The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under "Risk Factors," and "Special Note Regarding Forward-Looking Statements",

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes. The management's discussion and analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Annual Report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.

The discussion and analysis of our financial condition and results of operations are based on the Company's financial statements, which management has prepared in accordance with U.S. generally accepted accounting

principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base estimates on historical experience and on various other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

As the result of the October 2010 merger with InVivo Therapeutics Corporation and related transactions, InVivo Therapeutics Corporation was considered the accounting acquirer and therefore the financial results of InVivo Therapeutics Corporation are now considered the financial results of the Company on a historical and going-forward basis.

Critical Accounting Policies and Estimates

Our consolidated financial statements, which appear in Item 8 of this Annual Report on Form 10-K, have been prepared in accordance with accounting principles generally accepted in the United States, which require that the management make certain assumptions and estimates and, in connection therewith, adopt certain accounting policies. Our significant accounting policies are set forth in Note 2 to our consolidated financial statements. Of those policies, we believe that the policies discussed below may involve a higher degree of judgment and may be more critical to an accurate reflection of our financial condition and results of operations.

Share-Based Compensation

Stock options are generally granted with an exercise price at fair market value at the date of the grant. The stock options generally expire ten years from the date of grant. Stock option awards vest upon terms determined by the Company's Board of Directors.

We recognize compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors as an expense in the statement of operations over the service period based on a measurement of fair value for each stock-based award. The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Due to our limited operating history and limited number of sales of our Common Stock, we estimated our volatility in consideration of a number of factors including the volatility of our stock as well as that of comparable public companies. We use historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company's stock plans is based on the average of the contractual term (generally 10 years) and the vesting period (generally 48 months) The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.

The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option pricing model:

                                                    December 31,
                                                  2012         2011
             Risk-free interest rate           0.62-3.05%   0.97-3.05%
             Expected dividend yield               0%           0%
             Expected term (employee grants)      6.25         6.25
             Expected volatility                  75%          49%

Derivative Instruments

Certain of our issued and outstanding warrants to purchase Common Stock contain anti-dilution provisions. These warrants do not meet the requirements for classification as equity and are recorded as derivative warrant liabilities. We use valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates consistent with those discussed in Share-Based Compensation above in estimating the fair value for the warrants considered to be derivative warrant liabilities. Such derivative warrant liabilities are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. The fair value of the derivative warrant liability is most sensitive to changes in the fair value of the underlying Common Stock and the estimated volatility of our Common Stock.

Research and Development and General and Administrative Expenses

Research and development expenses consist primarily of payroll and payments to contract research and development companies and payroll. General and administrative expenses consist primarily of payroll, rent and professional services.

Results of Operations

Comparison of the years ended December 31, 2012 and 2011

Research and Development Expenses

Research and development expenses increased by $2,273,000 to approximately $6,376,000 for the year ended December 31, 2012 from approximately $4,103,000 for the year ended December 31, 2011. The increase in expenses is primarily attributable to increased research and development activity and the resulting increase in compensation costs of $1,245,000 due to both additional staffing and pay raises, $765,000 of costs in 2012 for the manufacturing of scaffolding devices, increase in rent and facility costs of $609,000, and increase in lab supplies of $212,000, offset by a reduction in pre-clinical testing of $861,000.

General and Administrative Expenses

General and administrative expenses increased by $1,848,000 to approximately $6,404,000 for the year ended December 31, 2012 from approximately $4,556,000 for the year ended December 31, 2011. The increase in expenses is primarily attributable to an increase in compensation costs of $534,000 due to additional staffing and pay raises, an increase of $178,000 in legal costs, an increase of $238,000 in recruiting and relocation costs, an increase of $170,000 in travel and conference meeting costs, an increase of $455,000 in stock compensation costs and an increase in rent and facilities costs of $240,000.

Interest Expense

Interest expense increased by $59,000 to approximately $72,000 for the year ended December 31, 2012 from approximately $13,000 for the year ended December 31, 2011. The increase in interest expense is due to an increase in borrowing under the loans payable.

Derivatives Gain (Loss)

Derivatives gain (loss) increased by approximately $43,546,000 to a derivative gain of $17,480,000 for the year ended December 31, 2012 from a derivative loss of $26,066,000 for the year ended December 31, 2011. The increase in this non-cash gain for the year ended December 31, 2012 reflects the decrease in the fair value of derivative warrant liability due primarily to the decrease in the fair value of the underlying Common Stock.

Financial Condition, Liquidity and Capital Resources

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. Accordingly, the Company is considered to be in the development stage.

Since inception, the Company incurred negative cash flows from operations. The Company has financed its operations primarily through the sale of equity-related securities. At December 31, 2012, the accumulated deficit was $43,153,000 and the stockholders' deficit was $2,310,000.

At December 31, 2012, we had total current assets of $13,570,000 and current liabilities of $16,791,000 resulting in a working capital deficit of $3,221,000. At December 31, 2012, the Company had total assets of $16,062,000 and total liabilities of $18,372,000, resulting in a stockholders' deficit of $2,310,000.

Net cash used by operating activities for the year ended December 31, 2012 was approximately $10,204,000. The operating loss used $12,678,000, increases in accounts payable and accrued expenses provided $988,000, non-cash stock share based compensation provided $1,233,000 and depreciation and amortization provided $367,000.

Net cash used by investing activities for the year ended totaled $2,141,000 for purchases of capital equipment.

Net cash provided by financing activities was approximately $20,806,000 for the year ended December 31, 2012, due mainly to approximately $18,155,000 proceeds from a public offering. In addition, the Company received $1,241,000 from the exercise of stock options and warrants and approximately $1,444,000 from loans, net of repayments.

At December 31, 2012, the Company had cash of approximately $12,825,000 which the Company expects to be sufficient to meet its operating and capital requirements into the first quarter of 2014. However, the Company will need to raise substantial additional capital in the future to complete clinical trials, obtain marketing approvals and commercialize its products, potentially through debt or equity financings. The sale of debt or equity securities may cause dilution to existing stockholders. Furthermore, there can be no assurance that we will be able to raise such funds if and when they are required. Failure to obtain future funding when needed or on acceptable terms would materially adversely affect our results of operations.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Commitments and Contingencies

On November 29, 2011, and as amended on September 17, 2012, the Company entered into a commercial lease for 26,150 square feet of office, laboratory and manufacturing space in Cambridge, Massachusetts ("Cambridge Lease"). The term of this lease is six years and three months, with one five-year extension option. The terms of the lease requires a standby letter of credit in the amount of $311,000 secured by a deposit with a commercial bank.

Pursuant to the terms of the non-cancelable lease agreements in effect at December 31, 2012, future minimum rent commitments are as follows:

Year Ending December 31,

                                2013             $ 1,168,659
                                2014               1,198,265
                                2015               1,237,533
                                2016               1,263,642
                                2017               1,294,859
                                2018               1,045,752

                               Total             $ 7,208,710