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 September 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
October 5, 2009 there were 34,829,234 shares of common stock, $.01 par value,
issued and outstanding.





Neuralstem,
Inc.




Table of
Contents




PagePART
      I -
                      FINANCIAL
      INFORMATION
                      4Item
      1.
                      Financial
      Statements
                      4Balance
      Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
                      4Statements
      of Operations (Unaudited)Three
      months ended September 30, 2009 and 2008 and nine months ended September
      30, 2009 and 2008
                      5Statements
      of Cash Flows (Unaudited)nine
      months ended September 30, 2009 and 2008
                      6Statements of Changes in
      Stockholders' Equity (Deficit) (Unaudited)For the period from January 1,
      2009 through September 30, 2009
                      7Notes
      to Unaudited Financial Statements
                      8Item
      2.
                      Management's
      Discussion and Analysis of Financial Condition and Results
      of Operations
                      14Item
      3.
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      21Item
      4.
                      Controls
      and Procedures
                      21PART
      II
                      OTHER
      INFORMATION
                      22Item
      1.
                      Legal
      Proceedings
                      22Item
      1A.
                      Risk
      Factors
                      22Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      31Item
      3.
                      Defaults
      Upon Senior Securities
                      31Item
      4.
                      Submission
      of Matters to a Vote of Security Holders.
                      31Item
      5.
                      Other
      Information
                      31Item
      6.
                      Exhibits
                      31


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.  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” or “common stock” refers
to our $.01 par value common stock.   The information contained
herein is current as of the date of this Quarterly Report (September 30, 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 nine month period ended September 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





September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    2,420,715
                    
                    
                    $
                    4,903,279Prepaid
      expenses
                    
                    
                    160,204
                    
                    
                    
                    136,287Total
      current assets
                    
                    
                    2,580,919
                    
                    
                    
                    5,039,566Property
      and equipment, net
                    
                    
                    136,086
                    
                    
                    
                    163,930Intangible
      assets, net
                    
                    
                    264,342
                    
                    
                    
                    212,265Other
      assets
                    
                    
                    70,525
                    
                    
                    
                    52,972Total
      assets
                    
                    $
                    3,051,872
                    
                    
                    $
                    5,468,733LIABILITIES
      AND STOCKHOLDERS'  (DEFICIT) EQUITYCURRENT
      LIABILITIESAccounts
      payable, accrued expenses and salaries
                    
                    $
                    2,353,257
                    
                    
                    $
                    1,265,488LONG-TERM
      LIABILITIESFair
      value of warrant obligations
                    
                    
                    5,622,339
                    
                    
                    
                    -Total
      liabilities
                    
                    
                    7,975,596
                    
                    
                    
                    1,265,488STOCKHOLDERS'
      (DEFICIT) EQUITYPreferred
      stock, 7,000,000 shares authorized, zero shares issued and
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.01 par value; 150 million shares authorized, 34,829,234 and
      33,751,300 shares outstanding in 2009 and 2008
respectively
                    
                    
                    348,292
                    
                    
                    
                    337,513Additional
      paid-in capital
                    
                    
                    59,311,203
                    
                    
                    
                    61,352,527Accumulated
      deficit
                    
                    
                    (64,583,219
                    )
                    
                    
                    (57,486,795
                    )Total
      stockholders' (deficit) equity
                    
                    
                    (4,923,724
                    )
                    
                    
                    4,203,245Total
      liabilities and stockholders' (deficit) equity
                    
                    $
                    3,051,872
                    
                    
                    $
                    5,468,733


4




Neuralstem,
Inc.


Statements
of Operations


(Unaudited)





Three
      Months
                
                
                Nine
      MonthsEnded
      September 30,
                
                
                Ended
      September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses:Research
      and development costs
                
                
                1,308,565
                
                
                
                1,766,040
                
                
                
                4,195,366
                
                
                
                4,598,611General,
      selling and administrative expenses
                
                
                1,191,480
                
                
                
                1,400,795
                
                
                
                3,898,666
                
                
                
                3,802,673Depreciation
      and amortization
                
                
                22,537
                
                
                
                17,223
                
                
                
                64,757
                
                
                
                46,7602,522,582
                
                
                
                3,184,058
                
                
                
                8,158,789
                
                
                
                8,448,044Operating
      loss
                
                
                (2,522,582
                )
                
                
                (3,184,058
                )
                
                
                (8,158,789
                )
                
                
                (8,448,044
                )Nonoperating
      (expense) income:Interest
      income
                
                
                6,274
                
                
                
                6,101
                
                
                
                17,054
                
                
                
                37,963Interest
      expense
                
                
                (194
                )
                
                
                -
                
                
                
                (194
                )
                
                
                -(Loss)
      gain from change in fair value of warrant obligations
                
                
                (2,580,481
                )
                
                
                -
                
                
                
                761,178
                
                
                
                -(2,574,401
                )
                
                
                6,101
                
                
                
                778,038
                
                
                
                37,963Net
      loss attributable to common shareholders
                
                $
                (5,096,983
                )
                
                $
                (3,177,957
                )
                
                $
                (7,380,751
                )
                
                $
                (8,410,081
                )Net
      loss per share, basic and diluted
                
                $
                (0.15
                )
                
                $
                (0.10
                )
                
                $
                (0.22
                )
                
                $
                (0.26
                )Weighted
      average common shares outstanding, basic and diluted
                
                
                34,562,322
                
                
                
                32,151,300
                
                
                
                34,027,542
                
                
                
                32,008,533


5





Neuralstem,
Inc.


Statements
of Cash Flows


(Unaudited)





Nine
      MonthsEnded
      September 30,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (7,380,751
                )
                
                $
                (8,410,081
                )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                
                
                64,757
                
                
                
                46,760Share
      based compensation expenses
                
                
                3,417,790
                
                
                
                3,469,992Gain
      from change in fair value of warrant obligations
                
                
                (761,178
                )
                
                
                0Changes
      in operating assets and liabilities:Prepaid
      expenses
                
                
                (23,917
                )
                
                
                (81,047
                )Other
      assets
                
                
                (17,553
                )
                
                
                (11,175
                )Accounts
      payable and accrued expenses
                
                
                1,087,768
                
                
                
                254,109Net
      cash used in operating activities
                
                
                (3,613,084
                )
                
                
                (4,731,442
                )Cash
      flows from investing activities:Acquisition
      of intangible assets
                
                
                (75,576
                )
                
                
                (62,247
                )Purchase
      of property and equipment
                
                
                (13,413
                )
                
                
                (71,454
                )Net
      cash used in investing activities
                
                
                (88,989
                )
                
                
                (133,701
                )Cash
      flows From financing activities:Issuance
      of common stock
                
                
                1,219,509
                
                
                
                2,711,211Net
      cash provided by financing activities
                
                
                1,219,509
                
                
                
                2,711,211Net
      decrease in cash
                
                
                (2,482,564
                )
                
                
                (2,153,932
                )Cash
      and cash equivalents, beginning of period
                
                
                4,903,279
                
                
                
                7,403,737Cash
      and cash equivalents, end of period
                
                $
                2,420,715
                
                
                $
                5,249,805Cash
      paid for interest
                
                $
                194
                
                
                $
                0


6


Neuralstem,
Inc.


STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


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


(Unaudited)





TotalCommon
                        
                        
                        Common
                        
                        
                        Additional
                        
                        
                        
                        
                        
                        Stockholders'StockShares
                        
                        
                        StockAmount
                        
                        
                        Paid-InCapital
                        
                        
                        AccumulatedDeficit
                        
                        
                        Equity
                          (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 to liabilities
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,417,790
                        
                        
                        
                        
                        
                        
                        
                        3,417,790Issuance
      of common stock through Private Placement ($1.25 per share), net of
      financing costs of $96,608.
                        
                        
                        800,000
                        
                        
                        
                        8,000
                        
                        
                        
                        895,391
                        
                        
                        
                        
                        
                        
                        
                        903,391Issuance
      of common stock from warrants exercised ($1.25 per share), net of
      financing costs of $31,300.
                        
                        
                        277,934
                        
                        
                        
                        2,779
                        
                        
                        
                        508,115
                        
                        
                        
                        
                        
                        
                        
                        510,894Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (7,380,751
                        )
                        
                        
                        (7,380,751
                        )Balance
      at September 30, 2009
                        
                        
                        34,829,234
                        
                        
                        $
                        348,292
                        
                        
                        $
                        59,311,203
                        
                        
                        $
                        (64,583,219
                        )
                        
                        $
                        (4,923,724
                        )


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, the Company evaluated subsequent events
after the balance sheet date through November 16, 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 does not generate cash. The Company's management
does not know when this will change. The Company has expended and will continue
to expend substantial funds in the research, development and clinical and
pre-clinical testing of the Company's stem cell technologies and products with
the goal of ultimately obtaining approval from the United States Food and Drug
Administration ("FDA") to market and sell our products. We believe our long-term
cash position is inadequate to fund all of the costs associated with the full
range of testing and clinical trials required by the FDA for our core products.
Based on our current operating levels, we believe that we have sufficient levels
of cash and cash equivalents to fund operations into the first quarter of
2010.





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





Revenue
Recognition





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





Research and
Development




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




Loss per Common
Share




Basic
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.


8





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.




During
the nine months ended September 30, 2009, we granted 366,000 options, and in the
similar period ended September 30, 2008, we granted 5,600,000 options. We
recorded related compensation expenses as our options vest in accordance with
guidance issued by the FASB related to share based payments.  We recognized
$1,069,134 and $1,309,092 in share-based compensation expense during the three
months ended September 30, 2009 and 2008, respectively, from the vesting of
stock options or warrants. We recognized $3,417,790 and $3,469,992 in
share-based compensation expense during the nine months ended June 30, 2009 and
2008, respectively, from the vesting of stock options or warrants.




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





Number of
                                        Options
                                      
                                      
                                      Weighted-
                                        Average
                                        Exercise
                                        Price
                                      
                                      
                                      Weighted-
                                        Average
                                        Remaining
                                        Contractual
                                        Life
                                        (in years)
                                      
                                      
                                      Aggregate
                                        Intrinsic
                                        ValueOutstanding
      at January 1, 2009
                                      
                                      
                                      8,750,659
                                      
                                      
                                      $
                                      2.55
                                      
                                      
                                      
                                      8.2
                                      
                                      
                                      $Granted
                                      
                                      
                                      366,000
                                      
                                      
                                      
                                      1.31
                                      
                                      
                                      
                                      7.4
                                      
                                      
                                      $
                                      102,720Exercised
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      -Outstanding
      at September 30, 2009
                                      
                                      
                                      9,116,659
                                      
                                      
                                      $
                                      2.51
                                      
                                      
                                      
                                      7.4
                                      
                                      
                                      $
                                      2,700,720Exercisable
      at September 30, 2009
                                      
                                      
                                      5,071,159
                                      
                                      
                                      $
                                      1.88
                                      
                                      
                                      
                                      6.9
                                      
                                      
                                      $
                                      2,631,360





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





Three Months Ended Sept.
30,2009
                
                
                2008Research
      and development costs
                
                $
                703,300
                
                
                $
                817,171General,
      selling and administrative expenses
                
                
                365,834
                
                
                
                491,921Total
                
                $
                1,069,134
                
                
                $
                1,309,092





Nine Months Ended Sept. 30,2009
                
                
                2008Research
      and development costs
                
                $
                2,183,702
                
                
                $
                2,265,846General,
      selling and administrative expenses
                
                
                1,234,088
                
                
                
                1,204,146Total
                
                $
                3,417,790
                
                
                $
                3,469,992


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
                
                
                
                2.0
                
                
                
                -Granted
                
                
                2,440,000
                
                
                
                1.26
                
                
                
                2.8Exercised
                
                
                (277,934
                )
                
                
                1.25
                
                
                
                -Forfeited
                
                
                -Outstanding
      at September 30, 2009
                
                
                15,241,828
                
                
                $
                2.12
                
                
                
                2.0
                
                
                
                -Exercisable
      at September 30, 2009
                
                
                12,241,828
                
                
                $
                1.91
                
                
                
                2.0
                
                
                
                -





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





Strike
                      
                      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 the common
stock purchase warrants, which were outstanding at January 1, 2009, and which
have exercise price reset and anti-liquidation features, from equity to
liability status as if these warrants were treated as a derivative liability
since their date of issue.  On January 1, 2009, we reduced
additional paid-in capital by $6.9 million and decreased the beginning
retained deficit by $.3 million as a cumulative effect to establish a long-term
warrant liability of $6.6 million to recognize the fair value of such
warrants.  During the three months ended September 30, 2009, 277,934
warrants were exercised. The fair value of the common stock purchase warrants
which remained declined to $5.6 million as of September 30, 2009, and we
recognized a $0.76 million gain from the change in fair value of these
warrants for the nine months ended September 30, 2009, and a $2.6 million loss
for the three months ended September 30, 2009,





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




September
      30,
                  
                  
                  January
      1,2009
                  
                  
                  2009Annual
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life (years)
                  
                  
                  0.75-2.00
                  
                  
                  
                  1-2.5Risk
      free interest rate
                  
                  
                  0.18%-0.95
                  %
                  
                  
                  0.40
                  %Expected
      volatility
                  
                  
                  85%-97
                  %
                  
                  
                  86
                  %


10




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





Significant New Accounting
Pronouncements





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





In May
2009, the FASB issued new accounting guidance related to the accounting and
disclosures of subsequent events.  This guidance incorporates the
subsequent events guidance contained in the auditing standards literature into
authoritative accounting literature.  It also 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.  This guidance is effective
for financial statements issued for interim or annual periods ending after June
15, 2009.  We adopted this guidance upon its issuance and it had no
material impact on our financial statements.  The Company has
evaluated subsequent events for potential recognition and/or disclosure through
November 16, 2009, the date the consolidated financial statements included in
this Quarterly Report on Form 10-Q were issued.


In June
2009, the FASB issued new accounting guidance to improve financial reporting by
companies involved with variable interest entities and to provide more relevant
and reliable information to users of financial statements.  This
guidance is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited.  We adopted
this guidance upon is issuance and it had no 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 new accounting guidance related to fair value
measurements and related disclosures.  This new guidance establishes a
standard framework for measuring fair value in generally accepted accounting
principles, clarifies the definition of "fair value" within that framework, and
expands disclosures about the use of fair value measurements. We adopted this
new guidance in the first quarter of 2008 with regard to all financial assets
and liabilities in our financial statements going forward.  However,
the FASB deferred the effective date of this new guidance for one year as it
relates to fair value measurement requirements for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value on a
recurring basis.  We adopted these remaining provisions on January 1,
2009.  The adoption of this accounting guidance had no material impact
on our financial statements.


11




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




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





Level 1
      —
            
            Inputs
      are unadjusted, quoted prices in active markets for identical assets at
      the reporting date. Active markets are those in which transactions for the
      asset or liability occur in sufficient frequency and volume to provide
      pricing information on an ongoing basis.The
      fair valued assets we hold that are generally included in this category
      are money market securities where fair value is based on publicly quoted
      prices and included in cash equivalents.Level 2
      —
            
            Inputs
      are other than quoted prices included in Level 1, which are either
      directly or indirectly observable for the asset or liability through
      correlation with market data at the reporting date and for the duration of
      the instrument's anticipated life.We
      carry no investments classified as Level 2.Level 3
      —
            
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities and which
      reflect management's best estimate of what market participants would use
      in pricing the asset or liability at the reporting date. Consideration is
      given to the risk inherent in the valuation technique and the risk
      inherent in the inputs to the model.  Our warranty obligations
      are considered Level 3.




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





Fair value measurements at September 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
                    
                    $
                    2,420,715
                    
                    
                    $
                    2,420,715
                    
                    
                    $
                    -
                    
                    
                    $
                    -Liabilities:Fair
      value of warrant obligations
                    
                    
                    5,622,339
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,622,339





Three months
                    ended
                    September 30,
                    2009
                  
                  
                  Nine months
                    ended
                    September 30,
                    2009Fair
      value of warrant obligations at beginning of period
                  
                  $
                  3,236,634
                  
                  
                  $
                  -Cumulative
      effect of reclassification of warrants to liabilities at beginning
      period
                  
                  
                  -
                  
                  
                  
                  6,578,293Net
      loss (gain) for change in fair value included in the statement of
      operations for period
                  
                  
                  2,580,481
                  
                  
                  
                  (761,178
                  )Decrease
      in value from warrant exercises
                  
                  
                  (194,776
                  )
                  
                  
                  (194,776
                  )Fair
      value of warrant obligations at end of period
                  
                  $
                  5,622,339
                  
                  
                  $
                  5,622,339





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’ (Deficit) Equity





The
Company 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.  In
September 2009, several warrant holders exercised 277,934 warrants at $1.25 per
warrant increasing equity by approximately $347,000, less $31,300 in related
financing costs.





Note
5.  Change in Accounting Principle: Recharacterization of
Warrants





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


12





We
adopted the FASB guidance 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 the new guidance. Because of certain price adjustment provisions contained
in the warrants, they were no longer deemed to be indexed to our stock and
therefore, no longer meet the scope exception.  Hence, these warrants
were determined to be derivatives and were reclassified from equity to
liabilities.  As a result of this change in accounting principle, on
January 1, 2009 we recorded these liabilities at their value of
$6,578,293.  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 fair value from January 1, 2009 going
forward resulting in the recognition of gain or loss in our statement of
operations for changes in their fair value.   In the nine months
ended September 30, 2009 we recognized a gain from the change in the fair value
of these warrant obligations of $761,178.


13





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 consolidated
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.•
            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 third quarter of 2009 to 2008; (ii) the nine month
      period ended September 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 including the credit
      quality of our investment portfolio 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, particularly in
the “Risk Factors” in Part II, Item 1A of this Quarterly
Report.  Our actual results may differ materially.





OVERVIEW





Neuralstem
is focused on the development and commercialization of treatments for diseases
affecting the central nervous system (the brain and the spinal cord, or the
“CNS”).  Our primary development focus has been on identifying and
developing potential cell-based therapeutics utilizing our proprietary neural
stem cell based technologies which treat disease by replacing dead or
diseased  cells with new healthy cells.  In particular, we
have concentrated our research and devoted the majority of our efforts on
developing a neural stem cell  therapy for the treatment of
amyotrophic lateral sclerosis (“ALS” or “Lou Gehrig’s
Disease”).    To date, this research has all
been  pre-clinical.     On September 21, 2009
the U.S. Food and Drug Administration (FDA) approved our Investigational New
Drug (IND) application to commence a Phase I human trial for ALS.  As
a result, we anticipate that for the next 18 months, our primary focus will be
on our duties as the sponsor of this Phase I  clinical
trial.


14





In
addition to ALS, we are also working on the following indications for
our stem cells based therapies: Chronic Spinal Cord Injury,
Acute/subacute Spinal Cord Injury, Stroke, Epilepsy, Traumatic Brain Injury and
Huntington’s disease.  Even though we believe our stem cell based
technologies may be effective in the treatment of such diseases, we are still
involved in pre clinical work and testing for all of these
indications..





In June
of 2009 we received a notice of allowance from the U.S. Patent and Trademark
Office (USPTO) for a patent on our small molecule compounds. Patent application
12/049,922, entitled “Use of Fused Nicotinamides to Promote Neurogenesis,”
claims four chemical entities and any pharmaceutical composition including
them.  We believe the development of these compounds may lead to a new
class of drug with both neurogenic1 and neuroprotective2
properties.  Preliminary testing of a lead compound from this group in
animal models has lead us to chose  the treatment of depression as the
first indication to pursue.    Provided we are able to
secure  financing, in excess of that which will be required to
complete our current clinical trial for ALS, we anticipate conducting additional
preclinical research regarding this compound and the filing of an IND to
commence a Phase I trial to treat major depression by the end of
2011.  We also believe that our small molecule compounds may be
applicable to the treatment of such diseases as Anxiety, Schizophrenia,
Dementia, Alzheimer’s disease and Diabetic neuropathy.  Although we
believe our small molecule compound may be effective in the treatment of such
diseases, we are still at the  stage of creating proof of principal
pre clinical data for these other indications.





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





Revenue





We have
not derived any revenue or cash flows from the sale or commercialization of any
therapeutic products.   In prior periods, we derived some
revenues from grant reimbursements and licensing fees which we do not foresee
continuing.  As a result, we have incurred annual operating losses
since inception and expect to incur substantial operating losses in the future.
Therefore, we are dependent upon external financing.





Our focus
is now on initiating and successfully managing the clinical trial for
ALS.  We are also pursuing, to a lesser extent, pre-clinical studies
on other central nervous system indications for our cell based and small
molecule therapies in preparation for additional clinical trials. We are not
concentrated on generating revenue.  We do not anticipate realizing
any revenue in the near future.





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




Before we
can derive revenue or cash inflows from the commercialization of any of our
therapeutic product candidates, we will need to: (i) conduct substantial
testing and characterization of our proprietary cell types, (ii) undertake
preclinical and clinical testing for specific disease indications;
(iii) pursue required regulatory approvals. These steps are risky,
expensive and time consuming.


1   Promotes
the generation of new neurons.


2   Protects
neurons from apoptosis or degeneration.


15




Research
& Development Expenses




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




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




We expect
that research and development expenses will increase in the future, as funding
allows. To the extent that it is practical, we will continue to outsource much
of our efforts, including product manufacture, proof of principle and
preclinical testing, toxicology, tumorigenicity, dosing rationale, and
development of clinical protocol and IND packages. This approach allows the
Company to use the best expertise available for each task and keep its spending
inside available cash resources.   There are numerous factors
associated with the successful commercialization of any of our cell-based and
small molecule products, including future regulatory requirements and legal
restrictions on the testing and research of cell based products, many of which
cannot be determined with accuracy at this time given the stage of our
development and the novel nature of primary stem cell based technologies. The
regulatory pathways, both in the United States and internationally, are complex
and fluid given the novel and, in general, clinically unproven nature of stem
cell technologies. At this time, due to such uncertainties and inherent risks,
we cannot estimate in a meaningful way the duration of, or the costs to
complete, our R&D programs or whether, when or to what extent we will
generate revenues or cash inflows from the commercialization and sale of any of
our therapeutic product candidates or any non-therapeutic applications of our
cell-based technologies. Our future R&D expenses will depend in large part
on the availability of funding and on the determinations we make as to the
scientific and clinical prospects of each product candidate, as well as our
ongoing assessment of the regulatory requirements and each product candidate’s
commercial potential.





There can
be no assurance that we will be able to develop any product successfully, or
that we will be able to recover our development costs, whether upon
commercialization of a developed product or otherwise. We cannot provide
assurance that any of these programs will result in products that can be
marketed or marketed profitably. If certain of our development-stage programs do
not result in commercially viable products, our results of operations could be
materially adversely affected.





Stem
Cells




Our
development priority is the ALS clinical trial at Emory University in Atlanta.
We estimate that the Phase I trial will require 12 to 18 patients at an
estimated cost of $130,000 per patient. The per- patient number includes the
costs of the operation to administer our spinal cord cells, and post operation
treatment for the patient, Emory University’s charges for running the trial and
third party trial monitoring and data collection. Our spending on an individual
patient will be spread over the life of the trial as the majority of our costs
are incurred after the patient has been operated on. We expect trial spending to
gradually build to $100,000 per month after a number of patients have been
treated. The completion of the trial could be delayed if concerns arise over
safety or if we encounter challenges in recruitment. Any delay in the trial for
any reason would increase the cost of the trial and delay the process of
bringing the treatment to market.




As
previously stated, we believe our cell based technology also has therapeutic
value for a number of additional indications.  We will also work on
proof of principle testing, dosing rationale, and the development of clinical
protocols for the most promising of these indications. We intend to submit IND
applications to the FDA to initiate clinical trials for the most promising
treatment candidates.


16





Small
Molecule Compounds





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





General and
Administrative Expenses:





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





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





CRITICAL
ACCOUNTING POLICIES





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Note 2 of the Notes to Financial Statements describes the significant
accounting policies used in the preparation of the financial statements. Certain
of these significant accounting policies are considered to be critical
accounting policies, as defined below.





A
critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: (1) we are required to
make assumptions about matters that are highly uncertain at the time of the
estimate; and (2) different estimates we could reasonably have used, or
changes in the estimate that are reasonably likely to occur, would have a
material effect on our financial condition or results of
operations.





Estimates
and assumptions about future events and their effects cannot be determined with
certainty. We base our estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances.
These estimates may change as new events occur, as additional information is
obtained and as our operating environment changes. These changes have
historically been minor and have been included in the financial statements as
soon as they became known. Based on a critical assessment of our accounting
policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that our financial statements
are fairly stated in accordance with accounting principles generally accepted in
the United States, and present a meaningful presentation of our financial
condition and results of operations. We believe the following critical
accounting policies reflect our more significant estimates and assumptions used
in the preparation of our financial statements:





Use of
Estimates—our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and, accordingly,
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Specifically, our management has estimated the expected economic life and value
of our licensed technology, our net operating loss for tax purposes and our
stock option and warrant expenses related to compensation to employees and
directors, consultants and investment banks. Actual results could differ from
those estimates.





Revenue
Recognition—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.


17





Intangible and
Long-Lived Assets—We follow FASB guidelines related to the accounting for
impairment of long-lived assets, which established a "primary asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long lived asset to be held and
used. Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. During the period ended September 30, 2009 no impairment losses
were recognized.





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





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





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





Beginning
in 2006, we adopted the new guidance issued by the FASB related to share based
payments.  The new guidance 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 Nine Months Ended September 30, 2009 &
2008





Three Months Ended September
      30,
                  
                  
                  Nine Months Ended September
    30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      expenses
                  
                  $
                  2,522,582
                  
                  
                  $
                  3,184,058
                  
                  
                  $
                  8,158,789
                  
                  
                  $
                  8,448,044Operating
      loss
                  
                  
                  (2,522,582
                  )
                  
                  
                  (3,184,058
                  )
                  
                  
                  (8,158,789
                  )
                  
                  
                  (8,448,044
                  )Non-operating
      income (expense)
                  
                  
                  (2,574,401
                  )
                  
                  
                  6,101
                  
                  
                  
                  778,038
                  
                  
                  
                  37,963Net
      income (loss)
                  
                  $
                  (5,096,983
                  )
                  
                  $
                  (3,177,957
                  )
                  
                  $
                  (7,380,751
                  )
                  
                  $
                  (8,410,081
                  )





For the
third quarter of 2009, the Company reported a net loss of $5,096,983, or $0.15
per share, compared to a net loss of $3,177,957, or $0.10 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 nine months of 2009 was $7,380,751 or $0.22 per share, compared to
$8,410,081, or $0.26 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 September 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.





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





We do not
anticipate any revenues for 2009.





Operating
expenses totaled $2,522,582 and $3,184,058 for the three months ended
September 30, 2009 and 2008.  The decrease in operating expense of
$661,476 was due to a decrease in R&D spending, and a decrease in non-cash
stock based compensation expense.


18





Research
and development expenses totaled $1,308,565 for the three months ended September
30, 2009 compared to $1,766,040 for the same period of 2008.  The
decrease of $457,475 or 26% for the three months ended September 30, 2009
compared to the comparable period in 2008 was primarily attributable to
significant reductions in spending on contracted research in the third quarter
as the FDA clinical trial application was completed in the second quarter. In
addition, stock option expense dropped by $113,871 as an option award became
fully vested and expensed at the end of the previous quarter.





General
and administrative expenses totaled $1,191,480 for the three months ended
September 30, 2009 compared to $1,400,795 for the same period of
2008.  The decrease of $209,315 or 15% for the three months ended
September 30, 2009 compared to the comparable period in 2008 was primarily
attributable to reductions  in stock option expenses of $126,087 as
several early option grants were fully vested and expensed. The remaining
expense decrease was spread over a wide range of categories and reflects
management’s ongoing efforts to manage cash consumption.





Depreciation
and amortization expenses totaled $22,537 for the three months ended September
30, 2009 compared to $17,223 for the same period of 2008.   The
increase of $5,314 or 31% for the three months ended September 30, 2009 compared
to the comparable period in 2008 was attributable to additions to fixed asset
and capitalized patent filing fees over the past year.





Nonoperating (expense)
income totaled ($2,574,401) and $6,101 for the three months ended September 30,
2009 and 2008, respectively.  The increase in nonoperating expense was
due to expenses associated with the Company’s warrant accounting.





Interest
income totaled $6,080 for the three months ended September 30, 2009 compared to
$6,101 for the same period of 2008. The decrease for the three months ended
September 30, 2009 compared to the comparable period in 2008 was attributable to
lower cash balances.





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.  In the three
months ended September 30, 2009 the fair value of the common stock purchase
warrants increased again, due to an increase in the stock price.  We
recognized a $2.6 million expense for the three months ended September 30,
2009.





Results
of Operations for the Nine Months ending September 30, 2009 and
2008





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


We do not
anticipate any revenues for 2009.





Operating
expenses totaled $8,158,789 and $8,448,044 for the nine months ended
September 30, 2009 and 2008.  About half of the decrease of $289,255
for the nine months ended September 30, 2009 compared to the comparable period
in 2008 was attributable to decreased research and development
expenditures and a decrease in non-cash stock compensation
expense.





Research
and development expenses totaled $4,195,366 for the nine months ended September
30, 2009 compared to $4,598,611 for the same period of 2008.  The
decrease of $403,245 for the nine months ended September 30, 2009 compared to
the comparable period in 2008 was primarily attributable to the costs in 2008 of
completing the application to the FDA to move our cell based products into
clinical trials and a reduction in non-cash stock-based compensation expense of
$82,144.





General
and administrative expenses totaled $3,898,666 for the nine months ended
September 30, 2009 compared to $3,802,673 for the same period of
2008.  The increase of $95,993 or 3% for the nine months ended
September 30, 2009 compared to the same period in 2008 was primarily
attributable to increased litigation expenses of $115,029 and increased non-cash
stock-based compensation expense of $38,737 offset by expense decreases spread
over a wide range of categories and reflects management’s ongoing efforts to
manage cash consumption.





Depreciation
and amortization expenses totaled $64,757 for the nine months ended September
30, 2009 compared to $46,760 for the same period of 2008.   The
increase of $17,997 or 39% for the nine months ended September 30, 2009 compared
to the same period in 2008 was attributable to fixed asset and patent filing fee
additions over the past year.





Nonoperating (expense)
income totaled $778,038 and $37,963 for the nine months ended September 30, 2009
and 2008, respectively.  The nonoperating income or expense is
discussed below.





Interest
income totaled $17,054 for the nine months ended September 30, 2009 compared to
$37,963 for the same period of 2008. The decrease of $20,909 for the nine months
ended September 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.  In the three
months ended September 30, 2009, the fair value of these common stock purchase
warrants increased to $5.6 million due to an increase in the stock price. We
recognized a $2.6 million non-cash expense (or loss) from the change in fair
value of these warrants for the three months ended September 30,
2009.  The net gain for the nine month period ended September 30, 2009
is $761,178.


19





LIQUIDITY
AND CAPITAL RESOURCES





Since
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 current monthly cash burn rate is approximately
$425,000.  We anticipate that our available cash will be sufficient to
finance most of our current activities for at least the next five months from
September 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.  We estimate
that we will have sufficient cash and cash equivalents to finance our current
operations, pre-clinical and clinical work for at least five months from
September 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.





Nine
      Months Ended Sept. 30,2009
                            
                            
                            2008Cash and
      cash equivalents
                            
                            $
                            2,420,715
                            
                            
                            $
                            5,249,805Net
      cash used in operating activities
                            
                            $
                            (3,613,084
                            )
                            
                            $
                            (4,731,442
                            )Net
      cash used in investing activities
                            
                            $
                            (88,989
                            )
                            
                            $
                            (133,701
                            )Net
      cash provided by financing activities
                            
                            $
                            1,219,509
                            
                            
                            $
                            2,711,211





Total
cash and cash equivalents was $2,240,715 and $5,249,805 for the nine months
ended September 30, 2009 and 2008, respectively.  The decrease in our
cash and cash equivalents of $3,009,090 or 57% for the nine months ended
September 30, 2009 compared to the same period in 2008 was primarily attributed
to placement of our common equity of $2,711,211 in the first nine months of 2008
versus $1,219,510  in the first nine months of 2009.





Net
Cash Used in Operating Activities





Operating
activities required $3,613,084 for the nine months ended September 30, 2009
compared to $4,731,442 for the same period in 2008. The decrease in cash
consumption of $1,118,358 or 24% for the nine months ended September 30, 2009
compared to the same period in 2008 was primarily attributable to an
increase of $1,087,768  in short term financing by vendors, employees
and other service providers in the first nine months of 2009 and a reduction in
spending particularly in research.





Net
Cash Used in Investing Activities





In our
investment activities we used $88,990 for the nine months ended September 30,
2009 compared to $133,701 for the same period of 2008. The decrease in our cash
of $44,711 or 34% for the nine months ended September 30, 2009 compared to the
same period in 2008 was primarily attributable to the fact that we had a
decrease in our purchase of property and equipment.





Net
Cash Provided by Financing Activities





Cash provided by financing activities
was $1,219,510 for the nine months ended September 30, 2009, compared to
$2,711,211 for the same period of 2008.


20





Listed
below are our key financing transactions.  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 to a strategic purchaser $2,500,000 of our
      common stock.


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


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


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




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.




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 (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure.





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


21





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 nor do they 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 no 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.





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 September 30, 2009, we have raised $59,659,495 of
capital and recorded accumulated losses totaling $64,583,219.  On September
30, 2009, we had a working capital surplus of $227,662 and stockholders’ (deficit)
equity of $(4,923,724).  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 nine month period ended September 30, 2009 was $7,380,751. We
had no revenues for the nine months ended September 30, 2009.


22




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





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





We
will need to raise additional capital to continue operations.





Since
inception, we have relied almost entirely on external financing to fund
operations. Such financing has primarily come primarily from the sale of common
stock and the exercise of investor warrants.  As of September 30,
2009, we had cash and cash equivalents on hand of
$2,420,715.  Presently, we have a monthly cash burn rate of
approximately $425,000.  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
September 21, 2009 the FDA approved the IND application to commence Phase I
trials for ALS.  As a result, we expect the additional cost related to
increase our monthly burn rate.





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 will be available if needed. If additional financing
is not available, we may not be able to fund operations and planned growth,
develop or enhance our technologies, take advantage of business opportunities or
respond to competitive market pressures.  If we exhaust our cash
reserves and are unable to realize adequate additional financing, we may be
unable to meet operating obligations and be required to initiate bankruptcy
proceedings or delay, or eliminate some or all of our research and product
development programs.


23





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 and may result in substantial dilution.





Risks
Relating to Our Business





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





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





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





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





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





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





On
September 21, 2009, we received approval from the FDA for our first IND in
order to commence clinical trials.  Although we have received approval
from the FDA to commence trials, the outcome of the trials is uncertain, and if
we are unable to satisfactorily complete such trials, or if such trials yield
unsatisfactory results, we will be unable to commercialize our proposed
products. No assurances can be given that the clinical trials will be
successful.  The failure of such trials could delay or prevent
regulatory approval and could harm our ability to generate revenues, operate
profitably or remain a viable business.


24





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:





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





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





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





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


25





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.





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





Our
proposed products, if approved for marketing, may not achieve market acceptance
since hospitals, physicians, patients or the medical community in general may
decide not to accept and utilize these products. The products that we are
attempting to develop represent substantial departures from established
treatment methods and will compete with a number of more conventional drugs and
therapies manufactured and marketed by major pharmaceutical companies. The
degree of market acceptance will depend on a number of factors,
including:





·
            the clinical efficacy and safety
      of our proposed products;





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





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





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





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


26





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





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





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





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





In
addition, we anticipate growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing.  We anticipate the need for additional
management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel in
the areas of our present and planned activities, and there can be no assurance
that we will be able to continue to attract and retain the qualified personnel
necessary for the development our business.





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





We have
entered into employment agreements with Messrs. Garr and Johe which expire on
November 1, 2012.  In the event either individual is terminated prior
to the full term of their respective contracts, for any reason other than a
voluntary resignation, all compensation due to such employee under the terms of
the respective agreement shall become due and payable immediately. These
provisions will make the replacement of either of these employees very costly
and could cause difficulty in effecting a change in control. Termination prior
to the full term of these contracts would cost us as much as $1,230,000 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 our business activities,
which could lead to significant losses.





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 our 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. 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.


27





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.





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





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





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


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





The NYSE
AMEX will periodically review our progress toward regaining compliance with the
company guide regulations. If it concludes that our progress is not
satisfactory, it may suspend and delist the Company’s common
stock.  If our common stock is no longer eligible for listing and is
delisted, trading in our common stock may be conducted on 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.





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.





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.


28





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





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





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





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





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





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





We are
entitled under our amended and restated certificate of incorporation to issue up
to 150,000,000 common and 7,000,000 “blank check” preferred shares. As of
September 30, 2009, we have issued and outstanding 34,829,234 common shares,
24,408,487 common shares reserved for issuance upon the exercise of current
outstanding options and warrants (excluding options and warrants issued under
our equity compensation plans), 223,341 common shares reserved for issuance of
additional grants under our 2005 incentive stock plan, and 760,000 shares
reserved for issuance of grants under our 2007 stock plan. Accordingly, we will
be entitled to issue up to 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.





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.”




29




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





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





Our
products may not receive regulatory approval.





The FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacturing and marketing of pharmaceutical products
through lengthy and detailed laboratory, pre-clinical and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and vary
substantially based upon the type, complexity and novelty of the proposed
product.  On September 21, 2009 the FDA approved our IND application
to commence a Phase I trial for ALS. We cannot assure you that we will
successfully complete any clinical trials in connection with such IND. Further,
we cannot predict when we might first submit any product license application for
FDA approval or whether any such product license application will be granted on
a timely basis, if at all.  Moreover, we cannot assure you that FDA
approvals for any products developed by us will be granted on a timely basis, if
at all. Any delay in obtaining, or failure to obtain, such approvals could have
a material adverse effect on the marketing of our products and our ability to
generate product revenue.





Development
of our technologies is subject to extensive government regulation.





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





We base
our research and development on the use of human stem cells obtained from human
tissue. The U.S. federal and state governments and other jurisdictions impose
restrictions on the acquisition and use of human tissue, including those
incorporated in federal Good Tissue Practice, or 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.


30





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.





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 that 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% 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 shares 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.





·
            On
      July 2, 2009, pursuant to our director compensation policy, we granted
      each of Messrs. Ogilvie and Oldaker options to purchase 35,000 common
      shares as compensation for their services on our board of directors and
      related committees.  The options: (i) vest quarterly over the
      grant year, (ii) have an exercise price of $1.17 per share, and (iii) a
      term of seven years.  The options were granted pursuant to our
      2007 Stock Plan.




ITEM 3.
            DEFAULT UPON SENIOR
      SECURITIES





None





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





None





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.


31





SIGNATURES





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




NEURALSTEM,
      INC.Date: November
      16, 2009
              
              /s/ I. Richard GarrChief
      Executive Officer/s/ John ConronChief
      Financial Officer(Principal
      Accounting Officer)




32





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
                        
                        7/1/0931.1
                        
                        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
                        
                        *





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