U.S.SECURITIES AND EXCHANGE
COMMISSION


Washington,D.C.20549
















FORM 10-Q




(Mark one)




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




For the Quarterly Period Ended March 31,
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.   YesxNo ̈




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 ̈Nox




As ofMay1,2009there were33,751,300 shares of common
stock, $.01 par value, issued and outstanding.














Neuralstem, Inc.




Table of Contents


PagePART I -
                                  FINANCIAL
      INFORMATION
                                  3Item 1.
                                  Financial
      Statements
                                  3Balance Sheetsas ofMarch 31, 2009 (Unaudited) and December 31,
      2008
                                  3Statements of
      Operations(Unaudited)Threemonths endedMarch 31, 2009and 2008
                                  4Statements of Cash
      Flows(Unaudited)Threemonths endedMarch 31, 2009 and
      2008
                                  5Statements of Changes in
      Stockholders' Equity(Unaudited)For the period from January 1,
      2009 through March 31, 2009
                                  6Notes toFinancial Statements
      (Unaudited)
                                  7Item 2.
                                  Management's Discussion andAnalysis
      of Financial Condition andResults
      of Operations
                                  13Item 3.
                                  Quantitative and Qualitative
      Disclosures about Market Risk
                                  20Item 4.
                                  Controls and
      Procedures
                                  20PART II -
                                  OTHER
      INFORMATION
                                  21Item 1.
                                  Legal
      Proceedings
                                  21Item 1A.
                                  Risk
Factors
                                  21Item 2.
                                  Unregistered Sales of Equity
      Securities and Use of Proceeds
                                  29Item 3.
                                  Defaults Upon Senior
      Securities
                                  29Item 4.
                                  Submission of Matters to a Vote of
      Security Holders.
                                  29Item 5.
                                  Other
      Information
                                  29Item 6.
                                  Exhibits
                                  31







2





PART I


FINANCIAL
INFORMATION








ITEM
1.  FINANCIAL STATEMENTS





Neuralstem,
Inc.




Balance Sheets





March 31,
                      
                      
                      December
31,2009
                      
                      
                      2008(Unaudited)ASSETSCURRENT
    ASSETSCash and cash
      equivalents
                      
                      $
                      3,567,108
                      
                      
                      $
                      4,903,279Prepaid
      expenses
                      
                      
                      99,427
                      
                      
                      
                      136,287Total
      current assets
                      
                      
                      3,666,535
                      
                      
                      
                      5,039,566Property and equipment,
      net
                      
                      
                      155,516
                      
                      
                      
                      163,930Intangible assets,
      net
                      
                      
                      239,088
                      
                      
                      
                      212,265Other
assets
                      
                      
                      61,472
                      
                      
                      
                      52,972Total
assets
                      
                      $
                      4,122,611
                      
                      
                      $
                      5,468,733LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts payable and
      accrued expenses
                      
                      $
                      1,630,442
                      
                      
                      $
                      1,265,488LONG-TERM
      LIABILITIESFair value of warrant
      obligations
                      
                      
                      2,762,835
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      4,393,277
                      
                      
                      
                      1,265,488STOCKHOLDERS'
      (DEFICIT) EQUITYPreferred
      stock, 7,000,000 shares authorized, zero shares issued and
      outstandingCommon stock: $0.01 par value; 150
      million sharesauthorized, 33,751,300 shares
      outstanding in 2009and 2008
                      
                      
                      337,513
                      
                      
                      
                      337,513Additional paid-in
      capital
                      
                      
                      58,688,611
                      
                      
                      
                      61,352,527Accumulated
      deficit
                      
                      
                      (56,296,790
                      )
                      
                      
                      (57,486,795
                      )Total stockholders'
      (deficit) equity
                      
                      
                      (270,666
                      )
                      
                      
                      4,203,245Total liabilities and
      stockholders' equity
                      
                      $
                      4,122,611
                      
                      
                      $
                      5,468,733











3





Neuralstem,
Inc.




Statements of Operations


(Unaudited)





Three
MonthsEnded March
    31,2009
                            
                            
                            2008Revenues
                            
                            $
                            -
                            
                            
                            $
                            -Operating
      expenses:Research and development
      costs
                            
                            
                            1,434,010
                            
                            
                            
                            1,198,843General, selling and
      administrative expenses
                            
                            
                            1,457,238
                            
                            
                            
                            1,083,169Depreciation and
      amortization
                            
                            
                            20,796
                            
                            
                            
                            13,7572,912,044
                            
                            
                            
                            2,295,769Operating
    loss
                            
                            
                            (2,912,044
                            )
                            
                            
                            (2,295,769
                            )Nonoperating
      income:interest
    income
                            
                            
                            2,264
                            
                            
                            
                            21,317Gain
      from change in fair value of warrant obligations
                            
                            
                            3,815,458
                            
                            
                            
                            -3,817,722
                            
                            
                            
                            21,317Net Income (loss) attributable to
      common shareholders
                            
                            $
                            905,678
                            
                            
                            $
                            (2,274,452
                            )Net income (loss) per share,
      basic
                            
                            $
                            0.03
                            
                            
                            $
                            (0.07
                            )Net income (loss) per share,
      diluted
                            
                            $
                            0.03
                            
                            
                            $
                            (0.07
                            )Weighted average common shares
      outstanding - basic
                            
                            
                            33,751,300
                            
                            
                            
                            31,762,872Weighted average common shares
      outstanding - diluted
                            
                            
                            35,643,178
                            
                            
                            
                            31,762,872








4





Neuralstem,
Inc.





Statements
of Cash Flows
 (Unaudited)
 
 Three
      MonthsEnded March
    31,2009
                        
                        
                        2008Cash Flows From Operating
      Activities:Net income
      (loss)
                        
                        $
                        905,678
                        
                        
                        $
                        (2,274,452
                        )Adjustments to reconcile net
      income (loss) tocash used in operating
      activities:Depreciation and
      amortization
                        
                        
                        20,796
                        
                        
                        
                        13,758Stock based
      expenses
                        
                        
                        1,198,704
                        
                        
                        
                        1,094,538Gain
      from change in fair value of warrants
                        
                        
                        (3,815,458
                        )
                        
                        
                        0Changes in operating assets and
      liabilities:Prepaid
      expenses
                        
                        
                        36,860
                        
                        
                        
                        6,655Other
      assets
                        
                        
                        (8,500
                        )
                        
                        
                        (6,001
                        )Accounts payable
      and accrued expenses
                        
                        
                        364,954
                        
                        
                        
                        (522,692
                        )Net cash used in
      operating activities
                        
                        
                        (1,296,966
                        )
                        
                        
                        (1,688,194
                        )Cash Flows From Investing
      Activities:Capital outlay for intangible
      assets
                        
                        
                        (33,948
                        )
                        
                        
                        (2,744
                        )Purchase of property and
      equipment
                        
                        
                        (5,257
                        )
                        
                        
                        (28,886
                        )Net cash used in
      investing activities
                        
                        
                        (39,205
                        )
                        
                        
                        (31,630
                        )Cash Flows From Financing
      Activities:Issuance of common
      stock
                        
                        
                        -
                        
                        
                        
                        2,573,937Net cash
      provided by financing activities
                        
                        
                        0
                        
                        
                        
                        2,573,937Net (decrease) increase in
      cash
                        
                        
                        (1,336,171
                        )
                        
                        
                        854,113Cash and cash equivalents,
      beginning of period
                        
                        
                        4,903,279
                        
                        
                        
                        7,403,737Cash and cash equivalents, end of
      period
                        
                        $
                        3,567,108
                        
                        
                        $
                        8,257,850








5





Neuralstem,
Inc.
 STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
 For
the Three Months Ended March 31, 2009
 (Unaudited)
 
 Additional
                    
                    
                    
                    
                    
                    TotalCommon
Stock
                    
                    
                    Common
Stock
                    
                    
                    Paid-In
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    EquityBalance
      at January 1, 2009
                    
                    
                    33,751,300
                    
                    
                    $
                    337,513
                    
                    
                    $
                    61,352,527
                    
                    
                    $
                    (57,486,795
                    )
                    
                    $
                    4,203,245Cumulative
      effect of reclassification of warrants under EITF 07-5
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (6,862,620
                    )
                    
                    
                    284,327
                    
                    
                    
                    (6,578,293
                    )Balance,
      January 1, 2009, as adjusted
                    
                    
                    33,751,300
                    
                    
                    $
                    337,513
                    
                    
                    
                    54,489,907
                    
                    
                    
                    (57,202,468
                    )
                    
                    
                    (2,375,048
                    )Share
      based payment - employee compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,198,704
                    
                    
                    
                    
                    
                    
                    $
                    1,198,704Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    905,678
                    
                    
                    
                    905,678Balance
      at March 31, 2009
                    
                    
                    33,751,300
                    
                    
                    $
                    337,513
                    
                    
                    $
                    55,688,611
                    
                    
                    $
                    (56,296,790
                    )
                    
                    $
                    (270,666
                    )








6





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
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.




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





Note 2.  Significant Accounting
Policies and Recent Accounting Pronouncements





Use of
Estimates




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




The Company's business currently
generates limited amounts of cash which will not be sufficient to meet its
future capital requirements. 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 cashand cash equivalentsand access to funds that we will not
require additional debt or equity financing during 2009.


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





Revenue
Recognition





Our revenue recognition policies are in
accordance with the SEC’s Staff Accounting Bulletin (SAB) No. 101,Revenue Recognition
in Financial Statementsas
amended by SAB 104.Our revenue is derived
primarily from providing treated samples for gene expression data from stem cell
experiments, from providing services under various grant programs and through
the licensing of the use of our intellectual property.  Revenue is
recognized when there is persuasive evidence that an arrangement exists,
delivery of goods and services has occurred, the price is fixed and
determinable, and collection is reasonably
assured.


Research and
Development




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




Income or
Loss per Common Share




Basic income or loss per common share is
calculated by dividing net income or loss by the weighted average number of
common shares outstanding during the period. Diluted income or loss per common
share adjusts basic income or loss per share for the potentially dilutive
effects of shares issuable under our stock option plan, using the treasury stock
method.At March 31, 20096,500,659
options and 4,212,000warrants
were excluded from the calculation as their effect would have been
anti-dilutive.  At March 31, 2008 all of the Company’s 7,400,659 options and 11,158,515 warrants have been
excluded from the calculation as their effect would have been
anti-dilutive.





7




For
      The Three Months Ended March 31,2009
                      
                      
                      
                      2008Basic:Net
      income (loss) attributable to common shareholders
                      
                      $
                      905,678
                      
                      
                      $
                      (2,274,452
                      )Weighted
      average common shares outstanding
                      
                      
                      33,751,300
                      
                      
                      
                      31,762,872Basic
      earnings per common share
                      
                      $
                      0.03
                      
                      
                      $
                      (0.07
                      )Diluted:Net
      income (loss) attributable to common shareholders
                      
                      $
                      905,678
                      
                      
                      $
                      (2,274,452
                      )Weighted
      average common shares outstanding
                      
                      
                      33,751,300
                      
                      
                      
                      31,762,872Dilutive
      effect of stock options and warrants
                      
                      
                      1,891,878
                      
                      
                      
                      -Weighted
      average common shares outstanding - diluted
                      
                      
                      35,643,178
                      
                      
                      
                      31,762,872Diluted
      earnings per common share
                      
                      $
                      0.03
                      
                      
                      $
                      (0.07
                      )





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 three months ended March 31,
2009, we granted no options, and in the similar period ended March 31, 2008, we
granted 4,200,000 options. We recorded related compensation expenses as our
options vest in accordance with the Statement of Financial Accounting Standards
(“SFAS”) 123(R),Share-Based
Payment.We
recognized $1,198,704 and $1,094,538 in share-based compensation expense
during the three months ended March 31, 2009 and 2008, respectively, from the
vesting of stock options or warrants.




A summary of stock option activity
during the three months ended March 31, 2009 and related information is included
in the table below:








Weighted-Weighted-
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateNumber
                
                
                Exercise
                
                
                Contractual
                
                
                Intrinsicof
      Options
                
                
                Price
                
                
                Life
      (in years)
                
                
                ValueOutstanding
      at January 1, 2009
                
                
                8,800,659
                
                
                $
                2.55
                
                
                
                8.2Granted
                
                
                196,000
                
                
                
                1.64Exercised
                
                
                -Forfeited
                
                
                -Outstanding
      at March 31, 2009
                
                
                8,996,659
                
                
                $
                2.53
                
                
                
                7.9
                
                
                $
                1,152,000Exercisable
      at March 31, 2009
                
                
                3,872,326
                
                
                $
                2.07
                
                
                
                7.3
                
                
                $
                864,000




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




Three Months EndedMarch 31,2009
                                                    
                                                    2008Research and development costs
                                                    $
                                                    740,201
                                                    
                                                    $
                                                    752,014General, selling and
      administrative expenses
                                                    
                                                    458,503
                                                    
                                                    
                                                    342,524Total
                                                    $
                                                    1,198,704
                                                    
                                                    $
                                                    1,094,538






8




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




Weighted-Weighted-
                              
                              
                              AverageAverage
                              
                              
                              Remaining
                              
                              
                              AggregateNumber
                              
                              
                              Exercise
                              
                              
                              Contractual
                              
                              
                              Intrinsicof
      Options
                              
                              
                              Price
                              
                              
                              Life
      (in years)
                              
                              
                              ValueOutstanding
      at January 1, 2009
                              
                              
                              13,079,762
                              
                              
                              $
                              2.27
                              
                              
                              
                              2
                              
                              
                              
                              -Granted
                              
                              
                              -Exercised
                              
                              
                              -Forfeited
                              
                              
                              -Outstanding
      at March 31, 2009
                              
                              
                              13,079,762
                              
                              
                              $
                              2.27
                              
                              
                              
                              2
                              
                              
                              
                              -Exercisable
      at March 31, 2009
                              
                              
                              10,079,762
                              
                              
                              $
                              2.05
                              
                              
                              
                              2
                              
                              
                              
                              -




Effective January 1,
2009 we adopted the provisions of EITF 07-05, described below.  As a
result of adopting EITF 07-05, 8,547,762 of our issued and outstanding common
stock purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment. These warrants
have the following characteristics:
 
 Strike
                  
                  Date
                  
                  Date
                  
                  WarrantsPrice
                  
                  of
      Issue
                  
                  of Expiration
                  
                  OutstandingSeries
      A & B Warrants
                  $1.25
                  
                  February-06
                  
                  February-11
                  
                  4,359,605Series
      A & B Warrants, Placement Agent
                  $1.10
                  
                  February-06
                  
                  February-11
                  
                  782,005Series
      C Warrants
                  $1.25
                  
                  October-07
                  
                  October-12
                  
                  1,227,000Series
      C Warrants, Placement Agent
                  $1.25
                  
                  March-07
                  
                  March-12
                  
                  294,480Series
      C Warrants, anti-dilution awards
                  $1.25
                  
                  December-08
                  
                  October-12
                  
                  1,472,400Series
      C Warrants, Placement Agent, anti-dilution awards
                  $1.25
                  
                  December-08
                  
                  March-12
                  
                  412,272Total
      Warrants no longer accounted for as Equity
                  
                  
                  
                  
                  
                  
                  8,547,762
  As
such, effective January 1, 2009 we reclassified the fair value of these common
stock purchase warrants, which were outstanding at January 1, 2009, and which
have exercise price reset and anti-liquidation features, from equity to
liability status as if these warrants were treated as a derivative liability
since their date of issue.  On January 1, 2009, we reduced
additional paid-in capital by $6.9 million and decreased the beginning
retained deficit by $.3 million as a cumulative effect to establish a long-term
warrant liability of $6.6 million to recognize the fair value of such warrants.
The fair value of these common stock purchase warrants declined to $2.8 million
as of March 31, 2009. We recognized a $3.8 million gain from the
change in fair value of these warrants for the three months ended March 31,
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:
 
 March
      31,
                    
                    January
      1,2009
                    
                    2009Annual
      dividend yield
                    
                    
                    —
                    
                    
                    
                    —Expected
      life (years)
                    
                    
                    1.25
      to 2.75
                    
                    
                    
                    1
      to 2.5Risk-free
      interest rate
                    
                    
                    0.4
                    %
                    
                    
                    0.4
                    %Expected
      volatility
                    
                    
                    73
                    %
                    
                    
                    86
                    %
   9
  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
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
years. The implementation of SFAS 157 did not have a material impact on our
financial statements.
 
 In
June 2007, the FASB ratified a consensus opinion reached by the Emerging Issue
Task Force (“EITF”) on EITF Issue 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities.” The guidance in EITF Issue 07-3 requires use to
defer and capitalize nonrefundable advance payments made for goods or services
to be use in research and developments activities until the goods have been
delivered or the related services have been performed. If the goods are no
longer expected to be delivered nor the services expected to be performed, we
would be required to expense the related capitalized advance payments. The
consensus in EITF Issue 07-3 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2007 and is to be
applied prospectively to new contracts entered into on or after December 15,
2007. Early adoption is not permitted. Retrospective application of EITF Issue
07-3 is also not permitted. The impact of applying this consensus did not have
material effect on our research and development contractual arrangements entered
into on or after December 15, 2007.
  In
December 2007, the FASB ratified a consensus reached by the EITF on Issue 07-1,
“Accounting for Collaborative
Arrangements.” The EITF concluded on the definition of a collaborative
arrangement and that revenues and costs incurred with third parties in
connection with collaborative arrangements would be presented gross or net based
on the criteria in EITF 99-19 and other accounting literature. Based on the
nature of the arrangement, payments to or from collaborators would be evaluated
and its terms, the nature of the entity’s business, and whether those payments
are within the scope of other accounting literature would be presented.
Companies are also required to disclose the nature and purpose of collaborative
arrangements along with the accounting policies and the classification and
amounts of significant financial-statement amounts related to the arrangements.
Activities in the arrangement conducted in a separate legal entity should be
accounted for under other accounting literature; however required disclosure
under EITF 07-1 applies to the entire collaborative agreement. EITF 07-1 is
effective for us January 1, 2008 and is to be applied retrospectively to all
periods presented for all collaborative arrangements existing as of the
effective date.  The adoption of EITF 07-1 did not have a material
impact on our financial statements.
 
 In
June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
"Determining Whether an
Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"
(Issue 07-05). This Issue provides guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity's own stock. Issue 07-05 applies to any freestanding financial instrument
or embedded feature that has all the characteristics of a derivative under
paragraphs 6-9 of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception under paragraph 11(a) of SFAS 133. Issue 07-05 also
applies to any freestanding financial instrument that is potentially settled in
an entity's own stock, regardless of whether the instrument has all the
characteristics of a derivative under paragraphs 6-9 of SFAS 133, for purposes
of determining whether the instrument is within the scope of EITF Issue 00-19,
"Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," (Issue 00-19) which provides accounting guidance for instruments
that are indexed to, and potentially settled in, the issuer's own stock. Issue
07-05 is effective for fiscal years beginning after December 15, 2008. Early
application is not permitted by entities that have previously adopted an
alternative accounting policy.
  3.  Fair
Value
  In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements," or
SFAS No. 157. SFAS No. 157 establishes a standard framework for
measuring fair value in generally accepted accounting principles, clarifies the
definition of "fair value" within that framework, and expands disclosures about
the use of fair value measurements. We adopted SFAS No. 157 in the first
quarter of 2008 with regard to all financial assets and liabilities in our
financial statements going forward, and, consistent with FASB Staff Position
157-2, "Effective Date of FASB
Statement No. 157," we have elected to adoption of SFAS No. 157
for non-financial assets and liabilities not recognized or disclosed at fair
value on a recurring basis until the first quarter of 2009. The adoption of SFAS
No. 157 had no material impact on our financial statements.  The
book value of our nonfinancial assets approximated their fair values at March
31, 2009.
   10
  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, defined by SFAS No. 157 and
directly related to the amount of subjectivity associated with the inputs to
fair valuation of these assets and liabilities, are as follows:
 
 Level 1
      —
                          
                          Inputs
      are unadjusted, quoted prices in active markets for identical assets at
      the reporting date. Active markets are those in which transactions for the
      asset or liability occur in sufficient frequency and volume to provide
      pricing information on an ongoing basis.The
      fair valued assets we hold that are generally included in this category
      are money market securities where fair value is based on publicly quoted
      prices.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.The
      fair valued assets we hold that are generally included in this category
      are investment grade auction rate certificates and commercial paper where
      fair value is based on valuation methodologies such as models using
      observable market inputs, such as benchmark yields, reported trades,
      broker/dealer quotes, bids, offers and other reference
    data.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.
  We
carry no investments classified as Level 2.
  Financial
assets and liabilities measured at fair value on a recurring basis are
summarized below:
 
 Fair
      value measurements at March 31, 2009 usingMarch 31,
                              2009
                            
                            
                            Quoted
      prices in
                              active
      markets for
                              identical
      assets
                              (Level 1)
                            
                            
                            Significant
      other
                              observable
                              inputs
                              (Level 2)
                            
                            
                            Significant
                              unobservable
                              inputs
                              (Level 3)Assets:Cash
      and cash equivalents
                            
                            $
                            3,567,108
                            
                            
                            $
                            3,567,108
                            
                            
                            $
                            —
                            
                            
                            $
                            —Liabilities:Fair
      value of warrant obligations
                            
                            
                            2,762,835
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,762,835
  Note 4.   Stockholders’
Equity
  During the first three months of 2009,
the Company granted 196,000 options on shares of common stock to consultants as
an incentive for these consultants’ continued employment. The options vest in
periods between issue date and one year. The Company valued these options using
the Black-Scholes option pricing model using the following assumptions: exercise
price of between $1.25 and $2.00, term of two years, volatility rate of 74% and
discount rate of .74%. The total value of these options will be expensed over
the vesting period. The Company began to record the expense related to these
options in the first quarter of 2009.
  Note 5.  Change in Accounting
Principle: Recharacterization of Warrants
  In June 2008, the FASB ratified the
consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05,
“Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.” (Issue
07-5).Issue
07-05 clarifies the determination of whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which would qualify as a scope
exception under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.”
   11
  We adopted Issue 07-05 as of
January 1, 2009.  As is discussed in Note 1 above, as of that
date we had 8,547,762 warrants which were reassessed under Issue 07-05. Because of certain price adjustment
provisions contained in the warrants, they were no longer deemed to be indexed
to our stock andtherefore, no longer meet the scope
exception of FAS 133.  Hence, these warrants were determined to be
derivatives and were reclassified from equity to liabilities.  As a
result of this change in accounting principle, on January 1, 2009 we recorded
these liabilities at their value of $6,578,293.  Atthat date we also recorded a cumulative
catch up adjustment of $284,327 to reduce the accumulated deficit and a
$6,862,620 decrease to Additional Paid-in Capital.  The adjustment to
the accumulated deficit (the cumulative income effect of the accounting change)
was calculated for the decrease in the fair value of the warrants from the date
of their issuance through January 1, 2009.
  These warrant liabilities will be marked
to market from January 1, 2009 going forward resulting in the recognition of
income or expense in our statement of operations for changes in their fair
value.   In the three months ended March 31, 2009 we recognized a
gain from the change in the fair value of these warrant obligations of
$3,815,458.
  Note 6. Subsequent
Events
 
 There are no subsequent events to report
for the three months ended March 31, 2009.











12





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








ADVISEMENT





We urge you to read this entireQuarterly Report on Form
10-Q, including the” Risk
Factors” section,the financial statements,and related notes includedherein.As used in thisQuarterly Report, unlessthecontext otherwise requires, the words
“we,” “us,”“our,” “the Company,” “Neuralstem”and “Registrant”refer to Neuralstem, Inc.Also, any reference to “common shares,”
“Common Stock,” “common stock” or “Common Shares” refers to our $.01 par value
common stock.The information contained herein is
current as of the date of thisQuarterly Report(March31, 2009), unless another date is specified.





We prepare our interim financial
statements in accordance withUnited Statesgenerally accepted accounting
principles.  Our financials and results of operation for the three month
period ended March 31, 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 ourproposedproduct develops and, if a market
      develops, the rate at which it
develops;




·
            our ability to successfully sell
      our productsonce
      developed;




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




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




·
            our ability to obtain
      reimbursement from third party payers for the products that weintend tosell;




·
            the accuracy of our estimates and
      projections;




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




·
            changes in our business plan and
      corporate strategies; and




·
            other risks and uncertainties
      discussed in greater detail in the sectionof this reportcaptioned “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.





13




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





•
                    Overview-Discussion of our business
      and overall analysis of financial and other highlights affecting the
      company in order to provide context for the remainder of
      MD&A.•
                    Trends &
      Outlook -Discussion of what we view as the
      overall trends affecting our business andthe strategy for2009.•
                    Critical
      AccountingPolicies
      -Accountingpoliciesthat 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 comparingthe
      first quarter of2009to 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, and particularly in the “Overview” and Trends
& Outlook” section (see also “Risk Factors” in Part II, Item 1A of this
Quarterly Report).  Our actual results may differ
materially.





OVERVIEW




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





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





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





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





In addition to our corestem celltissue based technology we have begun
developing asmall-molecule
compound.  The Company has performed preliminaryin
vitroandin vivotests on the compound with regard to
neurogenesis.  Based on the results of these tests we have applied for
aU.S.patent on the
compound.





Technology





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








14





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





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





Research





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




TRENDS &
OUTLOOOK





Revenue:Our revenue was previously derived
primarily from grant reimbursements and licensing fees. As our focus is now on
pre-clinical work in anticipation of entering clinical trials in 2009, we are
not concentrated on generating revenue.





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





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





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





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





In 2006 we retained Quintiles, Inc. to
assist with regulatory compliance, preparation of our firstINDapplication, and patient enrollment for
our first human trial. While recruitment for the trial cannot commence until we
have received an FDA approved protocol, much of the infrastructure required must
be developed and in place well in advance. For instance, we can begin to
identify, contact, and educate prospective patients as well as the treatment
community prior to commencing these trials.





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








15





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




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





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




CRITICAL ACCOUNTING
POLICIES





Our financial statements have been
prepared in accordance with accounting principles generally accepted in theUnited 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 theUnited 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 theUnited
Statesand, 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.







16





Intangible
and Long-Lived Assets—we
follow SFAS No. 144, "Accountingfor Impairment of
Disposal of Long-Lived Assets," which established a "primary
asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long lived asset to be held and
used. Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. During the period ended December 31, 2008 no impairment
losses were recognized.




Accounting for
Warrants–The
Company has adopted the provisions of EITF 07-05, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-05”). EITF 07-05 applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative,
as defined by SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” and to any freestanding financial instruments that are
potentially settled in an entity’s own common stock.  As a result,
certain of our warrants are considered to be derivatives and must be valued
using various assumptions as they are recorded as liabilities.


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




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





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








RESULTS OF
OPERATIONS





Result
of Operations – First Quarter
of 2009 Compared to First Quarter of 2008





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





Revenue







The company did not have revenue for the
three months ended March 31, 2009 and 2008, respectively.







Three Months Ended March
      31,2009
                                    
                                    2008Revenue
                                    
                                    $
                                    --
                                    
                                    $
                                    --





We do not anticipate any revenues for
2009.





Operating Expenses







Operating expense totaled
$2,912,044  and $2,295,769  for the three months ended March
31, 2009 and 2008, respectively.





Three Months
      Ended March 31,2009
                                
                                
                                2008OperatingexpensesResearch &
      development
                                
                                $
                                1,434,010
                                
                                
                                $
                                1,198,843General, selling &
      administrative expense
                                
                                
                                1,457,238
                                
                                
                                
                                1,083,169Depreciation and
      amortization
                                
                                
                                20,796
                                
                                
                                
                                13,757Total
    expense
                                
                                $
                                2,912,044
                                
                                
                                $
                                2,295,769










17





Research and Development
Expenses









Research and development expenses
totaled $1,434,010 for the three months ended March 31, 2009 compared to
$1,198,843  for the same period of 2008.  The increase of
$235,167 or 20% for the three months ended March 31, 2009 compared to the
comparable period in 2008 was primarily attributableto the costs of completing the
application to the FDA to move our tissue based products into clinical trials
and other operating expenses.





General and Administrative
Expenses







G&A expenses totaled $1,457,238 for
the threemonths ended March 31, 2009 compared to
$1,083,169  for the same period of 2008.  The increase of
$374,069or35% for the three months ended March 31,
2009 compared to the comparable period in 2008 was primarily
attributabletoincreased litigation expenses and a
$116,000 increase in stock-based compensation expense.





Depreciation and
Amortization





Depreciation and amortization expenses
totaled$20,796for the three months ended March 31,
2009 compared to$13,757for the same period of
2008.   Theincreaseof$7,039or 51% for the three months ended
March 31, 2009 compared to the comparable period in 2008 wasprimarily attributable to fixed asset and patent filing
fee additions over the past year.




Nonoperating Income




Nonoperating incometotaled$3,817,722and$21,317for the three months ended March 31,
2009 and 2008, respectively.







Three
      Months Ended March 31,2009
                    
                    
                    2008Nonoperating
      income:Interestincome
                    
                    $
                    2,264
                    
                    
                    $
                    21,317Change on gain in fair value
      of warrants
                    
                    
                    3,815,458
                    
                    
                    
                    -Total nonoperating
      income
                    
                    $
                    3,817,722
                    
                    
                    $
                    21,317






Interest Income







Interest income totaled $2,264 for the
three months ended March 31, 2009 compared to $21,317 for the same period of
2008. The decrease of $19,053 for the three months ended March 31,
2009 compared to the comparable period in 2008 was attributabletolower cash balances and much
reduced  interest rates on short term savings.





Gain from change in fair value of
warrants





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. The fair value of these common stock purchase warrants declined to
$2.8 million as of March 31, 2009 because of a decline in the stock price.
We recognized a $3.8 million non-cash gain from the change in fair value of
these warrants for the three months ended March 31,
2009.





18





LIQUIDITY AND CAPITAL
RESOURCES







Since our inception, we have financed
our operations through the private placement of our securities, the exercise of
investor warrants, and to a lesser degree from grants. Our currently monthly
cash burn rate isapproximately$500,000. In the next several months we
expect the monthly burn rate to drop below $400,000. We anticipate that our
available cash will be sufficient to finance most of our current activities for
at least the next9months fromMarch31, 2009, although certain activities and
related personnel may need to be reduced.





On December 18, 2008, we filed our firstINDwith the FDA.  In the event
the FDA approves ourIND, we expect additional costs related to
the trial this year of about $350,000.Assuming approval of theIND,we estimate that we will have
sufficient cash and cash equivalents to finance our current operations,
pre-clinical and clinical work for at least9months fromMarch31, 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 raiseadditional funding, including, but not
limited to, the volatility of our common shares and general market
conditions.







Three Months Ended March
      31,2009
                      
                      
                      2008Cash andcash
      equivalents
                      
                      $
                      3,567,108
                      
                      
                      $
                      8,257,850Net cash used in operating
      activities
                      
                      $
                      (1,296,966
                      )
                      
                      $
                      (1,688,194
                      )Net cash used in investing
      activities
                      
                      
                      (39,205
                      )
                      
                      
                      (31,630
                      )Net cash provided by financing
      activities
                      
                      
                      0
                      
                      
                      
                      2,573,937







Total cash and cash equivalents
was$3,567,108 and$8,257,850 for the three months ended
March 31, 2009 and 2008, respectively.The decrease in our cash of$4,690,742or 57% for the three months
ended March 31, 2009 compared to the comparable period in 2008 wasprimarily attributed to placement of our common equity of$2,573,937in the first quarter of 2008, a
reduction of $600,000 in amounts payable by the company in less than one year in
the first quarter of 2008, an increase of $300,000 in short term financing by
vendors, employees and other service providers in the first quarter of
2009.   The Company also accelerated research and development
spending in the first quarter of 2009 to prepare for clinical trials and
experienced higher legal fees due to litigation.
 
 Net Cash Used in Operating
Activities
 
  In our operating activities we used$1,296,966 for the three months ended
March 31, 2009 compared to$1,688,194 for the same period of 2008.The decrease in our cash of$391,288 or 23% for the three months
ended March 31, 2009 compared to the comparable period in 2008 wasprimarily attributable toplacement of our common equity of$2,573,937in the first quarter of 2008, a
reduction of $600,000 in amounts payable by the company in less than one year in
the first quarter of 2008, an increase of $300,000 in short term financing by
vendors, employees and other service providers in the first quarter of
2009.   The Company also accelerated research and development
spending in the first quarter of 2009 to prepare for clinical trials and
experienced higher legal fees due to litigation.
 
 Net Cash Used in Investing
Activities
 
 In our investment activities we used$39,205for the three months ended March 31,
2009 compared to $31,630for the same period of 2008.Theincrease in our cash of$7,575 or 24% for the three months ended
March 31, 2009 compared to the comparable period in 2008 wasprimarily attributable to an increase in our investment in
property and equipment.
 
 Net Cash Provided by Financing
Activities
 
 There was no cash provided by financing
activities for the three months ended March 31, 2009 compared to$2,573,937for the same period of
2008.


19





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




•
            In March of 2006 we completed the
      private placement of $5,000,000 of our units consisting of: (i) one shares
      of common stock; (ii) one half class A warrant; and (iii) one half class B
      warrant.  The units were priced at
  $1.00.•
            In March of 2007 we completed the
      private placement of $6,135,000 of our units consisting of: (i) one share
      of common stock; and (ii) one half class C warrant.  The units
      were priced at $2.50.•
            In October of 2007 warrant holders
      holding approximately1,227,000of our class C warrants exercised
      their warrants.  As an inducement for the exercise, we issued
      those warrant holders who exercised their warrants a replacement class C
      warrant.•
            In February of 2008, we sold a
      strategic purchaser $2,500,000 of our common
  stock.•
            On December 18, 2008, we sold $2,000,000 of
      commonstock pursuant
      to our shelf registration statement on Form
  S-3.







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





We intend to pursue opportunities to
obtain additional financing in the future through the sale of our securities and
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, we filed a
Prospectus Supplement announcing that we entered into a securities purchase
agreement under which we sold $2,000,000 of common shares pursuant to such shelf
registration.  Accordingly, we may issue an additional $23,000,000
pursuant to the 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 weare considered a smaller reporting
company, as defined byRule
229.10(f)(1).







ITEM 4.
            CONTROLS
      AND PROCEDURES.





Evaluation of Disclosure Controls and
Procedures




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




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







20





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, we filed suit
      against StemCells, Inc., StemCells California, Inc. (collectively
      “StemCells”) and Neurospheres Holding Ltd., (collectively StemCells and
      Neurospheres Holding Ltd are referred to as “Plaintiffs”) in U.S. District
      Court for the District of Maryland, alleging that U.S. Patent No.
      7,361,505 (the “‘505 patent”), alleging that the 505 patent was
      exclusively licensed to the Plaintiffs, is invalid, not infringed, and
      unenforceable.   See Civil Action No. 08-1173.   On
      May 13, we filed an Amended Complaint seeking declaratory judgment that
      U.S. Patent No. 7,155,418 (the “‘418 patent”) is invalid and not infringed
      and that certain statements made by our CEO are not trade libel or do not
      constitute unfair competition as alleged by the Plaintiffs.  On July
      15, 2008, the Plaintiffs filed a Motion to Dismiss for Lack of Subject
      Matter Jurisdiction, Lack of Personal Jurisdiction, and Improper Venue or
      in the Alternative to Transfer to the Northern District of
      California.  On August 27, 2008, Judge Alexander Williams, Jr. of the
      District of Maryland denied StemCells’ Motion to Dismiss, but granted
      Neurospheres’ motion to dismiss. On September 11, 2008, StemCells filed
      its answer asserting counterclaims of infringement for the ‘505 patent,
      the ‘418 patent, and state law claims for trade libel and unfair
      competition. On October 1, 2008, Neuralstem filed a motion to dismiss or
      strike StemCells’ state law trade libel and unfair competition
      claims.  That motion is still pending and it is not known when
      nor on what basis will this matter be
  concluded.





·
            On July 28, 2006, StemCells,
      Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in
      Maryland, alleging that Neuralstem has been infringing, contributing to
      the infringement of, and or inducing the infringement of four patents
      owned by or exclusively licensed to StemCells relating to stem cell
      culture compositions, genetically modified stem cell cultures, and methods
      of using such cultures.





In
October 2006, Neuralstem filed a motion to dismiss, or in the alternative for
summary judgment, arguing that its preclinical research activities are covered
under the “safe harbor” provision of 35 U.S.C. § 271(e)(1) (the ‘“safe harbor”
defense’).  The parties agreed to stay substantive discovery in the
case pending resolution of Neuralstem’s motion to dismiss based on the “safe
harbor” defense.  While limited discovery was on-going on the “safe
harbor” defense, in response to submissions from Neuralstem, the Patent Office
ordered reexamination of all four of the patents-in-suit owned by
StemCells.  In view of the reexamination proceedings, both parties
agreed that a stay of the entire lawsuit was warranted.  On June 25,
2007, Judge Alexander Williams, Jr. entered an order staying the entire
litigation pending the outcome of the reexamination proceedings.  It
is not known when nor on what basis will this matter 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 thisQuarterly Report, may adversely affect our business,
operating results and financial condition.  The uncertainties and risks
enumerated below as well as those presented elsewhere in thisQuarterly Reportshould be considered carefully in
evaluating our company and our business and the value of our
securities.








Risks
Relating to Our Stage of Development





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





Since
inception in 1996 and through December 31, 2008, we have raised $61,690,040 of
capital and recorded accumulated losses totaling $57,486,795. On December 31,
2008, we had a working capital surplus of $3,774,078 and stockholders’ equity of
$4,203,245.
Our net losses for the two most recent fiscal years have been $11,830,798 and
$7,063,272 for 2008 and 2007 respectively. We had no revenues for the twelve
months ended December 31, 2008.








21





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





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





We
will need to raise additional capital to continue operations.





Historically we have
generated limited amounts of cash which are not sufficient to meet current or
future operating or capital requirements.  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 March 31, 2009, we had cash and cash equivalents on
hand of $3,567,108 .  Presently, we have a monthly cash burn rate of
approximately $500,000.  We will need to raise additional capital to
fund anticipated operating expenses and future expansion. Among other things,
external financing will be required to cover the further development of our
technologies and products and general operating costs. On
December 18, 2008, we filed our firstINDto
commence clinical trials on one of our proposed products.  On February
20, 2009 we received notification from the FDA that ourINDwas
on hold pending our submission of additional information and modifications to
our IND.  In the event theINDis
approved, we expect additional cost related to the trials to be phased in slowly
over the following 12 months.





We
have expended and expect to continue to expend substantial cash in the research,
development, clinical and pre-clinical testing of our stem cell technologies
with the goal of ultimately obtaining FDA approval to market our proposed
products. We will require additional funds to conduct research and development,
establish and conduct clinical and pre-clinical trials, commercial-scale
manufacturing arrangements and to provide for marketing and distribution. These
funds may not be available on acceptable terms, if at all. If adequate funds are
unavailable, we may have to delay, reduce the scope of, or eliminate one or more
of our research, development or commercialization programs, which may materially
harm our business, financial condition and results of operations.





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





·
            the
      continued progress and cost 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
may use resources more rapidly than currently anticipated, resulting in the need
for additional funding.  We cannot assure you that financing whether
from external sources or related parties will be available if needed. If
additional financing is not available when required or is not available on
acceptable terms, we may not be unable to fund operations and planned growth,
develop or enhance our technologies, take advantage of business opportunities or
respond to competitive market pressures.








22





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. If we are able to obtain such additional financing, it may be
dilutive to current shareholders. We have authority to issue additional shares
of common stock and preferred stock, or warrants which may be convertible into
any one or more classes or series of capital stock. We are authorized to issue
150,000,000 shares of common stock and 7,000,000 shares of preferred stock. Such
securities may generally be issued without the approval or consent of our
stockholders.





Risks
Relating to Intellectual Property and Government Regulation





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





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





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





We
anticipate conducting research in countries outside of the United
States.  A number of our competitors are located in these countries
and may be able to get access to 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 FDA approval.





The
FDA and comparable government agencies in foreign countries impose substantial
regulations on the manufacturing and marketing of pharmaceutical products
through lengthy and detailed laboratory, pre-clinical and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and vary
substantially based upon the type, complexity and novelty of the proposed
product. On December 18, 2008, we submitted its first IND, application to the
FDA.  We cannot assure you when or if such IND application will be
granted, nor can we assure you that if the IND is granted, that we will
successfully complete any clinical trials in connection with such IND. Further,
we cannot yet accurately predict when we might first submit any product license
application for FDA approval or whether any such product license application
will be granted on a timely basis, if at all.  Moreover, we cannot
assure you that FDA approvals for any products developed by us will be granted
on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such
approvals could have a material adverse effect on the marketing of our products
and our ability to generate product revenue.





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.








23





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.





Risks
Relating to Our Business





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





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





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





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





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





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








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 proceeding 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 of which 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 demonstrating sufficient safety and efficacy in order to obtain
      regulatory approval to commence clinical
trials;





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





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





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





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





·
            insufficient
      financial resources.





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





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





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





The
manufacturing of cell-based therapeutic products is novel, highly regulated,
critical to our business, and dependent upon specialized key
materials.





The
manufacturing of cell-based therapeutic products is a complicated and difficult
process, dependent upon substantial know-how and subject to the need for
continual process improvements.  We depend almost exclusively on third
party manufacturers to supply our cells.  In addition, our suppliers’
ability to scale-up manufacturing to satisfy the various requirements of our
planned clinical trials is uncertain.  Manufacturing irregularities or
lapses in quality control could have a serious 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





Ethical
and other concerns surrounding the use of stem cells may negatively affect
regulatory approval or public perception of our product candidates.





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 certain proposed products in the human
therapeutic field may depend to a significant degree on patient reimbursement of
the costs of such products and related treatments. We cannot assure you that
reimbursement in the United States or foreign countries will be available for
any products developed, or, if available, will not decrease in the future, or
that reimbursement amounts will not reduce the demand for, or the price of, our
products.  The Company cannot predict what additional regulation or
legislation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect such regulation or
legislation may have on our business. If additional regulations are overly
onerous or expensive or if health care related legislation makes our business
more expensive or burdensome than originally anticipated, we may be forced to
significantly downsize our business plans or completely abandon the current
business model.





Our
products may not be profitable due to manufacturing costs.





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





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





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





·
            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 failure to attract and retain
such personnel or to develop such expertise would adversely affect our
business.





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





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





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





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





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





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





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





Our
strategy for the development, clinical and preclinical testing and
commercialization of our proposed products is based on an outsource model. This
model requires us to enter into collaborations with third parties in order to
further develop the technology and products. In the event we are not able to
enter into such relationships in the future, our ability to develop products may
be seriously hindered or we would be required to expend considerable resources
to bring such functions in-house. Either outcome could result in our inability
to develop a commercially feasible product or in the need for substantially more
working capital to complete the research in-house. Also, we currently rely on
third parties to assist us with a substantial portion of our research and
development. Although our collaborative agreements do not impose any duties or
obligations on us other than the licensing of our technology, the failure of any
of these third parties may hinder our ability to develop products in a timely
fashion.





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





We
currently have no internal manufacturing capability, and will rely extensively
on FDA-approved licensees, strategic partners or third party contract
manufacturers or suppliers. We currently have an agreement with Charles River
Laboratories International, Inc. (“Charles River”) for the manufacturing and
storage of our cells. In the event Charles River fails to provide suitable
cells, we would be forced to either manufacture the cells ourselves or seek
other third party vendors. Should we be forced to manufacture our stem cells, we
cannot give you any assurance that we will be able to develop an internal
manufacturing capability or procure alternative third party suppliers. Moreover,
we cannot give you any assurance that any contract manufacturers or suppliers we
procure will be able to supply our product in a timely or cost effective manner
or in accordance with applicable regulatory requirements or our
specifications.








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 may no longer meet the
continued listing requirements of the NYSE AMEX.
 
 Effective
January 1, 2009, we adopted the provisions of EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”).  As a result, we reclassified 8,547,762 of our issued and
outstanding common stock purchase warrants from equity to liability
status.  The adjustment also had the effect of reducing stockholder’s
equity by $2.8 million.  Due to such adjustment, we may no longer meet
the continued listing requirements of the NYSE AMEX with regard to stockholders
equity.   If the NYSE AMEX makes the determination that our common
stock is no longer eligible for listing and is delisted, trading in our common
stock may be conducted in the over-the-counter bulletin board or on the “pink
sheets.”  In such event, broker-dealers may be less willing or able to sell
and/or make a market in our common stock. Moreover, such markets have
historically been less liquid than the NYSE AMEX.  Accordingly, an investor
would find it more difficult to dispose of, or to obtain accurate quotations for
the price of, our common stock.





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 a seasoned issuer’s. 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.  Additionally, in 2008 the SEC extended the compliance
period for non-accredited filers with regard to Section
404(b).  Unless further extended, we will be required to include
attestation reports in our annual report for year ending on December 31,
2009.  We anticipate this will further increase the costs associated
with our compliance with the Sarbanes-Oxley Act of 2002.


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




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





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





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




We
are entitled under our amended and restated certificate of incorporation to
issue up to 150,000,000 common and 7,000,000 “blank check” preferred shares. As
of March 31, 2009, we have issued and outstanding 33,751,300 common shares,
22,076,421 common shares reserved for issuance upon the exercise of current
outstanding options and warrants (excluding options and warrants issued under
our equity compensation plans), 423,341 common shares reserved for issuance of
additional grants under our 2005 incentive stock plan, and 830,000 shares
reserved for issuance of grants under our 2007 stock plan. Accordingly, we will
be entitled to issue up to 92,918,938 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.


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




None


ITEM
      3.
            DEFAULT UPON SENIOR
      SECURITIES





None





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





None





ITEM
      5.
            OTHER
      INFORMATION





None








29





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:May 15,
2009
              
              /s/ I.Richard
      GarrChief Executive
      Officer/s/John
      ConronChief Financial
      Officer(Principal Accounting
      Officer)







30




INDEX TO EXHIBITS






Incorporated by
      ReferenceExhibit
                        No.
                      
                      Description
                      
                      Filed
                        Herewith
                      
                      Form
                      
                      Exhibit
                        No.
                      
                      File No.
                      
                      Filing Date31.1
                      
                      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
                      
                      *










31