing, we were required to
submit a plan detailing how we intend to regain compliance.  On July
6, 2009, we submitted our plan.  If the NYSE AMEX does not accept our
plan, our common stock will be delisted.  In the event of delisting
from the NYSE AMEX, our common stock may commence trading on the
over-the-counter bulletin board or on the “pink sheets.” As of August 14,
2009, we have not received any additional correspondence from the NYSE
AMEX.  Please refer to the Part II section 1A of this report entitled
“Risk Factors” for a further discussion of the implication of
delisting.










Neuralstem,
Inc.




Table of
Contents




PagePART
      I -
                      FINANCIAL
      INFORMATION
                      
                      4Item
      1.
                      Financial
      Statements
                      
                      4Balance
      Sheets as of June 30, 2009 (Unaudited) and December 31,
    2008
                      
                      4Statements
      of Operations (Unaudited)Three
      months ended June 30, 2009 and 2008 and Six months ended June 30, 2009 and
      2008
                      
                      5Statements
      of Cash Flows (Unaudited)Six
      months ended June 30, 2009 and 2008
                      
                      6Statements of Changes in
      Stockholders' Equity (Deficit) (Unaudited)For the period from January 1,
      2009 through June 30, 2009
                      
                      7Notes
      to Financial Statements (Unaudited)
                      
                      8Item
      2.
                      Management's
      Discussion and Analysis of Financial Condition and Results
      of Operations
                      
                      15Item
      3.
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      24Item
      4.
                      Controls
      and Procedures
                      
                      24PART
      II
                      OTHER
      INFORMATION
                      
                      24Item
      1.
                      Legal
      Proceedings
                      
                      24Item
      1A.
                      Risk
      Factors
                      
                      25Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      36Item
      3.
                      Defaults
      Upon Senior Securities
                      
                      36Item
      4.
                      Submission
      of Matters to a Vote of Security Holders.
                      
                      36Item
      5.
                      Other
      Information
                      
                      37Item
      6.
                      Exhibits
                      
                      37




2




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 included
herein.  As used in this Quarterly Report, unless the context
otherwise requires, the words “we,” “us,”“our,” “the Company,” “Neuralstem” and
“Registrant” refer to Neuralstem, Inc. Also, any reference to “common shares,”
“Common Stock,” “common stock” or “Common Shares” refers to our $.01 par value
common stock.   The information contained herein is current as of
the date of this Quarterly Report (June 30, 2009), unless another date is
specified.





We
prepare our interim financial statements in accordance with United States
generally accepted accounting principles (“GAAP”).  Our financials and
results of operation for the three and six month period ended June 30, 2009 are
not necessarily indicative of our prospective financial condition and results of
operations for the pending full fiscal year ending December 31, 2009. 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”).





FORWARD
LOOKING STATEMENTS





In this
Quarterly Report we make a number of statements, referred to as “forward-looking
statements,” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), which
are intended to convey our expectations or predictions regarding the occurrence
of possible future events or the existence of trends and factors that may impact
our future plans and operating results. These forward-looking statements are
derived, in part, from various assumptions and analyses we have made in the
context of our current business plan and information currently available to use
and in light of our experience and perceptions of historical trends, current
conditions and expected future developments and other factors we believe are
appropriate in the circumstances. You can generally identify forward looking
statements through words and phrases such as“believe,” “expect,” “seek,”
“estimate,” “anticipate,” “intend,” “plan,” “budget,” “project,” “may likely
result,” “may be,” “may continue”  and other similar
expressions.





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




·
              the success of our research and
      development activities, the development of a viable commercial production,
      and the speed with which regulatory authorizations and product launches
      may be achieved;
 
 ·
              whether or not a market for our
      proposed product develops and, if a market develops, the rate at which it
      develops;
 
 ·
              our ability to successfully sell
      our products once developed;
 
 ·
              our ability to attract and retain
      qualified personnel to implement our business plan and corporate
      strategies;
 
 ·
              our ability to develop sales,
      marketing, and distribution
capabilities;
 
 ·
              our ability to obtain
      reimbursement from third party payers for the products that we intend to
      sell;
 
 ·
              our ability to fund our
      short-term and long-term financing
needs;
 
 ·
              changes in our business plan and
      corporate strategies; and
 
 ·
              other risks and uncertainties
      discussed in greater detail in the section of this report captioned
      “Risk
      Factors”




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


3





PART
I


FINANCIAL
INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





Neuralstem,
Inc.




Balance
Sheets





June 30,
                                      
                                      
                                      December 31,2009
                                      
                                      
                                      2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                      
                                      $
                                      3,218,321
                                      
                                      
                                      $
                                      4,903,279Prepaid
      expenses
                                      
                                      
                                      60,812
                                      
                                      
                                      
                                      136,287Total
      current assets
                                      
                                      
                                      3,279,133
                                      
                                      
                                      
                                      5,039,566Property
      and equipment, net
                                      
                                      
                                      144,917
                                      
                                      
                                      
                                      163,930Intangible
      assets, net
                                      
                                      
                                      249,132
                                      
                                      
                                      
                                      212,265Other
      assets
                                      
                                      
                                      58,472
                                      
                                      
                                      
                                      52,972Total
      assets
                                      
                                      $
                                      3,731,654
                                      
                                      
                                      $
                                      5,468,733LIABILITIES
      AND STOCKHOLDERS'  (DEFICIT) EQUITYCURRENT
      LIABILITIESAccounts
      payable, accrued expenses and salaries
                                      
                                      $
                                      1,901,789
                                      
                                      
                                      $
                                      1,265,488LONG-TERM
      LIABILITIESFair
      value of warrant obligations
                                      
                                      
                                      3,236,634
                                      
                                      
                                      
                                      -Total
      liabilities
                                      
                                      
                                      5,138,423
                                      
                                      
                                      
                                      1,265,488STOCKHOLDERS'
      (DEFICIT) EQUITYPreferred
      stock, 7,000,000 shares authorized,zero
      shares issued and outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, $0.01 par value; 150 million sharesauthorized,
      34,551,300 and 33,751,300 sharesoutstanding
      in 2009 and 2008, respectively.
                                      
                                      
                                      345,513
                                      
                                      
                                      
                                      337,513Additional
      paid-in capital
                                      
                                      
                                      57,733,955
                                      
                                      
                                      
                                      61,352,527Accumulated
      deficit
                                      
                                      
                                      (59,486,237
                                      )
                                      
                                      
                                      (57,486,795
                                      )Total
      stockholders' (deficit) equity
                                      
                                      
                                      (1,406,769
                                      )
                                      
                                      
                                      4,203,245Total
      liabilities and stockholders' equity
                                      
                                      $
                                      3,731,654
                                      
                                      
                                      $
                                      5,468,733




4




Neuralstem,
Inc.




Statements
of Operations


(Unaudited)





Three Months
                
                
                Six MonthsEnded June 30,
                
                
                Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses:Research
      and development costs
                
                
                1,452,793
                
                
                
                1,633,729
                
                
                
                2,886,802
                
                
                
                2,832,572General,
      selling and administrative expenses
                
                
                1,249,947
                
                
                
                1,318,708
                
                
                
                2,707,186
                
                
                
                2,401,877Depreciation
      and amortization
                
                
                21,424
                
                
                
                15,780
                
                
                
                42,220
                
                
                
                29,5372,724,164
                
                
                
                2,968,217
                
                
                
                5,636,208
                
                
                
                5,263,986Operating
      loss
                
                
                (2,724,164
                )
                
                
                (2,968,217
                )
                
                
                (5,636,208
                )
                
                
                (5,263,986
                )Nonoperating(expense)
      income:Interest
      income
                
                
                8,516
                
                
                
                10,545
                
                
                
                10,780
                
                
                
                31,862(Loss)gain
      from change in fair value of warrant obligations
                
                
                (473,799
                )
                
                
                -
                
                
                
                3,341,659
                
                
                
                -(465,283
                )
                
                
                10,545
                
                
                
                3,352,439
                
                
                
                31,862Net
      loss attributable to common shareholders
                
                $
                (3,189,447
                )
                
                $
                (2,957,672
                )
                
                $
                (2,283,769
                )
                
                $
                (5,232,124
                )Net
      loss per share, basic and diluted
                
                $
                (0.09
                )
                
                $
                (0.09
                )
                
                $
                (0.07
                )
                
                $
                (0.16
                )Weighted
      average common shares outstanding
                
                
                33,760,091
                
                
                
                32,109,858
                
                
                
                33,755,720
                
                
                
                31,936,365




5





Neuralstem,
Inc.





Statements
of Cash Flows


(Unaudited)





Six MonthsEnded June 30,2009
                  
                  
                  2008Cash
      Flows From Operating Activities:Net
      loss
                  
                  $
                  (2,283,769
                  )
                  
                  $
                  (5,232,124
                  )Adjustments
      to reconcile net loss tocash
      used in operating activities:Depreciation
      and amortization
                  
                  
                  42,220
                  
                  
                  
                  29,537Share
      based compensation expenses
                  
                  
                  2,348,656
                  
                  
                  
                  2,160,900Gain
      from change in fair value of warrant obligations
                  
                  
                  (3,341,659
                  )
                  
                  
                  0Changes
      in operating assets and liabilities:Prepaid
      expenses
                  
                  
                  75,475
                  
                  
                  
                  50,017Other
      assets
                  
                  
                  (5,500
                  )
                  
                  
                  (6,001
                  )Accounts
      payable, accrued    expenses and
    salaries
                  
                  
                  636,300
                  
                  
                  
                  (80,589
                  )Net
      cash used in operating activities
                  
                  
                  (2,528,277
                  )
                  
                  
                  (3,078,260
                  )Cash
      Flows From Investing Activities:Acquisition
      of intangible assets
                  
                  
                  (51,692
                  )
                  
                  
                  (22,456
                  )Purchase
      of property and equipment
                  
                  
                  (8,380
                  )
                  
                  
                  (61,221
                  )Net
      cash used in investing activities
                  
                  
                  (60,072
                  )
                  
                  
                  (83,677
                  )Cash
      Flows From Financing Activities:Issuance
      of common stock
                  
                  
                  903,391
                  
                  
                  
                  2,724,787Net
      cash provided by financing activities
                  
                  
                  903,391
                  
                  
                  
                  2,724,787Net
      decrease in cash and cash equivalents
                  
                  
                  (1,684,958
                  )
                  
                  
                  (437,150
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  4,903,279
                  
                  
                  
                  7,403,737Cash
      and cash equivalents, end of period
                  
                  $
                  3,218,321
                  
                  
                  $
                  6,966,587




6


Neuralstem,
Inc.


STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


For the
period from January 1, 2009 through June 30, 2009


(Unaudited)





TotalCommon
                  
                  
                  Common
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  Stockholders'Stock
                  
                  
                  Stock
                  
                  
                  Paid-In
                  
                  
                  Accumulated
                  
                  
                  EquityShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  (Deficit)Balance
      at January 1, 2009
                  
                  
                  33,751,300
                  
                  
                  $
                  337,513
                  
                  
                  $
                  61,352,527
                  
                  
                  $
                  (57,486,795
                  )
                  
                  $
                  4,203,245Cumulative
      effect of reclassification of warrants under EITF 07-5
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (6,862,620
                  )
                  
                  
                  284,327
                  
                  
                  
                  (6,578,293
                  )Balance,
      January 1, 2009, as adjusted
                  
                  
                  33,751,300
                  
                  
                  $
                  337,513
                  
                  
                  
                  54,489,907
                  
                  
                  
                  (57,202,468
                  )
                  
                  
                  (2,375,048
                  )Share
      based payment - employee compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,348,656
                  
                  
                  
                  
                  
                  
                  
                  2,348,656Issuance
      of common stock through Private Placement ($1.25 per share), net of
      financing costs of $96,608.
                  
                  
                  800,000
                  
                  
                  
                  8,000
                  
                  
                  
                  895,392
                  
                  
                  
                  
                  
                  
                  
                  903,392Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,283,769
                  )
                  
                  
                  (2,283,769
                  )Balance
      at June 30, 2009
                  
                  
                  34,551,300
                  
                  
                  $
                  345,513
                  
                  
                  $
                  57,733,955
                  
                  
                  $
                  (59,486,237
                  )
                  
                  $
                  (1,406,769
                  )




7




NEURALSTEM,
INC.


NOTES
TO (UNAUDITED) FINANCIAL STATEMENTS




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, 2008.  Further, in connection with
preparation of the financial statements and in accordance with the recently
issued Statement of Financial Accounting Standards No. 165 “Subsequent Events”
(SFAS 165), the Company evaluated subsequent events after the balance sheet date
through August 14, 2009.  See note 6 for a discussion of subsequent
events.




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 generates limited amounts of cash which will not be
sufficient to meet all its future capital requirements and research and
development efforts. 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 and access to funds that we will not require additional debt or
equity financing during 2009.




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 the SEC’s Staff Accounting
Bulletin (SAB) No. 101,Revenue Recognition in Financial Statements as amended by SAB 104.  Our revenue is
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
loss per common share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share adjusts basic loss per share for the potentially dilutive effects
of shares issuable under our stock option plan, using the treasury stock method.
All of the Company’s options and warrants, which are common stock equivalents,
have been excluded from the calculation of diluted loss per share, as their
effect would have been anti-dilutive.





Share Based
Payments





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


8




During
the six months ended June 30, 2009, we granted 246,000 options, and in the
similar period ended June 30, 2008, we granted 5,370,000 options. We recorded
related compensation expenses as our options vest in accordance with the
Statement of Financial Accounting Standards (SFAS) 123(R),Share-Based
Payment.   We recognized $1,149,952 and $1,066,362 in share-based
compensation expense during the three months ended June 30, 2009 and 2008,
respectively, from the vesting of stock options or warrants. We recognized
$2,348,656 and $2,160,900 in share-based compensation expense during the six
months ended June 30, 2009 and 2008, respectively, from the vesting of stock
options or warrants.




A summary
of stock option activity during the six months ended June 30, 2009 and related
information is included in the table below:




Weighted-AverageWeighted-
                  
                  
                  RemainingAverage
                  
                  
                  Contractual
                  
                  
                  AggregateNumber
                  
                  
                  Exercise
                  
                  
                  Life (in
                  
                  
                  Intrinsicof Options
                  
                  
                  Price
                  
                  
                  years)
                  
                  
                  ValueOutstanding
      at January 1, 2009
                  
                  
                  8,750,659
                  
                  
                  $
                  2.55
                  
                  
                  
                  8.2
                  
                  
                  $
                  -Granted
                  
                  
                  246,000
                  
                  
                  
                  1.71
                  
                  
                  
                  5.4
                  
                  
                  
                  -Exercised
                  
                  
                  -Forfeited
                  
                  
                  -Outstanding
      at June 30, 2009
                  
                  
                  8,996,659
                  
                  
                  $
                  2.53
                  
                  
                  
                  7.6
                  
                  
                  $
                  1,296,000Exercisable
      at June 30, 2009
                  
                  
                  4,349,659
                  
                  
                  $
                  2.08
                  
                  
                  
                  7.2
                  
                  
                  $
                  972,000




Share-based
compensation expense included in the statements of operations for the three
months and six months ended June 30, 2009 and 2008 was as
follows:





Three Months Ended June 30,2009
                  
                  
                  2008Research
      and development costs
                  
                  $
                  740,201
                  
                  
                  $
                  696,661General,
      selling and administrative expenses
                  
                  
                  409,751
                  
                  
                  
                  369,701Total
                  
                  $
                  1,149,952
                  
                  
                  $
                  1,066,362




Six Months Ended June 30,2009
                  
                  
                  2008Research
      and development costs
                  
                  $
                  1,480,402
                  
                  
                  $
                  1,448,675General,
      selling and administrative expenses
                  
                  
                  868,254
                  
                  
                  
                  712,225Total
                  
                  $
                  2,348,656
                  
                  
                  $
                  2,160,900




9




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




Weighted-Weighted-
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateNumber
                
                
                Exercise
                
                
                Contractual
                
                
                Intrinsicof Warrants
                
                
                Price
                
                
                Life (in years)
                
                
                ValueOutstanding
      at January 1, 2009
                
                
                13,079,762
                
                
                $
                2.27
                
                
                
                4.2
                
                
                
                -Granted
                
                
                2,440,000
                
                
                
                1.26
                
                
                
                2.0
                
                
                
                -Exercised
                
                
                -Forfeited
                
                
                -Outstanding
      at June 30, 2009
                
                
                15,519,762
                
                
                $
                2.11
                
                
                
                3.6
                
                
                
                -Exercisable
      at June 30, 2009
                
                
                12,519,762
                
                
                $
                1.89
                
                
                
                2.8
                
                
                
                -




Effective
January 1, 2009 we adopted the provisions of EITF 07-05, described
below.  As a result of adopting EITF 07-05, 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
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,547,762




As
such, effective January 1, 2009 we reclassified the fair value of these 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.
The fair value of these common stock purchase warrants declined to $3.3 million
as of June 30, 2009. We recognized a $3.3 million gain from the change in
fair value of these warrants for the six months ended June 30,
2009.


10




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:





June 30,
                  
                  January 1,2009
                  
                  2009Annual
      dividend yield
                  
                  
                  —
                  
                  
                  
                  —Expected
      life (years)
                  
                  
                  .75-2.25
                  
                  
                  
                  1
      to 2.5Risk-free
      interest rate
                  
                  
                  0.56-1.11
                  %
                  
                  
                  0.4
                  %Expected
      volatility
                  
                  
                  82-115
                  %
                  
                  
                  86
                  %




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





Significant New Accounting
Pronouncements




In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) 162, “The Hierarchy of Generally
Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements. SFAS 162 was effective
November 15, 2008. The adoption of SFAS 162 did not have a material
impact on our financial position, results of operations or cash
flows.





In June
2008, the FASB ratified the consensus reached on EITF Issue No. 07-05, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" (Issue
07-05). This Issue provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock.
Issue 07-05 applies to any freestanding financial instrument or embedded feature
that has all the characteristics of a derivative under paragraphs 6-9 of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception under paragraph 11(a) of SFAS 133. Issue 07-05 also
applies to any freestanding financial instrument that is potentially settled in
an entity's own stock, regardless of whether the instrument has all the
characteristics of a derivative under paragraphs 6-9 of SFAS 133, for purposes
of determining whether the instrument is within the scope of EITF Issue 00-19,
"Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," (Issue 00-19) which provides accounting guidance for instruments
that are indexed to, and potentially settled in, the issuer's own stock. Issue
07-05 is effective for fiscal years beginning after December 15,
2008.  See Note 5 for a discussion of the effect of this standard,
that was adopted on January 1, 2009.


11





In May
2009, the FASB issued SFAS 165, “Subsequent
Events.”SFAS 165 requires the disclosure of the date through
which a company has evaluated subsequent events occurring after the balance
sheet date of the financial statements and whether this date is the date the
financial statements were issued or the date the financial statements were
available to be issued.  SFAS 165 is effective for financial
statements issued for interim or annual periods ending after June 15,
2009.  The implementation of SFAS 165 did not have a material impact
on our financial statements.  See note 6 for a discussion of
subsequent events.




In June
2009, the FASB issued SFAS 166, “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No.
140” (“SFAS 166”).  The Board’s objective in issuing SFAS 166
is to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets.  SFAS 166 must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited.   The Company does not
believe the adoption of SFAS 166 will have a material impact on the Company’s
financial statements.


In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”).  The Board’s objective in issuing SFAS
167 is to improve financial reporting by enterprises involved with variable
interest entities. SFAS 167 shall be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited.  The Company does not believe the adoption of SFAS 167
will have a material impact on the Company’s financial
statements.





In June
2009, the FASB issued SFAS 168 the FASB Accounting Standards Codificationand the Hierarchy of Generally
Accepted Accounting Principles “a replacement of FASB Statement No.
162” (“SFAS 168”).  SFAS 168 will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS 168, the Codification will supersede
all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative.  SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  Once the Codification is in effect, all of its content will
carry the same level of authority, effectively superseding SFAS
162.




3.  Fair
Value




In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements,"
(“SFAS 157”). SFAS 157 establishes a standard framework for measuring
fair value in generally accepted accounting principles, clarifies the definition
of "fair value" within that framework, and expands disclosures about the use of
fair value measurements. We adopted SFAS 157 in the first quarter of 2008 with
regard to all financial assets and liabilities in our financial statements going
forward, and, consistent with FASB Staff Position 157-2, "Effective Date of FASB Statement
No. 157," we have elected to adoption of SFAS 157 for non-financial
assets and liabilities not recognized or disclosed at fair value on a recurring
basis until the first quarter of 2009. The adoption of SFAS 157 had no
material impact on our financial statements.  The book value of our
nonfinancial assets approximated their fair values at June 30,
2009.




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.


12




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, defined by SFAS No. 157 and
directly related to the amount of subjectivity associated with the inputs to
fair valuation of these assets and liabilities, are as follows:





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





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





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





We carry
no investments classified as Level 2.





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




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





Fair value measurements at June 30, 2009 usingFair
                        Value on
                        Balance
                        Sheet
                      
                      
                      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
                      
                      $
                      3,218,321
                      
                      
                      $
                      3,218,321
                      
                      
                      $
                      -
                      
                      
                      $
                      -Liabilities:Fair
      value of warrant obligations
                      
                      $
                      3,236,634
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      3,236,634




The
following table is a reconciliation of the changes in the fair value of the
Company's warrant obligations, which have been classified in Level 3 in the fair
value hierarchy.


13




Three
                              
                              
                              Sixmonths
                              
                              
                              monthsended
                              
                              
                              endedJune 30,
                              
                              
                              June 30,2009
                              
                              
                              2009Fair
      value of warrant obligationsat
      beginning of period
                              
                              $
                              2,762,835
                              
                              
                              $
                              -Cumulative
      effect ofreclassification
      of warrantsunder
      EITF 07-5 at beginning of period
                              
                              
                              -
                              
                              
                              
                              6,578,293Unrealized
      loss (gain) included in thestatement
      of operations for period
                              
                              
                              473,799
                              
                              
                              
                              (3,341,659
                              )Issuances,
      extinguishmentsand
      reclassifications
                              
                              
                              -
                              
                              
                              
                              -Fair
      value of warrantobligations
      at end of period
                              
                              $
                              3,236,634
                              
                              
                              $
                              3,236,634





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





Note
4.   Stockholders’ Equity




During
the first six months of 2009, the Company granted 246,000 options on shares of
common stock to consultants as an incentive for these consultants’ continued
employment. The options vest in periods between issue date and one year. The
Company valued these options using the Black-Scholes option pricing model using
the following assumptions: exercise price of between $1.25 and $1.64, term of
two to three years, volatility rate of 73% to 74% and interest rates of
0.74% to 0.84%. The total value of these options will be expensed over the
vesting period. The Company began to record the expense related to these options
in the first quarter of 2009.





The
Company also completed a private placement of 800,000 common shares at $1.25 per
share increasing equity by approximately $1,000,000 in June 2009, less
approximately $97,000 in related placement and closing costs.





Note
5.  Change in Accounting Principle: Recharacterization of
Warrants




In June
2008, the FASB ratified the consensus reached on Emerging Issues Task Force
(EITF) Issue No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock.” (Issue
07-5).  Issue 07-05 clarifies the determination of whether an
instrument (or an embedded feature) is indexed to an entity’s own stock, which
would qualify as a scope exception under SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities.”


14


We
adopted Issue 07-05 as of January 1, 2009.  As is discussed in
Note 1 above, as of that date we had 8,547,762 warrants which were reassessed
under Issue 07-05. Because of certain price adjustment provisions contained in
the warrants, they were no longer deemed to be indexed to our stock and
therefore, no longer meet the scope exception of FAS 133.  Hence,
these warrants were determined to be derivatives and were reclassified from
equity to liabilities.  As a result of this change in accounting
principle, on January 1, 2009 we recorded these liabilities at their value of
$6,578,293.  At that date we also recorded a cumulative catch up
adjustment of $284,327 to reduce the accumulated deficit and a $6,862,620
decrease to additional paid-in capital.  The adjustment to the
accumulated deficit (the cumulative income effect of the accounting change) was
calculated for the decrease in the fair value of the warrants from the date of
their issuance through January 1, 2009.




These
warrant liabilities will be marked to market from January 1, 2009 going forward
resulting in the recognition of income or expense in our statement of operations
for changes in their fair value.   In the six months ended June
30, 2009 we recognized a gain from the change in the fair value of these warrant
obligations of $3,341,659.




Note
6. Subsequent Events





On June
4, 2009, NYSE Amex advised the Company that it does not comply with Section
1003(a)(i) of the Amex Company Guide.  On July 6, 2009, the Company
submitted a plan to resolve listing deficiencies and to regain compliance with
the NYSE Amex continued listing requirements within eighteen months. The Plan
will be reviewed by the exchange staff.  The Company would be subject
to periodic review to determine whether it is making progress consistent with
the plan.  If the Company has made a reasonable demonstration of an
ability to regain compliance with the continued listing standards within the
specified timeframe, the plan will be accepted.





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. The MD&A section 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
      2009.





•
            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: (i)  the first quarter of 2009 to 2008; (ii)
      the six month period ended June 30, 2009 and
  2008.





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




The
various sections of the 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.


15





OVERVIEW




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





We have
developed and we maintain a portfolio of patents and patent applications that
form the proprietary base for our research and development efforts in the area
of neural stem cell research.  We own or exclusively license four (4)
issued patents and thirteen (13) patent pending applications in the field of
regenerative medicine and related technologies. We believe our technology base,
in combination with our know-how, and collaborative projects with major research
institutions provides a competitive advantage and will facilitate the successful
development and commercialization of products for use in the treatment of a wide
array of neurodegenerative conditions and in regenerative repair of acute
disease.





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





All of
our research efforts to date have been at the level of basic research or in the
pre-clinical stage of development.  On December 18, 2008 we filed our first
Investigational New Drug Application (“IND”) with the U.S. Food and Drug
Administration (“FDA”) to begin a clinical trial to treat amyotrophic lateral
sclerosis (“ALS” or “Lou Gehrig’s Disease”). On February 20, 2009, the FDA
provided us with specific comments, questions and recommendations for
modification to the protocol submitted in our IND.  The trial is currently
on clinical hold. We are in the process of analyzing the notice and the FDA’s
comments and recommendations and in formulating a response thereto.





In
addition to our core stem cell tissue based technology we have begun developing
a small-molecule compound.  The Company has performed preliminary
in vitroand in vivotests on the compound
with regard to neurogenesis. In June the company received a notice of
allowance from the U.S. Patent and Trademark Office (USPTO) for a patent on four
new chemical entities that boost the generation of new neurons. Patent
application 12/049,922, entitled “Use of Fused Nicotinamides to Promote
Neurogenesis,” claims four chemical entities and any pharmaceutical composition
including them.





Technology





Our
technology is the ability to isolate human neural stem cells from most areas of
the developing human brain and spinal cord and our technology includes the
ability to grow them into physiologically relevant human neurons of all types.
Our two issued core patents entitled: (i)Isolation, Propagation,
and Directed Differentiation of Stem Cell from Embryonic and Adult Central
Nervous System of Mammals ; and (ii)In Vitro Generation of
Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem
Cell  contain claims which cover the process of deriving the
cells and the cells created from such process.





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





Our
technology also allows for cells to grow in cultured dishes, also known asin vitrogrowth, without
mutations or other adverse events that would compromise their
usefulness.


16





Research





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




TRENDS
& OUTLOOOK





Revenue:
Historically, our revenue was primarily derived from grant reimbursements,
licensing fees and  consulting fees. As our focus is now on
pre-clinical work in anticipation of entering clinical trials in 2009, we are
not concentrated on generating revenue.  Accordingly, we do not
anticipate realizing any revenue in the immediate future.





Long-term,
we anticipate our revenue will be derived primarily from licensing fees and the
sale of our cell therapy products. At present, we are in our pre-clinical stage
of development and as a result, we cannot accurately predict when or if we will
be able to produce a product for commercialization. Accordingly, we cannot
accurately estimate if or when we will begin generating revenue from such
sources.





Research &
Development Expense: Our research and development expenses consist
primarily of costs and expenses associated with pre-clinical research,
exclusively in the field of human neural stem cell therapies and regenerative
medicine, related to our clinical cell therapy candidates. These expenses
represent both pre-clinical development costs and costs associated with
non-clinical support activities such as quality control and regulatory
processes. The cost of our research and development personnel is the most
significant category of expense. However, we also incur expenses with third
parties, including license agreements, third-party contract services, sponsored
research programs and consulting expenses.





We do not
segregate research and development costs on a per project basis. Although we
have different areas of focus for our research, these areas are completely
intertwined and have not yet matured to the point where they are separate and
distinct projects. The intellectual property, scientists and other resources
dedicated to these efforts are not separately allocated to individual projects,
since our research is conducted on an integrated basis.





We expect
that research and development expenses will continue to increase, as funding
allows, in the foreseeable future as we add personnel, expand our pre-clinical
research (animal surgeries, manufacturing of cells, and in vitro
characterization of cells which includes testing and cell quality control),
begin clinical trial activities, increase our regulatory compliance
capabilities, and ultimately begin manufacturing.





The
amount of monetary increases stemming from increased personnel and expenses as
we move from pre-clinical to clinical stage is difficult to predict due to the
uncertainty inherent in the timing and extent of progress with regard to our
research programs and clinical trials. In addition, the results from our basic
research and pre-clinical trials, as well as the results of trials of similar
therapeutics underdevelopment by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology industry, or licensing the
technologies associated with these programs to third
parties.


17


On
December 18, 2008 we filed our first IND with the FDA to begin a clinical trial
to treat ALS or Lou Gehrig’s Disease.  On February 20, 2009, the FDA
provided us with specific comments, questions and recommendations for modifying
our protocol submitted in our IND.  As a result, the trial is on clinical
hold. We are in the process of analyzing the FDA’s comments and in
formatting a response.  We believe that it is not possible at this
stage to provide a meaningful estimate of the total cost to complete our ongoing
projects, including clinical trials, and bring any proposed products to market.
The use of human stem cells as a therapy is an emerging area of medicine, and it
is not known what clinical trials will be required by the FDA in order to gain
marketing approval. The costs to complete such clinical trials could vary
substantially depending upon the projects selected for development, the number
of clinical trials required and the number of patients needed for each study. At
a minimum, we estimate that a trial for an individual indication such as ALS
will require at least 10 to 12 patients at an estimated cost of $100,000 per
patient. It is possible that the completion of these studies could be delayed
for a variety of reasons, including difficulties in enrolling patients, delays
in manufacturing, incomplete or inconsistent data from the pre-clinical or
clinical trials, and difficulties evaluating the trial results. Any delay would
increase the cost of the trial, which would harm our operating results. Due to
these uncertainties, we cannot reasonably estimate the size, nature, nor timing
of the costs to complete, or the amount or timing of the net cash inflows, if
any, from our current activities. Until we obtain further relevant pre-clinical
and clinical data, we will not be able to estimate our future expenses related
to these programs or when, if ever, and to what extent, we will receive cash
inflows from resulting products.




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





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




CRITICAL
ACCOUNTING POLICIES





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Note 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.


18




Revenue
Recognition—our revenues, to date, has been derived primarily from
providing services as a subcontractor under federal grant programs and licensing
fees.  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 SFAS 144, "Accounting for Impairment of Disposal of
Long-Lived Assets," which established a "primary asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long lived asset to be held and
used. Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. During the period ended June 30, 2008 no impairment losses were
recognized.




Accounting for
Warrants–The
Company has adopted the provisions of EITF 07-05, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-05”). EITF 07-05 applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and to
any freestanding financial instruments that are potentially settled in an
entity’s own common stock.  As a result, certain of our warrants are
considered to be derivatives and must be valued using various assumptions as
they are recorded as liabilities.




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




Stock Based
Compensation—The Company accounts for equity instruments issued to
non-employees in accordance with EITF 96-18,“Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services.”  Accordingly, the estimated fair
value of the equity instrument is recorded on the earlier of the performance
commitment date or the date the services required are completed.





Beginning
in 2006, we adopted SFAS 123R “Share Based Payment” which
superseded APB Opinion No. 25.  SFAS 123R requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements.





RESULTS
OF OPERATIONS





Summary
Income Statement for the Three and Six Months Ended June 30, 2009 &
2008





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      expenses
                  
                  $
                  2,724,164
                  
                  
                  $
                  2,968,217
                  
                  
                  $
                  5,636,208
                  
                  
                  $
                  5,263,986Operating
      loss
                  
                  
                  (2,724,164
                  )
                  
                  
                  (2,968,217
                  )
                  
                  
                  (5,636,208
                  )
                  
                  
                  (5,263,986
                  )Non-operating
      income (expense)
                  
                  
                  (465,283
                  )
                  
                  
                  10,545
                  
                  
                  
                  3,352,439
                  
                  
                  
                  31,862Net
      income (loss)
                  
                  $
                  (3,189,447
                  )
                  
                  $
                  (2,957,672
                  )
                  
                  $
                  (2,283,769
                  )
                  
                  $
                  (5,232,124
                  )




19




For the
second quarter of 2009, the Company reported a net loss of $3,189,447, or $0.09
per share, compared to a net loss of $2,957,672 or $0.09 per share, for the
comparable 2008 period. The increase was caused by a non cash charge related to
a change in the way we account for certain warrants offset in part by reductions
in most other expense categories. Net loss attributable to common stockholders
for the first six months of 2009 was $2,283,769 or $0.07 per share, compared to
$5,232,124, or $0.16 per share, for the comparable period in 2008. The decrease
in net loss from year to year was due to a year to date gain in our warrant
accounting, partially offset by increases in non cash stock-based compensation
expense, R&D and legal fees.





Results
of Operations for the Three Months ending June 30, 2009 and 2008





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





We did
not have revenues for the three months ended June 30, 2009 and 2008,
respectively.


We do not
anticipate any revenues for 2009.





Operating
expenses totaled $2,724,164 and $2,968,217 for the three months ended
June 30, 2009 and 2008.  The decrease in operating expense of $244,053
was due to a decrease in R&D spending, and legal fees offset in part by an
increase in non-cash stock based compensation expense.





Research
and development expenses totaled $1,452,793 for the three months ended June 30,
2009 compared to $1,633,729 for the same period of 2008.  The
decrease of $180,936 or 11% for the three months ended June 30, 2009 compared to
the comparable period in 2008 was primarily attributable to the completion
of  the application to the FDA to move our tissue based products into
clinical trials in the first quarter of the year which significantly reduced
spending for contracted research.





General
and administrative expenses totaled $1,249,947 for the three months ended June
30, 2009 compared to $1,318,708  for the same period of
2008.  The decrease of $68,761 or 5% for the three months ended June
30, 2009 compared to the comparable period in 2008 was primarily attributable to
a reduction in legal expenses.





Depreciation
and amortization expenses totaled $21,424 for the three months ended June 30,
2009 compared to $15,780 for the same period of 2008.   The
increase of $5,644 or 36% for the three months ended June 30, 2009 compared to
the comparable period in 2008 was primarily attributable to fixed asset and
patent filing fee additions over the past year.




Nonoperating income
(expense) totaled ($465,283) and $10,545 for the three months ended June 30,
2009 and 2008, respectively.




Interest
income totaled $8,516 for the three months ended June 30, 2009 compared to
$10,545 for the same period of 2008. The decrease of $2,029 for the three months
ended June 30, 2009 compared to the comparable period in 2008 was attributable
to lower cash balances.


20





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 March 30, 2009, the fair value of these
common stock purchase warrants decreased because of a decrease in the stock
price, resulting in a gain for the quarter.  In the three months ended
June 30, 2009, the fair value of these common stock purchase warrants increased
to $3.2 million because of an increase in the stock price. We recognized a
$0.5 million non-cash expense from the change in fair value of these
warrants for the three months ended June 30, 2009.





Results
of Operations for the Six Months ending June 30, 2009 and 2008





The
company did not have revenues for the six months ended June 30, 2009 and 2008,
respectively.


We do not
anticipate any revenues for 2009.





Operating
expenses totaled $5,636,208 and $5,263,986 for the six months ended
June 30, 2009 and 2008.  About half of the increase of $372,222 for
the six months ended June 30, 2009 compared to the comparable period in 2008 was
attributable to an increase in non-cash stock compensation expense. Most of the
remainder was due to increased legal costs.





Research
and development expenses totaled $2,886,802 for the six months ended June 30,
2009 compared to $2,832,572 for the same period of 2008.  The
increase of $54,230 for the six months ended June 30, 2009 compared to the
comparable period in 2008 was primarily attributable to the costs of completing
the application to the FDA to move our tissue based products into clinical
trials and other operating expenses in the first quarter of this
year.





General
and administrative expenses totaled $2,707,186 for the six months ended June 30,
2009 compared to $2,401,877 for the same period of 2008.  The
increase of $305,309 or 13% for the six months ended June 30, 2009 compared to
the same period in 2008 was primarily attributable to increased litigation
expenses and an  increase in non-cash stock-based compensation
expense.





Depreciation
and amortization expenses totaled $42,220 for the six months ended June 30, 2009
compared to $29,537for the same period of 2008.   The increase of
$12,683 or 43% for the six months ended June 30, 2009 compared to the same
period in 2008 was primarily attributable to fixed asset and patent filing fee
additions over the past year.




Nonoperating (expense)
income totaled $3,341,439 and $31,862 for the six months ended June 30, 2009 and
2008, respectively.  The nonoperating income or expense are discussed
below.




Interest
income totaled $10,780 for the six months ended June 30, 2009 compared to
$31,862 for the same period of 2008. The decrease of $21,082 for the six months
ended June 30, 2009 compared to the comparable period in 2008 was attributable
to lower cash balances and much reduced interest rates on short term
savings.





Gain
(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 classification as if these warrants were
treated as a derivative liability since their date of issue.  We
established a long-term warrant liability of $6.6 million to recognize the fair
value of such warrants. In the first quarter ended March 30, 2009, the fair
value of these common stock purchase warrants decreased because of a decrease in
the stock price, resulting in a gain for the quarter.  In the three
months ended June 30, 2009, the fair value of these common stock purchase
warrants increased to $3.2 million because of an increase in the stock price. We
recognized a $473,799 non-cash expense from the change in fair value of these
warrants for the three months ended June 30, 2009.  The net gain for
the six month period ended June 30, 2009 is $3,341,659.


21





LIQUIDITY
AND CAPITAL RESOURCES




Since our
inception, we have financed our operations through the private placement of our
securities, the exercise of investor warrants, and to a lesser degree from
research grants. Our currently monthly cash burn rate is approximately
$500,000.  We anticipate that our available cash will be sufficient to
finance most of our current activities for at least the next 6 months from June
30, 2009, although certain activities and related personnel may need to be
reduced.





On
December 18, 2008, we filed our first IND with the FDA.  In the event
the FDA approves our IND, we expect additional costs related to the trial this
year of about $350,000.  Assuming approval of the IND, we estimate
that we will have sufficient cash and cash equivalents to finance our current
operations, pre-clinical and clinical work for at least 6 months from June 30,
2009. We cannot assure you that public or private financing or grants will be
available on acceptable terms, if at all. Several factors will affect our
ability to raise additional funding, including, but not limited to, the
volatility of our common shares and general market conditions.




Six Months Ended June 30,2009
                              
                              
                              2008Cash and
      cash equivalents
                              
                              $
                              3,218,321
                              
                              
                              $
                              6,966,587Net
      cash used in operating activities
                              
                              $
                              (2,528,277
                              )
                              
                              $
                              (3,078,260
                              )Net
      cash used in investing activities
                              
                              $
                              (60,072
                              )
                              
                              $
                              (83,677
                              )Net
      cash provided by financing activities
                              
                              $
                              903,391
                              
                              
                              $
                              2,724,787




Total
cash and cash equivalents was $3,218,321 and $6,966,587 for the six months ended
June 30, 2009 and 2008, respectively.  The decrease in our cash and
cash equivalents of $3,748,266 or 54% for the six months ended June 30, 2009
compared to the same period in 2008 was primarily attributed to placement of our
common equity of $2,573,937 in the first quarter of 2008 vs. $1,000,000 in the
second quarter of 2009,  an increase of $300,000 in short term
financing by vendors, employees and other service providers in the first quarter
of 2009.   The Company also accelerated research and development
spending in the first quarter of 2009 to prepare for clinical trials and
experienced higher legal fees due to litigation.





Net
Cash Used in Operating Activities




In our
operating activities we used $2,528,277 for the six months ended June 30, 2009
compared to $3,078,260 for the same period in 2008. The decrease in our cash of
$549,983 or 18% for the six months ended June 30, 2009 compared to the same
period in 2008 was primarily attributable to  an increase of $300,000 in
short term financing by vendors, employees and other service providers in the
first quarter of 2009 and a reduction in spending particularly in
research.


22


Net
Cash Used in Investing Activities





In our
investment activities we used $60,072 for the six months ended June 30, 2009
compared to $86,677 for the same period of 2008. The decrease in our cash of
$23,605 or 31% for the six months ended June 30, 2009 compared to the same
period in 2008 was primarily attributable to the fact that we had a decrease in
our investment in property and equipment.





Net
Cash Provided by Financing Activities





Cash provided by financing activities
was $903,391for the six months ended June 30, 2009,compared to $2,724,787for the same period of
2008.





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





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


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


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





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 sale of our securities, exercise of
outstanding warrants and grants to fund our operations.





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




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


23




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).





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 the Quarterly Reports filed or submitted under the Exchange Act is
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 and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.




Based on
management’s evaluation (with the participation of our CEO and Chief Financial
Officer (CFO)), as of the end of the period covered by this report, our CEO and
CFO have concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)), are effective to provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in SEC rules and forms, and is accumulated and
communicated to management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.




Changes
in Internal Control over Financial Reporting




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





PART
II


OTHER
INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS





As of the
date of this Quarterly 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, Neuralstem filed suit
against StemCells, Inc., StemCells California, Inc. (collectively “StemCells”)
and Neurospheres Holding Ltd., (collectively StemCells and Neurospheres Holding
Ltd. are referred to as “Defendants”) 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.   StemCells filed a near “mirror image” lawsuit in
California the same day which was subsequently transferred to
Maryland.  See Civil Action No. 08-2664.  On May 13,
Neuralstem 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 Defendants 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. Discovery has started in this
case, but not trial date has been set.  This matter has also been
consolidated with Civil Action Nos. 06-1877 and 08-2664.  It is not
known when nor on what basis these matters will be concluded


24





On July 28, 2006, StemCells, Inc. and
StemCells California, Inc. (“StemCells”) 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 (Civil Action No.
06-1877).  The case was stayed for approximately two years pending
reexamination proceedings in the United States Patent & Trademark
Office.  The stay in this case was recently lifted and this matter was
consolidated with Civil Action Nos. 08-1173 and 08-2664.  Discovery
has started, but no trial date has been set.  It is not known when nor
on what basis this matter will be concluded





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.





The
occurrence of any event detailed in the following risk factors could result in a
substantial decrease in 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 June 30, 2009, we have raised $58,079,468 of
capital and recorded accumulated losses totaling $59,486,237. On June 30, 2009,
we had a working capital surplus of $1,377,344 and stockholders’ (deficit)
equity of $(1,406,769). Our net losses for the two most recent fiscal years have
been $11,830,798 and $7,063,272 for 2008 and 2007 respectively.  Our
net loss for the six month period ended June 30, 2009 was
$2,283,769.  We had no revenues for the six months ended June 30,
2009.





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





Although
we have generated some revenue in prior years, we have not generated any revenue
from the commercial sale of our proposed stem cell products. Since inception, we
have engaged in several related lines of business and have discontinued
operations in certain areas. For example, in 2002, we lost a material contract
with the Department of Defense and were forced to close our principal facility
and lay off almost all of our employees in an attempt to focus our development
strategy on stem cell technologies. This limited and changing history may not be
adequate to enable you to fully assess our current ability to develop and
commercialize our technologies and proposed products, obtain approval from the
FDA, achieve market acceptance of our proposed products, and respond to
competition. 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.


25





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 primarily come primarily from the sale of common
stock and the exercise of investor warrants.  As of June 30, 2009, we
had cash and cash equivalents on hand of $3,218,321.  Presently, we
have a monthly cash burn rate of approximately $500,000.  We will need
to raise additional capital to fund anticipated operating expenses and future
expansion. Among other things, external financing will be required to cover the
further development of our technologies and products, as well as general
operating costs. On December 18, 2008, we filed our first IND to commence
clinical trials on one of our proposed products.  On February 20,
2009, we received notification from the FDA that our IND was on clinical
hold pending our submission of additional information and modifications to our
IND protocols.  In the event the IND is approved, we expect
additional cost related to the trials to be phased in slowly over the following
12 months.





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





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





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





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





·
            the time and costs involved in
      obtaining regulatory
clearance;





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





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





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





·
            competing technological and
      market developments;





·
            market acceptance of our proposed
      products;





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





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





We cannot
assure you that financing whether from external sources or related parties will
be available if needed. If additional financing is not available when required
or is not available on acceptable terms, we may not be unable to fund operations
and planned growth, develop or enhance our technologies, take advantage of
business opportunities or respond to competitive market
pressures.  Also, we may have to delay, reduce the scope of, or
eliminate one or more of our research, development or commercialization
programs, which may materially harm our business, financial condition and
results of operations.


26





Additional
financing requirements could result in dilution to existing
stockholders.





We are
not able to finance our operations through the sale of our
products.  Accordingly, we will be required to secure additional
financing which may be dilutive to current shareholders.  We are
authorized to issue 150,000,000 shares of common stock and 7,000,000 shares of
preferred stock. Such securities may generally be issued without the approval or
consent of our stockholders.





Risks
Relating to Intellectual Property and Government Regulation





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





We rely
on our intellectual property, including issued and applied-for patents, as the
foundation of our business. Our intellectual property rights may come under
challenge.  No assurances can be given that, even though issued, our
current and potential future patents will survive such challenges. For example,
in 2005 our neural stem cell technology was challenged in the U.S. Patent and
Trademark Office. Although we prevailed in this particular matter upon
re-examination by the patent office, these cases are complex, lengthy,
expensive, and could potentially be adjudicated adversely to our interests,
removing the protection afforded by an issued patent. The viability of our
business would suffer if such patent protection were limited or eliminated.
Moreover, the costs associated with defending or settling intellectual property
claims would likely have a material adverse effect on our business and future
prospects. At present, there is litigation with StemCells, Inc. which is in its
initial stages and any likely outcome is difficult to predict.  For a
further description of pending litigation, see Item 1. of Part II to the
Quarterly Report entitled “Legal
Proceedings.”





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





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





Our
products may not receive regulatory approval.





The FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacturing and marketing of pharmaceutical products
through lengthy and detailed laboratory, pre-clinical and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and vary
substantially based upon the type, complexity and novelty of the proposed
product. On December 18, 2008, we submitted our first IND application to the
FDA.  On February 20, 2009 we received notification from the FDA that
our IND was on clinical hold pending our submission of additional
information and modifications to our IND protocols.  We cannot assure you
when or if such IND application will be granted, nor can we assure you that if
the IND is granted, that we will successfully complete any clinical trials in
connection with such IND. Further, we cannot yet accurately 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.


27


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 cGTP, regulations. These
regulatory and other constraints could prevent us from obtaining cells and other
components of our products in the quantity or of the quality needed for their
development or commercialization. These restrictions change from time to time
and may become more onerous. Additionally, we may not be able to identify or
develop reliable sources for the cells necessary for our potential products —
that is, sources that follow all state and federal laws and guidelines for cell
procurement. Certain components used to manufacture our stem and progenitor cell
product candidates will need to be manufactured in compliance with the FDA’s
Good Manufacturing Practices, or cGMP. Accordingly, we will need to enter into
supply agreements with companies that manufacture these components to cGMP
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 will be materially and negatively
impacted.


28


Risks
Relating to Our Business





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





We have
concentrated our research on stem cell technologies  Our ability to
generate revenue and operate profitably will depend on being able to develop
these technologies for human applications. These are emerging technologies and
have limited human applications. We cannot guarantee that we will be able to
develop our technologies or that such development will result in products with
any commercial utility or value. We anticipate that the commercial sale of such
products and royalty/licensing fees related to the technology, will be our
primary sources of revenues. If we are unable to develop the technologies,
investors will likely lose their entire investment.





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 December 18, 2008, we submitted our
first IND application to the FDA.   On February 20, 2009,
the FDA provided us with specific comments, questions andrecommendations for
modification to the protocol submitted in our IND.  The trial is on
clinical hold. We are in the process of analyzing the notice and the FDA’s
comments and recommendations.  Even if we eventually receive approval
from the FDA to commence clinical trials, the outcome of pre-clinical, clinical
and product testing of our products is uncertain.  If we are unable to
satisfactorily complete testing, or if such testing yields unsatisfactory
results, we will be unable to commercially produce its proposed products. Before
obtaining regulatory approvals for the commercial sale of any potential human
products, our products will be subjected to extensive pre-clinical and clinical
testing to demonstrate their safety and efficacy in humans. No assurances can be
given that the clinical trials will demonstrate the safety and efficacy of such
products at all, or to the extent necessary to obtain appropriate regulatory
approvals, or that the testing of such products will be completed in a timely
manner, if at all, or without significant increases in costs, program delays or
both, all of which could harm our ability to generate revenues. In addition, our
proposed products may not prove to be more effective for treating disease or
injury than current therapies. Accordingly, we may have to delay or abandon
efforts to research, develop or obtain regulatory approval to market its
proposed products. Many companies involved in biotechnology research and
development have suffered significant setbacks in clinical trials, even after
promising results in earlier trials. The failure to adequately demonstrate the
safety and efficacy of a therapeutic product under development could delay or
prevent regulatory approval of the product and could harm our ability to
generate revenues, operate profitably or produce any return on an
investment.





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





Positive
results from pre-clinical studies should not be relied upon as evidence that
clinical trials will succeed. Even if our product candidates achieve positive
results in 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
reputation in the industry and in the investment community would likely be
significantly damaged, each such outcome would cause our stock price to decrease
significantly.





The
commencement of clinical testing of our potential product candidates may be
delayed.





The
commencement of clinical trials may be delayed for a variety of reasons,
including:


29





·
            delays in demonstrating
      sufficient safety and efficacy in order to obtain regulatory approval to
      commence clinical trials;





·
            delays in reaching agreement on
      acceptable terms with contract research organizations and clinical trial
      sites;





·
            delays in manufacturing
      quantities of a product candidate sufficient for clinical
      trials;





·
            delays in obtaining approval of
      an IND from the FDA or similar foreign
  approvals;





·
            delays in obtaining institutional
      review board approval to conduct a clinical trial at a prospective site;
      and





·
            insufficient financial
      resources.





In
addition, the commencement of clinical trials may be delayed due to insufficient
patient enrollment, which is a function of many factors, including the size of
the patient population, the nature of the protocol, the proximity of patients to
clinical sites, the availability of effective treatments for the relevant
disease, and the eligibility criteria for the clinical trial.  Delays
in the commencement of clinical testing of our product candidates could
significantly increase our product development costs and delay product
commercialization. In addition, many of the factors that may cause, or lead to,
a delay in the commencement of clinical trials may also ultimately lead to a
denial of regulatory approval of a product candidate.





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 if the clinical trials of any potential product candidate
are successfully initiated and completed, we will be able to submit a Biologics
License Application (“BLA”) to the FDA or that any BLA we submit will be
approved in a timely manner, if at all. If we are unable to submit a BLA with
respect to any future product candidate, or if any BLA we submit is not approved
by the FDA, we will be unable to commercialize that product. The FDA can and
does reject BLAs and requires additional clinical trials, even when product
candidates performed well or achieved favorable results in clinical trials. If
we fail to commercialize our product candidate, we may be unable to generate
sufficient revenues to attain profitability and our reputation in the industry
and in the investment community would likely be damaged, each of which would
cause our stock price to decrease.





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





The
manufacturing of 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.


30


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. For a further description of pending litigation, see Item
1. of Part II to the Quarterly Report entitled “Legal
Proceedings.”





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.  The Company 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. If we
are unable to realize significant profits from our potential product candidates,
its business would be materially harmed.





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:


31





·
            the clinical efficacy and safety
      of our proposed products;





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





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





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




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





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





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





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





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





In
addition, we anticipate growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing.  We anticipate the need for additional
management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel in
the areas of our present and planned activities, and there can be no assurance
that we will be able to continue to attract and retain the qualified personnel
necessary for the development our business. The failure to attract and retain
such personnel or to develop such expertise would adversely affect 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 $1,230,000 per
contract and the immediate vesting of all outstanding options and/or warrants
held by Messrs. Garr and Johe.





We
have no product liability insurance, which may leave us vulnerable to future
claims that we will be unable to satisfy.





The
testing, manufacturing, marketing and sale of human therapeutic products entails
an inherent risk of product liability claims, and we cannot assure you that
substantial product liability claims will not be asserted against us. We have no
product liability insurance. In the event we are forced to expend significant
funds on defending product liability actions, and in the event those funds come
from operating capital, we will be required to reduce its business activities,
which could lead to significant losses.


32





We
cannot assure you that adequate insurance coverage will be available in the
future on acceptable terms.





We have
limited commercial insurance policies. Any significant claim would have a
material adverse effect on its business, financial condition and results of
operations. Insurance availability, coverage terms and pricing continue to vary
with market conditions. We will endeavor to obtain appropriate insurance
coverage for insurable risks that we identify.  In the event a loss
occurs that is not covered, depending on the size of such loss, it could
materially affect our business plan or ability to operate.





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 enter into collaborations with third parties in order to
further develop the technology and products. In the event we are not able to
enter into such relationships in the future, our ability to 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. Also, we currently rely on
third parties to assist us with a substantial portion of our research and
development. The failure of any of these third parties may hinder our ability to
develop products in a timely fashion.





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. We currently have an agreement with Charles River
Laboratories International, Inc. (“Charles River”) for the manufacturing and
storage of our cells. In the event Charles River fails to provide suitable
cells, we would be forced to either manufacture the cells ourselves or seek
other third party vendors. 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.





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.





Risks
Relating to Our Common Stock





Our
common shares are sporadically or “thinly” traded.





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


33




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





Effective
January 1, 2009, we adopted the provisions of EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”).  As a result, we reclassified 8,547,762 of our issued and
outstanding common stock purchase warrants from equity to liability
status.  The adjustment also had the effect of reducing stockholder’s
equity by $2.8 million.  Due to such adjustment, we may no longer meet
the continued listing requirements of the NYSE AMEX with regard to stockholders
equity.   On June 4, 2009, as anticipated, we received notification
from the NYSE AMEX that we are not in compliance with continued listing
requirements contained in Section 1003(i) of the NYSE AMEX company
guide.  In order to maintain our listing on the NYSE AMEX, we were
required to submit a plan detailing how we intend to regain
compliance.  On July 6, 2009, we submitted our plan.  As of
the date of this report, we have not received any additional correspondence from
the NYSE AMEX.  If the NYSE AMEX makes the determination that does not
accept our plan and our common stock is no longer eligible for listing and is
delisted, trading in our common stock may be conducted inon the over-the-counter
bulletin board or on the “pink sheets.”  In such event, broker-dealers may
be less willing or able to sell and/or make a market in our common stock.
Moreover, such markets have historically been less liquid than the NYSE
AMEX.  Accordingly, an investor wouldinvestors will find it more difficult
to dispose of, or to obtain accurate quotations for the price of, our common
stock.





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





We
currently do not meet the continued listing requirements of the NYSE
AMEX.  If we are delisted, our stock will most likely commence trading
on the Over-the-Counter Bulletin Board or the Pink Sheets. In such case, a
stockholder likely would find it more difficult to trade our common stock or to
obtain accurate market quotations for it.  If our common stock is
delisted, it will become subject to the Securities and Exchange Commission’s
“penny stock rules,” which impose sales practice requirements on broker-dealers
that sell that common stock to persons other than established customers and
“accredited investors.” Application of this rule could make broker-dealers
unable or unwilling to sell our common stock and limit the ability of
stockholders to sell their common stock in the secondary market.





The
market price for our common shares is particularly volatile.





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


34





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





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





The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the SEC and the Public Company Accounting Oversight Board,
require changes in the corporate governance practices and financial reporting
standards for public companies. These new laws, rules and regulations, including
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to
internal control over financial reporting (“Section 404”), will materially
increase the Company's legal and financial compliance costs and make some
activities more time-consuming, burdensome and
expensive.  Additionally, in 2008 the SEC extended the compliance
period for non-accredited filers with regard to Section
404(b).  Unless further extended, we will be required to include
attestation reports in our annual report for year ending on December 31,
2009.  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 June
30, 2009, we have issued and outstanding 34,551,300 common shares, 24,516,421
common shares reserved for issuance upon the exercise of current outstanding
options and warrants (excluding options and warrants issued under our equity
compensation plans), 323,341 common shares reserved for issuance of additional
grants under our 2005 incentive stock plan, and 830,000 shares reserved for
issuance of grants under our 2007 stock plan. Accordingly, we will be entitled
to issue up to 89,778,938 additional common shares and 7,000,000 additional
preferred shares. Our board may generally issue those common and preferred
shares, or options or warrants to purchase those shares, without further
approval by our shareholders based upon such factors as our board of directors
may deem relevant at that time. Any preferred shares we may issue shall have
such rights, preferences, privileges and restrictions as may be designated from
time-to-time by our board, including preferential dividend rights, voting
rights, conversion rights, redemption rights and liquidation provisions. It is
likely that we will be required to issue a large amount of additional securities
to raise capital to further our development and marketing plans. It is also
likely that we will be required to issue a large amount of additional securities
to directors, officers, employees and consultants as compensatory grants in
connection with their services, both in the form of stand-alone grants or under
our various stock option plans, in order to attract and retain qualified
personnel. In the event of issuance, your proportionate ownership and voting
rights may be significantly decreased and the value of your investment
impacted.


35


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




We
incorporate by reference the information pertaining to unregistered sales of
equity securities as disclosed in our annual report file on Form 10-K for the
period ended December 31, 2008.  The following information is given
with regard to unregistered securities sold during the period covered by this
report that were not registered under the Securities Act and were not previously
included in a Current Report on Form 8-K.





·
            In
      January of 2009, we exchanged previously issued warrants to purchase
      50,000 common shares for options under our 2005 Stock Plan.  The
      warrants were originally issued on December 11, 2008 and have an exercise
      price of $2.75 per share.  The warrants expire on November 13,
      2013.  We exchanged the warrants for options have the same terms
      and duration.





·
            On January 12, 2009 we granted a
      consultant an option to purchase 100,000 common shares at a price per
      share of $1.64.  The option is 100% vested as of the grant date
      and has a term of 7 years.  The option was issued pursuant to
      our 2005 Stock Plan.





·
            On
      March 30, 2009, we granted a consultant an option to purchase 96,000
      common shares at a price per share of $1.25.  The option has a
      five year term and vests 100% vested on March 31,
  2009.





·
            On
      June 3, 2009, we granted a consultant, subject to board approval, an
      option to purchase 100,000 common shares at a price per share of
      $1.13.  The option vests as follows: (i) 25,000 shares shall be
      immediately exercisable on the grant date; and (ii) 25,000 share shall
      vest on each successive 6 month anniversary from the grant date so that
      the option will be 100% vested on the 18 month anniversary of the grant
      date.  The option has a term of 10 years and was issued pursuant
      to our 2005 Stock Plan.




ITEM
      3.
              DEFAULT
      UPON SENIOR SECURITIES




None


ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





We held
our 2009 Annual Meeting of Stockholders on July 2, 2009. At the meeting,
stockholders present or by proxy voted on the following matters:





1.  Election
of one Class II Director to serve until our 2010 annual meeting.





Votes For
                        
                        
                        Votes AbstainedScott
      Ogilvie
                        
                        
                        24,595,280
                        
                        
                        
                        223,423


36


2.  Ratification
of the appointment of Stegman & Company as the company’s independent
registered public accounting firm for 2009.




Votes For
                        
                        Votes Against
                        
                        Votes Abstained24,625,326
                        
                        21,904
                        
                        169,471
  ITEM
      5.
                          OTHER
      INFORMATION




None




ITEM
      6.
              EXHIBITS




The
exhibits listed in the accompanying index to exhibits are filed or incorporated
by reference as part of this Quarterly Report on 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: August
      14, 2009
            
            /s/ I. Richard GarrChief
      Executive Officer/s/ John ConronChief
      Financial Officer(Principal
      Accounting Officer)




INDEX
TO EXHIBITS


Incorporated by ReferenceExhibit
                                      No.
                                    
                                    Description
                                    
                                    Filed
                                      Herewith
                                    
                                    Form
                                    
                                    Exhibit
                                      No.
                                    
                                    File No.
                                    
                                    Filing Date1.01
                                    
                                    Form
      of Placement Agent Agreement between the Company and Midtown Partners
      & Co., LLC
                                    
                                    
                                    
                                    8-K
                                    
                                    1.01
                                    
                                    001-33672
                                    
                                    7/1/094.01
                                    
                                    Form
      of Series D, E and F Warrants
                                    
                                    
                                    
                                    8-K
                                    
                                    4.01
                                    
                                    001-33672
                                    
                                    7/1/094.02
                                    
                                    Form
      of Placement Agent Warrant
                                    
                                    
                                    
                                    8-K
                                    
                                    4.02
                                    
                                    001-33672
                                    
                                    7/1/0910.01
                                    
                                    Form
      of Securities Purchase Agreement
                                    
                                    
                                    
                                    8-K
                                    
                                    10.01
                                    
                                    001-33672
                                    
                                    7/1/09
 
 37
 
 31.1
                                
                                Certification
      of the Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                                
                                *31.2
                                
                                Certification
      of the Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                                
                                *32.1
                                
                                Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. §
1350
                                
                                *32.2
                                
                                Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. §
1350
                                
                                *
 38