U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




[mark
one]


x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the quarterly period ended:  March 31,
  2009




o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the transition period from ______________ to
  ______________




Commission
File Number 333-119366









NOVELOS
THERAPEUTICS, INC.


(Exact name of registrant as
specified in its charter)




DELAWARE
            
            04-3321804(State or other jurisdiction of
              incorporation or
      organization)
            
            (IRS
      Employer
              Identification
      No.)





One
Gateway Center, Suite 504, Newton, Massachusetts 02458


(Address of principal executive
offices)





(617)
244-1616


(Issuer’s telephone number, including
area code)





(Former name, former address, if
changed since last report)





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.  Yes xNo o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes oNo x





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 oNo o





Number of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 43,975,656shares of common stock, $.00001 par
value per share, as ofMay
8, 2009.




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.


(Check
one):





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            
            Smaller
      reporting company
            x(Do
      not check if a smaller reporting company)





NOVELOS THERAPEUTICS,
INC.




FORM10-Q INDEX




PART I.  FINANCIAL
      INFORMATIONItem 1.
            Financial
      Statements
            3Item 2.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            14Item 4.
            Controls and
      Procedures
            17PART II. OTHER
      INFORMATIONItem 1.
            Legal
      Proceedings
            18Item 1A.
            Risk
Factors
            18Item 2.
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            19Item 3.
            Defaults Upon Senior
      Securities
            19Item 4.
            Submission of Matters to a Vote of
      Security Holders
            19Item 5.
            Other
      Information
            19Item 6.
            Exhibits
            20





2





PART I.  FINANCIAL
INFORMATION




Item 1.Financial Statements




NOVELOS
THERAPEUTICS, INC.


BALANCE
SHEETS




March
      31,
              
              
              December
      31,2009
              
              
              2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and equivalents
              
              $
              6,974,412
              
              
              $
              1,262,452Prepaid
      expenses and other current assets
              
              
              88,495
              
              
              
              129,785Total
      current assets
              
              
              7,062,907
              
              
              
              1,392,237FIXED
      ASSETS, NET
              
              
              52,220
              
              
              
              58,451DEPOSITS
              
              
              15,350
              
              
              
              15,350TOTAL
      ASSETS
              
              $
              7,130,477
              
              
              $
              1,466,038LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
              
              $
              3,393,512
              
              
              $
              4,653,912Accrued
      compensation
              
              
              68,258
              
              
              
              240,639Accrued
      dividends
              
              
              860,362
              
              
              
              1,689,322Derivative
      liability
              
              
              586,824
              
              
              
              —Deferred
      revenue – current
              
              
              33,333
              
              
              
              33,333Total
      current liabilities
              
              
              4,942,289
              
              
              
              6,617,206DEFERRED
      REVENUE – NONCURRENT
              
              
              425,000
              
              
              
              433,333COMMITMENTS
      AND CONTINGENCIESREDEEMABLE
      PREFERRED STOCK:Series
      D convertible preferred stock, $0.00001 par value; 420 shares designated;
      413.5 shares issued and outstanding at December 31, 2008
              
              
              —
              
              
              
              13,904,100Series
      E convertible preferred stock, $0.00001 par value; 735
      shares   designated; 645.442875 shares issued and
      outstanding at March 31, 2009 (Note 5) (liquidation preference $32,675,546
      at March 31, 2009)
              
              
              21,672,675
              
              
              
              —21,672,675
              
              
              
              13,904,100STOCKHOLDERS’
      DEFICIENCY:Preferred
      stock, $0.00001 par value; 7,000 shares authorized:Series
      C cumulative convertible preferred stock; 272 shares issued and
      outstanding at March 31, 2009 and December 31, 2008 (liquidation
      preference $3,720,960 at March 31, 2009)
              
              
              —
              
              
              
              —Common
      stock, $0.00001 par value; 150,000,000 shares authorized; 43,975,656
      shares issued and outstanding at March 31, 2009 and December 31,
      2008
              
              
              440
              
              
              
              440Additional
      paid-in capital
              
              
              35,702,300
              
              
              
              40,204,112Accumulated
      deficit
              
              
              (55,612,227
              )
              
              
              (59,693,153
              )Total
      stockholders’ deficiency
              
              
              (19,909,487
              )
              
              
              (19,488,601
              )TOTAL
      LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
      DEFICIENCY
              
              $
              7,130,477
              
              
              $
              1,466,038


See
notes to financial statements.




3


NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF OPERATIONS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008REVENUE
            
            $
            30,968
            
            
            $
            8,333COSTS
      AND EXPENSES:Research
      and development
            
            
            1,783,832
            
            
            
            6,911,925General
      and administrative
            
            
            476,197
            
            
            
            263,075Total
      costs and expenses
            
            
            2,260,029
            
            
            
            7,175,000LOSS
      FROM OPERATIONS
            
            
            (2,229,061
            )
            
            
            (7,166,667
            )OTHER
      INCOME:Interest
      income
            
            
            1,013
            
            
            
            63,321Gain
      on derivatives
            
            
            412,120
            
            
            
            —Miscellaneous
            
            
            2,483
            
            
            
            2,249Total
      other income
            
            
            415,616
            
            
            
            65,570NET
      LOSS
            
            
            (1,813,445
            )
            
            
            (7,101,097
            )PREFERRED
      STOCK DIVIDENDS
            
            
            (768,183
            )
            
            
            (402,780
            )PREFERRED
      STOCK DEEMED DIVIDENDS
            
            
            (714,031
            )
            
            
            —NET
      LOSS ATTRIBUTABLE TO COMMONSTOCKHOLDERS
            
            $
            (3,295,659
            )
            
            $
            (7,503,877
            )BASIC
      AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
            
            $
            (0.07
            )
            
            $
            (0.19
            )SHARES
      USED IN COMPUTING BASIC ANDDILUTED
      NET LOSS ATTRIBUTABLE TOCOMMON
      STOCKHOLDERS PER COMMON SHARE
            
            
            43,975,656
            
            
            
            39,342,494




See
notes to financial statements.




4


NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF CASH FLOWS


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,813,445
            )
            
            $
            (7,101,097
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
            
            
            6,231
            
            
            
            3,491Stock-based
      compensation
            
            
            126,587
            
            
            
            87,689Gain
      on derivatives
            
            
            (412,120
            )
            
            
            —Change
      in:Prepaid
      expenses and other current assets
            
            
            41,290
            
            
            
            33,533Accounts
      payable and accrued liabilities
            
            
            (1,260,400
            )
            
            
            2,173,202Accrued
      compensation
            
            
            (172,381
            )
            
            
            (45,172
            )Deferred
      revenue
            
            
            (8,333
            )
            
            
            491,667Cash
      used in operating activities
            
            
            (3,492,571
            )
            
            
            (4,356,687
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of fixed assets
            
            
            —
            
            
            
            (12,271
            )Change
      in restricted cash
            
            
            —
            
            
            
            1,184,702Deferred
      financing costs
            
            
            —
            
            
            
            (57,213
            )Cash
      provided by investing activities
            
            
            —
            
            
            
            1,115,218CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the sale of preferred stock and warrants, net
            
            
            9,204,531
            
            
            
            —Proceeds
      from exercise of stock option
            
            
            —
            
            
            
            1,000Cash
      provided by financing activities
            
            
            9,204,531
            
            
            
            1,000INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
            
            
            5,711,960
            
            
            
            (3,240,469
            )CASH
      AND EQUIVALENTS AT BEGINNING OF YEAR
            
            
            1,262,452
            
            
            
            9,741,518CASH
      AND EQUIVALENTS AT END OF PERIOD
            
            $
            6,974,412
            
            
            $
            6,501,049SUPPLEMENTAL
      DISCLOSURES OF NON-CASH FINANCING ACTIVITIESDeemed
      dividends to preferred stockholders
            
            $
            714,031
            
            
            $
            —Dividends
      paid to preferred stockholders in shares of Series E preferred
      stock
            
            $
            1,597,144
            
            
            $
            —Dividends
      accrued but not paid to preferred stockholders
            
            $
            566,602
            
            
            $
            402,780Relative
      fair value of warrants to preferred stockholders
            
            $
            2,907,208
            
            
            $
            —Exchange
      of Series D preferred stock for Series E preferred stock
            
            $
            13,904,100
            
            
            $
            —




See
notes to financial statements.




5


Novelos
Therapeutics, Inc.


Notes
to Financial Statements





1.
            NATURE
      OF BUSINESS, BASIS OF PRESENTATION





Novelos
Therapeutics, Inc. (‘‘Novelos’’ or  the ‘‘Company’’) is a drug
development company focused on the development of therapeutics for the treatment
of cancer and hepatitis.  Novelos owns exclusive worldwide
intellectual property rights (excluding Russia and other states of the former
Soviet Union) related to certain clinical compounds and other pre-clinical
compounds based on oxidized glutathione.





The
Company is subject to a number of risks similar to those of other companies in
an early stage of development. Principal among these risks are dependence on key
individuals, competition from substitute products and larger companies, the
successful development and marketing of its products in a highly regulated
environment and the need to obtain additional financing necessary to fund future
operations.





The
Company is devoting substantially all of its efforts toward the research and
development of its products and has incurred operating losses since
inception.  The process of developing products will continue to
require significant research and development, non-clinical testing, clinical
trials and regulatory approval.  The Company expects that these
activities, together with general and administrative costs, will result in
continuing operating losses for the foreseeable future. The Company believes
that funds at March 31, 2009 will allow it to continue operations into late
2009, which is when it was previously anticipated that the results of its Phase
3 clinical trial in non-small cell lung cancer would be available. The primary
endpoint of the Phase 3 trial is increased median overall survival, to be
measured following the occurrence of 725 events (deaths), and based on
evaluation of activity through April 2009, the Company now anticipates that the
results from its Phase 3 trial will be available in early 2010. The Company’s
ability to execute its operating plan beyond late 2009 is dependent on its
ability to obtain additional capital (including through the sale of equity and
debt securities at any time and by entering into collaborative arrangements for
licensing rights in North America, which is not likely to occur before 2010) to
fund its development activities.  The Company plans to actively pursue
these alternatives during 2009 and 2010, but there can be no assurance that it
will obtain the additional capital necessary to fund its business beyond the end
of 2009.  The timing and content of the Phase 3 clinical trial results
may impact the Company’s projected cash requirements and its ability to obtain
capital.  Furthermore, continuing difficult conditions in the capital
markets globally may adversely affect the ability of the Company to obtain
funding in a timely manner.  The Company is continually evaluating
measures to further reduce costs to preserve existing capital.  If the
Company is unable to obtain sufficient additional funding, it will be required,
beginning in late 2009, to scale back its administrative activities and clinical
development programs, including the Phase 3 clinical development of its lead
drug candidate, NOV-002, or it may be required to cease operations
entirely.




The accompanying unaudited financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim
financial information and with the instructions to Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for the fair presentation of these financial statements have been
included. The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Interim results are not necessarily
indicative of results to be expected forother quarterly periods or forthe entire year ending
December 31, 2009. These unaudited financial statements
should be read in conjunction with the audited financial statements and related
notes thereto included in the Company’s latest annual report for the year ended
December 31, 2008on Form 10-K,which was filed with the Securities and
Exchange Commission (“SEC”) onMarch 30, 2009.





Comprehensive Income
(Loss)–The Company had no components of
comprehensive income (loss) other than the net loss in all periods
presented.





Derivative Instruments - The
Company generally does not use derivative instruments to hedge exposures to
cash-flow or market risks; however, certain warrants to purchase common stock
that do not meet the requirements for classification as equity in accordance
with Emerging Issues Task Force Issue No. 00-19 (“EITF 00-19”),Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock  and EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF
07-5”), are
classified as liabilities.  In such instances, net-cash settlement is
assumed for financial reporting purposes, even when the terms of the underlying
contracts do not provide for a net-cash settlement. These warrants are
considered derivative instruments since the agreements contain “down-round”
provisions whereby the number of shares for which the options are exercisable
and/or the exercise price of the warrants is subject to change in the event of
certain dilutive stock issuances.  The number of such warrants was
14,003,319 at January 1, 2009 and 15,115,687 at March 31, 2009.  The
primary underlying risk exposure pertaining to the warrants is the change in
fair value of the underlying common stock.  Such financial instruments
are initially recorded at fair value, or relative fair value when issued with
other instruments, with subsequent changes in fair value charged (credited) to
operations as a gain or loss on derivatives in each reporting period. If these
instruments subsequently meet the requirements for equity classification under
EITF 00-19 and EITF 07-5, the Company reclassifies the fair value to
equity.  At March 31, 2009, these warrants represent the only
derivative instruments held by the Company.




6




2.
            CHANGE
      IN ACCOUNTING PRINCIPLE




Effective
January 1, 2009, the Company adopted EITF 07-5, which establishes a framework
for determining whether certain freestanding and embedded instruments are
indexed to a company’s own stock for purposes of evaluation of the accounting
for such instruments under existing accounting literature.  As a
result of the adoption of EITF 07-5, certain warrants that were previously
determined to be indexed to the Company’s common stock upon issuance were
determined not to be indexed to the Company’s common stock because they include
‘down-round’ anti-dilution provisions.  The fair value of the warrants
at the dates of issuance totaling $6,893,000 was initially recorded as a
component of additional paid-in capital. Upon adoption of EITF 07-5, the Company
recorded a decrease to the opening balance of additional-paid-in capital of
$6,893,000 and recorded a decrease to accumulated deficit totaling $5,894,000,
representing the decrease in the fair value of the warrants from the date of
issuance to December 31, 2008.  The decrease in fair value of the
warrants of $412,000 during the three months ended March 31, 2009 has been
included as a component of other income in the accompanying statement of
operations for such period.  The fair value of the warrants at March
31, 2009 of $587,000 is included as a current liability in the accompanying
balance sheet as of such date.





3.
            FAIR
      VALUES OF ASSETS AND LIABILITIES





In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities generally measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability
of the assumptions used to determine fair value.





·
            Level
      1: Input prices quoted in an active market for identical financial assets
      or liabilities.


·
            Level
      2: Inputs other than prices quoted in Level 1, such as prices quoted for
      similar financial assets and liabilities in active markets, prices for
      identical assets and liabilities in markets that are not active or other
      inputs that are observable or can be corroborated by observable market
      data.


·
            Level
      3: Input prices quoted that are significant to the fair value of the
      financial assets or liabilities which are not observable nor supported by
      an active market.





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




March
      31, 2009Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Fair
      ValueLiabilities:Warrants
              
              $
              -
              
              
              $
              587,000
              
              
              $
              -
              
              
              $
              587,000




The fair
value of warrants have been estimated based on the closing price of the common
stock at the valuation  date using the Black-Scholes option pricing
model with assumed volatility of 80%, terms ranging from 1-2 years and discount
rates ranging from 0.57% to 0.81%.




4.
            COLLABORATION
      AGREEMENTS





2009
Collaboration Agreement with Mundipharma





On
February 11, 2009, Novelos entered into a collaboration agreement
(the  “Collaboration Agreement”) with Mundipharma International
Corporation Limited (“Mundipharma”) to develop, manufacture and commercialize
Licensed Products (as defined in the Collaboration Agreement), which includes
the Company’s lead compound, NOV-002, in Europe and Asia/Pacific (excluding
China) (the “Territory”).  Mundipharma is an independent associated
company of Purdue Pharma. L.P. (“Purdue”).




7




Under the
Collaboration Agreement, Mundipharma received an exclusive license to develop,
manufacture, market, sell or otherwise distribute the Licensed Products and
improvements thereon in the Territory.  Novelos is responsible for the
cost and execution of development, regulatory submissions and commercialization
of NOV-002 outside the Territory, and Mundipharma is responsible for the cost
and execution of certain development activities, all regulatory submissions and
all commercialization within the Territory.  In the unlikely event
that Mundipharma is required to conduct an additional Phase 3 clinical trial in
first-line advanced-stage non-small cell lung cancer in order to gain regulatory
approval in Europe, Mundipharma will be entitled to recover the full cost of
such trial by reducing milestone, fixed sales-based payments and royalty
payments to Novelos by up to 50% of the payments owed until Mundipharma recovers
the full costs of such trial.  In order for Mundipharma or Novelos to
access the other party’s data or intellectual property related to Independent
Trials (as defined in the Collaboration Agreement), the accessing party must pay
the sponsoring party 50% of the cost of such trial.





The
launch of Licensed Products, including initiation of regulatory and pricing
approvals, and subsequent commercial efforts to market and sell Licensed
Products in each country in the Territory, will be determined by Mundipharma
based on its assessment of the commercial viability of the Licensed Products,
the regulatory environment and other factors. Novelos has no assurance that it
will receive any amount of the launch payments, fixed sales-based payments or
royalties described below.





Mundipharma
will pay Novelos $2.5 million upon the launch of NOV-002 in each country, up to
a maximum of $25 million. In addition, Mundipharma will make fixed sales-based
payments up to an aggregate of $60 million upon the achievement of certain
annual sales levels payable once the annual net sales exceed the specified
thresholds.  Mundipharma will also pay as royalties to Novelos, during
the term of the Collaboration Agreement, a double-digit percentage on net sales
of Licensed Products, based upon a four-tier royalty schedule, in countries
within the Territory where Novelos held patents on the licensed technology as of
the effective date of the agreement.  Royalties in countries in the
Territory where Novelos does not hold patents as of the effective date will be
paid at 50% of the royalty rates in countries where patents are held. The
royalties will be calculated based on the incremental net sales in the
respective royalty tiers and shall be due on net sales in each country in the
Territory where patents are held until the last patent expires in the respective
country.  In countries in the Territory where Novelos does not hold
patents as of the effective date of the Collaboration Agreement, royalties will
be due until the earlier of 15 years from the date of Agreement or the
introduction of a generic in the respective country resulting in a 20% drop in
Mundipharma’s market share in such country.





For
countries in which patents are held, the Collaboration Agreement expires on a
country-by-country basis within the Territory on the earlier of (1) expiration
of the last applicable Novelos patent within the country or (2) the
determination that any patents within the country are invalid, obvious or
otherwise unenforceable.  For countries in which no patents are held,
the Collaboration Agreement expires the earlier of 15 years from its effective
date or upon generic product competition in the country resulting in a 20% drop
in Mundipharma’s market share. Novelos may terminate the Collaboration Agreement
upon breach or default by Mundipharma.  Mundipharma may terminate the
Collaboration Agreement upon breach or default, filing of voluntary or
involuntary bankruptcy by Novelos, the termination of certain agreements with
companies associated with the originators of the licensed technology, or 30-day
notice for no reason.  If any regulatory approval within the Territory
is suspended as a result of issues related to the safety of the Licensed
Products, then Mundipharma’s obligations under the Collaboration Agreement will
be suspended until the regulatory approval is reinstated.  If that
reinstatement does not occur within 12 months of the suspension, then
Mundipharma may terminate the Collaboration Agreement.





Concurrent
with the execution of the Collaboration Agreement, Novelos completed a private
placement of preferred stock and warrants to Purdue Pharma L.P. (“Purdue”), an
independent associated company of Mundipharma. See ‘Series E Preferred Stock
Private Placement’ below.





2007
Collaboration Agreement with Lee’s Pharmaceutical (HK) Ltd




In
December 2007 the Company entered into a Collaboration Agreement with Lee’s
Pharmaceutical (HK) Ltd. (“Lee’s Pharma”).  Pursuant to this
agreement, Lee’s Pharma obtained an exclusive license to develop, manufacture
and commercialize NOV-002 and NOV-205 in Hong Kong, Macau, China and Taiwan (the
“Lee’s Pharma Territory”).  Under the terms of the agreement the
Company received a license fee of $500,000 in March 2008 and is entitled to
receive up to $1,700,000 in future milestone payments upon the completion of
development and marketing milestones by Lee’s Pharma.  This initial
$500,000 payment received is being amortized over the estimated term of this
agreement, 15 years.  Accordingly, $8,333 of license revenue was
recognized in each of the three month periods ended March 31, 2009 and
2008.




8




The
Company will receive royalty payments of 20-25% of net sales of NOV-002 in the
Lee’s Pharma Territory and will receive royalty payments of 12-15% of net sales
of NOV-205 in the Lee’s Pharma Territory. Lee’s Pharma will also reimburse the
Company for the manufacturing cost of pharmaceutical products provided to Lee’s
Pharma in connection with the agreement.  Lee’s Pharma has committed
to spend a minimum amount on development in the first four years of the
agreement. The agreement expires upon the expiration of the last patent covering
any of the licensed products, or twelve years from the date of the first
commercial sale in China, whichever occurs later.




5.
            STOCKHOLDERS’
      DEFICIENCY





Series
E Preferred Stock Private Placement





Sale
of Series E Preferred Stock to Purdue Pharma





Concurrently
with the execution of the Collaboration Agreement, Novelos sold to Purdue, 200
shares of a newly created series of the Company’s preferred stock, designated
“Series E Convertible Preferred Stock”, par value $0.00001 per share (the
“Series E Preferred Stock”) and a warrant (the “Series E Warrant”) to purchase
9,230,769 shares of Novelos common stock for an aggregate purchase price of
$10,000,000 (the “Series E Financing”).  Pursuant to the related
securities purchase agreement with Purdue (the “Purchase Agreement”), Purdue has
the right to designate one observer to attend all meetings of the Company’s
Board of Directors, committees thereof and access to all information made
available to members of the Board.  This right shall last until such
time as Purdue no longerholds at least one-half of
the Series E Preferred Stock issued to them at closing. Purdue has the right to
participate in future equity financings that result in proceeds to the Company
of at least $20 million.





The
Series E Warrant is exercisable for an aggregate of 9,230,769 shares of Novelos
common stock at an exercise price of $0.65 per share. The warrant expires on
December 31, 2015.  The warrant exercise price and/or the common stock
issuable pursuant to such warrant are subject to adjustment for stock dividends,
stock splits or similar capital reorganizations so that the rights of the
warrant holders after such event will be equivalent to the rights of warrant
holders prior to such event.





Exchange
of Series D Preferred Stock for Series E Preferred Stock





The
Company also entered into an exchange agreement with the holders (the “Series D
Investors”) of the Company’s Series D Convertible Preferred Stock (the “Series D
Preferred Stock”) under which all 413.5 outstanding shares of Series D Preferred
Stock and accumulated but unpaid dividends thereon were exchanged for 445.442875
shares of Series E Preferred Stock.  The rights and preferences of the
Series E Preferred Stock are substantially the same as the Series D Preferred
Stock. In addition, the holders of Series D Preferred Stock waived liquidated
damages through the date of the exchange as a result of the Company’s failure to
file a registration statement covering the shares of common stock underlying the
Series D Preferred Stock and warrants not otherwise registered.  In
connection with the execution of this exchange agreement, warrants held by the
Series D Investors to purchase a total of 11,865,381 shares of the Company’s
common stock were amended to extend the expiration of the warrants to December
31, 2015 (from April 11, 2013) and to remove the forced exercise provision.
Also, the registration rights agreement dated May 2, 2007 with the Series D
Investors was amended to revise the definition of registrable securities under
the agreement to refer to Series E Preferred Stock.





Terms
of Series E Preferred Stock





The
shares of Series E Preferred Stock have a stated value of $50,000 per share and
are convertible into shares of common stock any time after issuance at the
option of the holder at $0.65 per share of common stock for an aggregate of
49,649,446 shares of common stock.  If there is an effective
registration statement covering the shares of common stock underlying the Series
E Preferred Stock and the VWAP, as defined in the Series E Certificate of
Designations, of Novelos common stock exceeds $2.00 for 20 consecutive trading
days, then the outstanding Series E Preferred Stock will automatically convert
into common stock at the conversion price then in effect.  The
conversion price will be subject to adjustment for stock dividends, stock splits
or similar capital reorganizations.




9




The
Series E Preferred Stock has an annual dividend rate of 9%, payable
semi-annually on June 30 and December 31.  Such dividends may be paid
in cash, in shares of Series E Preferred Stock or in registered shares of
Novelos common stock at the Company’s option, subject to certain
conditions.




For as
long as any shares of Series E Preferred Stock remain outstanding, Novelos is
prohibited from (i) paying dividends to its common stockholders, (ii) amending
its certificate of incorporation or by-laws, (iii) issuing any equity security
or any security convertible into or exercisable for any equity security at a
price of $0.65 or less or with rights senior to the Series E Preferred Stock
(except for certain exempted issuances), (iv) increasing the number of shares of
Series E Preferred Stock or issuing any additional shares of Series E Preferred
Stock, (v) selling or otherwise disposing of all or substantially all of its
assets (or in the case of licensing, any material intellectual property) or
entering into a merger or consolidation with another company unless Novelos is
the surviving corporation, the Series E Preferred Stock remains outstanding and
there are no changes to the rights and preferences of the Series E Preferred
Stock, (vi) redeeming or repurchasing any capital stock other than the Series E
Preferred Stock, (vii) incurring any new debt for borrowed money in excess of
$500,000 and (viii) changing the number of the Company’s directors.




Registration
Rights Agreement





Simultaneous
with the execution of the Purchase Agreement, the Company entered into a
registration rights agreement (the “Registration Rights Agreement”) with Purdue
and the Series D Investors.  The Registration Rights Agreement
requires Novelos to file with the Securities and Exchange Commission no later
than 5 business days following the six-month anniversary of the execution of the
Securities Purchase Agreement, a registration statement covering the resale of
(i) a number of shares of common stock equal to 100% of the shares issuable upon
conversion of the Series E Preferred Stock (excluding 12,000,000 shares of
common stock issuable upon conversion of the Series E Preferred Stock issued in
exchange for shares of outstanding Series D Preferred Stock as described below
that are included on a prior registration statement), (ii) 9,230,769 shares of
common stock issuable upon exercise of the warrants issued to Purdue and (iii)
11,865,381 shares of common stock issuable upon exercise of warrants held by the
Series D Investors. Novelos will be required to use its best efforts to have the
registration statement declared effective and to keep the registration statement
continuously effective under the Securities Act until the earlier of the date
when all the registrable securities covered by the registration statement have
been sold or the second anniversary of the closing.  In the event
Novelos fails to file the registration statement within the timeframe specified
by the Registration Rights Agreement, it will be required to pay to Purdue and
the Series D Investors liquidated damages equal to 1.5% per month (pro-rated on
a daily basis for any period of less than a full month) of the aggregate
purchase price of the Series E Preferred Stock and warrants until the delinquent
registration statement is filed.  Novelos will be allowed to suspend
the use of the registration statement for not more than 15 consecutive days or
for a total of not more than 30 days in any 12 month period.  The
Registration Rights Agreement replaces a prior agreement dated April 11, 2008
between Novelos and the Series D Investors.





The Company has an
obligation to maintain an effective registration statement covering 12,000,000
shares of common stock issuable upon Series E Preferred Stock, pursuant to a
registration rights agreement dated May 3, 2007, as
amended.The agreement, as amended, requires the Company to
use its best efforts to keep a registration statement covering 12,000,000 shares
of common stock continuously effective under the Securities Act until the
earlier of the date when all securities covered by this registration statement
have been sold or May 3, 2010.   In the event the Company does
not fulfill the requirements of the registration rights agreement, the Company
is required to pay to the investors liquidated damages equal to 1.5% per month
of the aggregate purchase price of the preferred stock and warrants until the
requirements have been met.  The second post-effective amendment was
declared effective on April 27, 2009. As of March 31, 2009, and
through the date of this filing, the Company has not concluded that it is
probable that damages will become due; therefore, no accrual for damages has
been recorded.





Advisor
Fees




Ferghana
Partners, Inc. (“Ferghana”), a New York consulting firm, received a cash fee for
their services in connection with the negotiation and execution of the
Collaboration Agreement equal to $700,000 (or seven percent (7%) of the gross
proceeds to the Company resulting from the sale of Series E Preferred Stock and
Common Stock Purchase Warrants to Purdue in connection with the Collaboration
Agreement).  Ferghana will also receive cash fees equal to six percent
(6%) of all payments to Novelos by Mundipharma under the Collaboration Agreement
other than royalties on net sales.




10




Accounting
Treatment of Series E Financing





The terms
of the Series E Preferred Stock contain provisions that may require redemption
in circumstances that are beyond the Company’s control. Therefore, the shares
have been recorded as redeemable preferred stock outside of permanent equity in
the balance sheet as of March 31, 2009.  The gross proceeds of
$10,000,000 received in conjunction with the Series E Financing were allocated
on a relative fair value basis between the Series E Preferred Stock and the
warrants.  The relative fair value of the warrants issued to investors
of $2,907,000 was recorded as additional paid-in capital while the relative fair
value of the Series E Preferred Stock of $7,093,000 was recorded as temporary
equity.  The carrying value of the Series E Preferred Stock was
immediately adjusted to its fair value of $7,385,000 based on the fair value of
the as-converted common stock.  The difference of $292,000 represents
a beneficial conversion feature and was recorded as a deemed dividend to
preferred stockholders. Issuance costs related to the Series E Financing of
$795,000 were netted against temporary equity.  The Series E Preferred
Stock that was issued in payment of dividends was initially recorded in
temporary equity at the value of the dividends that had accrued totaling
$1,597,000. This amount was then adjusted to the fair value of $1,179,000 based
on the fair value of the as-converted common stock.  The difference of
$418,000 was recorded as an offset to the deemed dividends
recorded.  The Series E Preferred Stock that was issued in exchange
for outstanding shares of Series D Preferred Stock was recorded at $13,904,000,
the carrying value of the shares of Series D Preferred Stock as of the date of
the exchange.





As a
result of the modification to the warrants to extend the term by approximately
32 months that occurred in connection with the exchange of all outstanding
shares of Series D Preferred Stock for shares of Series E Preferred Stock, in
the quarter ended March 31, 2009, a deemed dividend of $840,000 was
recorded.  This amount represents the incremental fair value of the
warrants immediately before and after modification using the Black-Scholes
option pricing model, volatility of 80%, discount rates of 1.54% and 2.17% and
the remaining terms.





Since the
Company has concluded it is not probable that an event will occur which would
allow the holders of Series E Preferred Stock to elect to receive a liquidation
payment, the carrying value will not be adjusted until the time that such event
becomes probable. The liquidation preference (redemption value) is $32,676,000
at March 31, 2009.





Common
Stock Warrants—The
following table summarizes information with regard to outstanding warrants
issued in connection with equity and debt financings as of March 31,
2009.





Offering
            
            Outstanding
              (as adjusted)
            
            
            Exercise
              Price
              (as adjusted)
            
            Expiration Date2005
      Bridge Loans
            
            
            720,000
            
            
            $
            0.625
            
            April
      1, 20102005
      PIPE - Placement agents and finders
            
            
            1,046,143
            
            
            $
            0.65
            
            August
      9, 2010Series
      A Preferred:Investors
      – September 30, 2005 closing
            
            
            909,090
            
            
            $
            0.65
            
            September
      30, 2010Investors
      – October 3, 2005 closing
            
            
            60,606
            
            
            $
            0.65
            
            October
      3, 20102006
      PIPE – Investors and placement agents
            
            
            12,379,848
            
            
            $
            1.82
            
            March
      7, 2011Series
      B Preferred:Investors
            
            
            7,500,000
            
            
            $
            0.65
            
            December
      31, 2015Placement
      agents
            
            
            900,000
            
            
            $
            1.25
            
            May
      2, 2012Series
      C Exchange
            
            
            1,333,333
            
            
            $
            1.25
            
            May
      2, 2012Series
      D Preferred
            
            
            4,365,381
            
            
            $
            0.65
            
            December
      31, 2015Series
      E Preferred
            
            
            9,230,769
            
            
            $
            0.65
            
            December
      31, 2015Total
            
            
            38,445,170





No
warrants have been exercised as of March 31, 2009.




11




6.
            STOCK-BASED
      COMPENSATION




The following table summarizes amounts
charged to expense for stock-based compensation related to employee and director
stock option grants and stock-based compensation recorded in connection with
stockoptionsgranted to non-employee consultants:





Three months
      ended
              March 31,2009
            
            
            2008Employee and director stock option
      grants:Research
      and development
            
            $
            36,260
            
            
            $
            28,330General
      and administrative
            
            
            82,015
            
            
            
            58,887118,275
            
            
            
            87,217Non-employee consultants stock
      option grants andrestricted stock
      awards:Research
      and development
            
            
            3,329
            
            
            
            70General
      and administrative
            
            
            4,983
            
            
            
            4028,312
            
            
            
            472Total stock-based
      compensation
            
            $
            126,587
            
            
            $
            87,689





Determining Fair
Value





The following table summarizes
weighted-average values and assumptions used for
options granted to employees, directors and consultants in the periods
indicated:




Three months
              ended
              March 31,2008Volatility
            
            
            80
            %Weighted-average
      volatility
            
            
            80
            %Risk-free interest
      rate
            
            
            3.28
            %Expected life
      (years)
            
            
            5Dividend
            
            
            0Weighted-average exercise
      price
            
            $
            0.60Weighted-average grant-date fair
      value
            
            $
            0.40





There were no stock option grants during
the three months ended March 31, 2009.





A summary of stock option activity is as
follows:




Options
              Outstanding
            
            
            Weighted
              Average
              Exercise
      Price
            
            
            Weighted
      Average
              Remaining
              Contracted
      Term in
              Years
            
            
            Aggregate
              Intrinsic
              ValueOutstanding at December 31,
      2008
            
            
            7,279,825
            
            
            $
            0.60
            
            
            
            7.9
            
            
            $
            989,718Options
      granted
            
            
            —Outstanding at March 31,
      2009
            
            
            7,279,825
            
            
            $
            0.60
            
            
            
            7.6
            
            
            $
            713,648Exercisable at March 31,
      2009
            
            
            4,371,481
            
            
            $
            0.68
            
            
            
            6.4
            
            
            $
            713,648





The aggregate intrinsic value of options
outstanding is calculated based on the positive difference between the closing
market price of the Company’s common stock at the end of the respective period
and the exercise price of the underlying options.





As of March 31, 2009, there was approximately $723,000of total unrecognized compensation cost
related to unvested stock-based compensation arrangements.Of this total
amount, 45%, 37% and 18%
areexpected to be
recognized during 2009, 2010and 2011, respectively.  The Company
expects2,908,344 inunvestedoptions to vest in the
future.The
weighted-average grant-date fair value of vested and unvested options
outstanding at March 31, 2009 was $0.41 and $0.31,
respectively.




12




In
January 2009, the Company modified the terms of options to purchase 40,000
shares of common stock held by two employees to vest all unvested options and to
extend the expiration dates of the options. The modification was made in
connection with the termination of the two employees to reduce costs. During the
three months ended March 31, 2009, incremental stock-based compensation expense
of $8,000 was recorded in connection with the modification of the option
terms.





7.
            NET
      LOSS PER SHARE





Basic net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock and the dilutive potential common stock
equivalents then outstanding. Potential common stock equivalents consist of
stock options, warrants and convertible preferred stock.  Since the
Company has a net loss for all periods presented, the inclusion of common stock
equivalents in the computation would be antidilutive. Accordingly, basic and
diluted net loss per share are the same.




The following potentially
dilutive securities have
been excluded from the computation of diluted net loss per share since their
inclusion would be antidilutive:




Three Months Ended March
      31,2009
            
            
            2008Stock
    options
            
            
            7,279,825
            
            
            
            5,082,651Warrants
            
            
            38,445,170
            
            
            
            26,873,047Conversion of preferred
      stock
            
            
            54,670,982
            
            
            
            18,264,000





8.
            INCOME
      TAXES





The Company accounts for income taxes in
accordance withStatement
of Financial Accounting Standards (“SFAS”)No. 109,Accounting for
Income Taxes(SFAS
109). Under SFAS 109,
deferred tax assets or liabilities are computed based on the difference between
the financial-statement and income-tax basis of assets and liabilities, and net
operating loss carryforwards, using the enacted tax rates. Deferred incometax expense or benefit is based on
changes in the asset or liability from period to period. The Company did not
record a provisionor
benefitfor federal, state
or foreign income taxes for
thethreemonths endedMarch 31, 2009because the Company has
experienced losses since
inception. The Company has not recorded deferred tax assets as their
realizationis uncertain.





13





Item 2.Management’s Discussion and Analysis of Financial Condition and
Resultsof
Operations




Forward-Looking
Statements




This
quarterly report on Form 10-Q includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
we refer to as the Exchange Act. For this purpose, any statements contained
herein regarding our strategy, future operations, financial position, future
revenues, projected costs, prospects, plans and objectives of management, other
than statements of historical facts, are forward-looking statements. The words
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,”
“projects,” “will,” “would” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the
plans, intentions or expectations disclosed in our forward-looking statements.
There are a number of important factors that could cause actual results or
events to differ materially from those disclosed in the forward-looking
statements we make. These important factors include our
significant  accounting estimates, such as those for unbilled contract
service fees and amounts due to clinical research organizations, clinical
investigators and contract manufacturers, the risk factors set forth below under
the caption “Risk Factors” and the risk factors set forth in Item 1A of our
annual report for the year ended December 31, 2008 on Form 10-K, which was filed
with the Securities and Exchange Commission (“SEC”) on March 30, 2009. Although
we may elect to update forward-looking statements in the future, we specifically
disclaim any obligation to do so, even if our estimates change, and readers
should not rely on those forward-looking statements as representing our views as
of any date subsequent to the date of this quarterly report.




Overview




We are a
biopharmaceutical company, established in 1996, commercializing oxidized
glutathione-based compounds for the treatment of cancer and
hepatitis.




NOV-002,
our lead compound, is currently in Phase 3 development for non-small cell lung
cancer.  NOV-002 is intended for use in combination with chemotherapy
to act as a chemoprotectant and a chemopotentiator.  Three separate
Phase 2 trials demonstrated clinical activity and safety of NOV-002 in
combination with chemotherapy in non-small cell lung cancer.  In May
2006, we finalized a Special Protocol Assessment (SPA) with the FDA for a single
pivotal Phase 3 trial in advanced non-small cell lung cancer in combination with
first-line chemotherapy, and received Fast Track designation in August 2006.
Patient enrollment commenced in November 2006 and targeted enrollment was
reached in March 2008.  The primary endpoint of thePhase
3 trial is increased median
overall survival, to be measured following the occurrence of 725
events (deaths).Based on evaluation of activity through April 2009, we now anticipate
that results for this trial will be available in early 2010.




NOV-002
is also being developed to treat early-stage breast cancer. In June 2007 we
commenced enrollment in a U.S. Phase 2 neoadjuvant breast trial, which is
ongoing at The University of Miami and The Medical University of South
Carolina  to evaluate the ability of NOV-002 to enhance the
effectiveness of chemotherapy.  As presented at the San Antonio Breast
Cancer Symposium (December 2008) six pathologic complete responses occurred in
the first 15 women (40%) who have completed chemotherapy and undergone surgery,
which is much greater than the historical control of less than 20% in HER-2
negative patients.  Furthermore, patients experienced decreased
hematologic toxicities.




NOV-002
is also being developed to treat chemotherapy-resistant ovarian
cancer.  In a U.S. Phase 2 chemotherapy-resistant ovarian cancer trial
at Massachusetts General Hospital and Dana-Farber Cancer Institute from July
2006 through May 2008, NOV-002 (plus carboplatin) slowed progression of the
disease in 60% of evaluable patients (nine out of 15 women). The median
progression-free survival was 15.4 weeks, almost double the historical control
of eight weeks. These results were presented at the American Society of Clinical
Oncology in May 2008.




Based on
results to-date, in 2009 we intend to initiate several Phase 2 trials with
NOV-002 in cancers.  Our ability to initiate these trials, and the
timing of such trials, will depend on available funding, principally from
collaborative arrangements or the issuance of debt or equity
securities.




NOV-205,
our second compound, is intended for use as a hepatoprotective agent with
immunomodulating and anti-inflammatory properties.  A U.S. Phase 1b
clinical trial in patients who previously failed treatment with pegylated
interferon plus ribavirin was completed in December 2007.  Based on
favorable safety results of that trial, we plan to initiate a longer duration,
proof-of-concept trial in the event we obtain the additional funding necessary
for that purpose.  However, there can be no assurance that such
funding will be available.




14




Both
compounds have completed clinical trials in humans and have been approved for
use in Russia, where they were originally developed.  We own all
intellectual property rights worldwide (excluding Russia and other states of the
former Soviet Union) related to compounds based on oxidized glutathione,
including NOV-002 and NOV-205. Our patent portfolio includes six U.S. issued
patents, two European issued patents and one Japanese issued
patent.




Results
of Operations





Revenue.Revenue
consists of amortization of license fees received in connection with partner
agreements and income received from a grant from the U.S. Department of Health
and Human Services.





Research
anddevelopment
expense.Research and development expense
consists of costs incurred in identifying, developing and testing product
candidates, which primarily
consist of salaries and related expenses for personnel, fees paid to
professional service providers for independent monitoring and analysis of our
clinical trials, costs of contract research and manufacturing and costs to
secure intellectual property.Wearecurrentlydevelopingtwoproprietarycompounds, NOV-002 and
NOV-205.To date, most of our research and
development costs have been associated with our NOV-002
compound.





General
and administrative expense.General and administrative
expense consists primarily of salaries and other related costs for personnel in
executive, finance and administrative functions. Other costs include facility
costs, insurance, costs for public and investor relations, directors’ fees and
professional fees for legal and accounting services.





Three Months Ended March 31, 2009 and
2008





Revenue.During
the three months ended March 31, 2009 and 2008 we recognized $8,000 in license
fees in connection with our collaboration with Lee’s Pharmaceutical (HK) Ltd.
(“Lee’s Pharma”), which commenced in December 2007.  Under the terms
of our agreement with Lee’s Pharma, the Company received a license fee of
$500,000 in March 2008 and is entitled to receive up to $1,700,000 in future
milestone payments upon the completion of development and marketing milestones
by Lee’s Pharma.  The $500,000 initial payment received is being
amortized over the estimated term of the agreement, 15 years.  During
the three months ended March 31, 2009, we also recognized $23,000 in grant
revenue related to a grant received from the U.S. Department of Health and Human
Services. The related costs are included as a component of research and
development expense.




Research and
Development.Research and
development expense for thethree monthsendedMarch 31, 2009was $1,784,000,compared to $6,912,000for thesame period in 2008. The $5,128,000,or74%, decrease in research
and development expense wasdue toa combination of factors.  In
March 2008, we reached the enrollment target for our Phase 3 clinical trial of
NOV-002, and an increasing number of patients completed their treatment regimen
throughout 2008.   As a result, certain clinical costs have
leveled out or declined. Contract research services such as those related to
clinical research organizations and central laboratory services decreased by
$1,496,000.  The cost of the chemotherapy drug to be provided to
patients at clinical sites in Europe decreased by
$1,723,000.  Clinical investigator expenses, which are affected by the
number of patients that remain on treatment, decreased by
$1,388,000.  Drug
manufacturingand
distributioncosts(including storing and shipping
chemotherapy drug) decreased by $485,000.  Salaries and overhead costs
decreased by $36,000.





General and
Administrative.General
andadministrative expense
for the three months ended March 31, 2009 was $476,000, comparedto $263,000for thesame period in 2008. The $213,000, 81%,increase was due principally to the fact
that the first three months of 2008 included a $404,000 credit that was recorded
to reduce an accrual for potential liquidated damages associated with
registration rights agreements.  We had accrued an estimate for such
damages in 2007 and those damages were then waived in connection with the sale
of Series D Preferred Stock during 2008. Stock-based compensation also increased
by $28,000.  These increases were partially offset by a $122,000
decrease in professional fees and a $97,000 decrease in salaries and overhead
costs. These decreases were a result of actions taken to reduce discretionary
spending in order to preserve cash.





Interest
Income.Interest income
for thethree months ended
March 31, 2009was
$1,000compared to$63,000 forthesame period in 2008.  This
decrease is a result of lower cash balances as well as a decline in prevailing
interest rates.




15




Gain on
derivatives–Effective January 1, 2009, we adopted EITF 07-5. As a result of the
adoption of EITF 07-5, we recorded a gain on derivatives of $412,000 during the
three months ended March 31, 2009. This amount represents the decrease in fair
value, during the three months ended March 31, 2009, of outstanding warrants
which contain “down-round” anti-dilution provisions.





Preferred Stock
Dividends.During thequarter endedMarch 31, 2009, we accrued $768,000 individendswith respect to our SeriesC, D and Epreferred stockholders. On February 11, 2009, all shares of
Series D preferred stock and accrued dividends thereon totaling $1,597,000
(including $202,000 that accrued during the three months ended March 31, 2009)
were exchanged for Series E preferred stock.The remaining accrued
dividends have not been paid. During the three months ended March 31,
2009, we also recorded
deemed dividendsto preferred stockholderstotaling$714,000.  This amountwas recorded in connection with the
financing that occurred in February 2009 andrepresents the value attributed to themodification of certain
warrants less the net adjustment required to record the newly issued shares of
Series E preferred stock at fair value, as described in Note 5 to the financial
statements.




During thequarter ended March 31, 2008, $403,000
in dividends were accrued with respect to Series B and C preferred
stock.  These dividends were paid in April following the closing of
the sale of Series D Preferred Stock.




The deemed dividends,cash dividendsand accrued dividendshave been included in the calculation ofnet loss attributable to common stockholders of $3,296,000, or $0.07 per
share, for the three months ended March 31, 2009 and $7,504,000 or $0.19 per
share, for the three months ended March 31, 2008.  The deemed
dividends and cash dividends are excluded from our net loss (from operating
activities) of $1,813,000 or $0.04 per share, for the three months ended March
31,2009 and $7,101,000 or $0.18 per share for the three months ended March 31,
2008.




Liquidity
and Capital Resources





We have financed our operations since
inception through the sale of securities and the issuance of debt(which was subsequently paid
off or converted into
equity). As ofMarch 31, 2009,we had $6,974,000in cash and equivalents.




During thethree months ended March 31,
2009, approximately
$3,493,000 in cash
was used in operations,
primarily due to a net loss of $1,813,000anda net decrease of $1,433,000 in accounts payable and
accrued liabilities.Other changes in working capital
provided cash of $32,000.The cash impact of the loss
wasincreased by a $412,000
non-cash gain on derivatives and reduced bynon-cash stock-based compensation
expense of $127,000 and depreciation andamortizationof fixed assets totaling$6,000.




During thethree months ended March31, 2009, we received net proceeds of
$9,205,000from the sale of our SeriesEPreferred stock (see Note5to the financial statements).





We
believe that our funds at March 31, 2009 will allow us to continue
operations at budgeted levels into late 2009, which is when we previously
expected the results of our Phase 3 clinical trial in non-small cell lung would
be available. The primary endpoint of our Phase 3 trial is increased median
overall survival, to be measured following the occurrence of 725 events
(deaths), and based on evaluation of activity through April 2009, we now
anticipate that the results from this trial will be available in early
2010.  Our ability to execute our operating plan beyond late 2009 is
dependent on our ability to obtain additional capital (including through the
sale of equity and debt securities at any time and by entering into
collaborative arrangements for licensing rights in North America, which is not
likely to occur before 2010) to fund our development activities. We plan to
pursue these alternatives during 2009 and 2010, but there can be no assurance
that we will obtain the additional capital necessary to fund our business beyond
late 2009.  The timing and content of the Phase 3 clinical trial
results may impact our projected cash requirements and our ability to obtain
capital. Furthermore, continuing adverse conditions in the capital markets
globally may affect our ability to obtain funding in a timely manner. We are
continuously evaluating measures to further reduce our costs to preserve
existing capital.  If we are unable to obtain sufficient additional
funding, we will be required, beginning in late 2009, to scale back our
administrative activities and clinical development programs, including the Phase
3 clinical development of our lead drug candidate, NOV-002, or we may be
required to cease operations entirely.


16




Item 4.Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2009.  Disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, are controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management, including
our principal executive and financial officers, to allow timely decisions
regarding required disclosures.





Based on
the evaluation of our disclosure controls and procedures as of March 31, 2009,
our Chief Executive Officer and our Chief Financial Officer concluded that, as
of such date, our disclosure controls and procedures were operating
effectively.





Change in Internal Control
over Financial Reporting





The
Company’s management, in connection with its evaluation of internal controls
(with the participation of the Company’s principal executive officer and
principal financial officer), did not identify any change in internal control
over the financial reporting process that occurred during the Company’s first
quarter of 2009 that would have materially affected, or would have been
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Limitations on Effectiveness
of Controls





In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
on certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.




17




PART II. OTHER
INFORMATION




Item 1.Legal Proceedings




None.




Item
1A. Risk Factors





The
report from our independent registered public accounting firm included in our
annual report on Form 10-K indicates that there is substantial doubt about
whether we will be able to continue as a going concern.
 
 The
report from our independent registered public accounting firm included with our
annual report on Form 10-K indicates that factors exist that raise substantial
doubt about our ability to continue as a going concern. We believe that our
funds at March 31, 2009 will allow us to continue operations at budgeted
levels into late 2009, which is when we previously anticipated that the results
of our Phase 3 clinical trial in non-small cell lung cancer would be
available.  The primary endpoint of our Phase 3 trial is increased
median overall survival, to be measured following the occurrence of 725 events
(deaths), and based on evaluation of activity through April 2009, we now
anticipate that the results from this trial will be available in early
2010.  Our ability to execute our operating plan beyond late 2009 is
dependent on our ability to obtain additional capital (including through the
sale of equity and debt securities at any time and by entering into
collaborative arrangements for licensing rights in North America, which is not
likely to occur before 2010) to fund our development activities. We plan to
pursue these alternatives during 2009, but there can be no assurance that we
will obtain the additional capital necessary to fund our business beyond
late 2009. The timing and content of the Phase 3 clinical trial
results may affect our projected cash requirements and our ability to obtain
capital. Furthermore, continuing adverse conditions in the capital markets
globally may impair our ability to obtain funding in a timely manner. We are
continuously evaluating measures to further reduce our costs to preserve
existing capital.  If we are unable to obtain sufficient additional
funding, we will be required, beginning in late 2009, to scale back our
administrative activities and clinical development programs, including the Phase
3 clinical development of our lead drug candidate, NOV-002, or we may have to
cease our operations entirely.




We
are prohibited from taking certain actions and entering into certain
transactions without the consent of holders of our Series E preferred
stock.





For as
long as any shares of Series E Preferred Stock remain outstanding we are
prohibited from taking certain actions or entering into certain transactions
without the prior consent of specific holders of outstanding shares of Series E
preferred stock (currently consisting of Xmark Opportunity Partners, OrbiMed
Advisors LLC and Purdue Pharma L.P.).  We are prohibited from paying
dividends to common stockholders, amending our certificate of incorporation,
issuing any equity security or any security convertible into or exercisable for
any equity security at a price of $0.65 or less or with rights senior to the
Series E Preferred Stock (except for certain exempted issuances), increasing the
number of shares of Series E Preferred Stock or issuing any additional shares of
Series E Preferred Stock other than the 735 shares designated in the Series E
Certificate of Designations, or changing the number of our
directors.  We are also prohibited from entering into certain
transactions such as:




·
            selling
      or otherwise disposing of all or substantially all of our assets (and in
      the case of licensing, any material intellectual property) or entering
      into a merger or consolidation with another company unless we are the
      surviving corporation, the Series E Preferred Stock remains outstanding
      and there are no changes to the rights and preferences of the Series E
      Preferred Stock;


·
            redeeming
      or repurchasing any capital stock other than Series E Preferred Stock;
      or


·
            incurring
      any new debt for borrowed money in excess of
  $500,000.





Even though
our board of directors may determine that any of these actions are in the best
interest of the Company or our shareholders, we may be unable to complete them
if we do not get the approval of specific holders of the outstanding shares of
Series E Preferred Stock.  The interests of the holders of Series E
preferred stock may differ from those of stockholders
generally.  Moreover, the relationship of Purdue Pharma with
Mundipharma (our collaborator on most non-U.S. development, manufacturing and
commercialization of NOV-002) has the potential of creating situations where the
interests of the Company and those of Purdue Pharma may conflict.  If
we are unable to obtain consent from each of the holders identified above, we
may be unable to complete actions or transactions that our board of directors
has determined are in the best interest of the Company and its
shareholders.




18




We
have not paid dividends to preferred stockholders totaling $860,000 as of March
31, 2009 and we may be unable to pay dividends to preferred stockholders when
due in future periods.





Our
ability to pay cash dividends on stated future dividend payment dates will be
dependent on a number of factors including the timing of future financings and
the amount of net losses in future periods. We anticipate that future dividends
on Series E preferred stock will be paid by issuing shares of common stock or
additional shares of Series E preferred stock, which will result in additional
dilution to existing shareholders. We anticipate that the accrued unpaid
dividend on our Series C preferred stock ($457,000 at March 31, 2009) will
continue to accumulate.




Item 2.Unregistered Sales of Equity Securities
and Use of Proceeds




On
February 11, 2009, we sold 200 shares of our Series E convertible preferred
stock and warrants to purchase 9,230,769 shares of common stock, receiving gross
proceeds of $10,000,000 and paid approximately $795,000 in fees and
expenses.  In addition, 413.5 shares of Series D convertible preferred
stock and accumulated dividends thereon were exchanged for 445.442875 shares of
Series E convertible preferred stock.





Item 3.Defaults Upon Senior
Securities





None.




Item 4.Submission of Matters to a Vote of
Security Holders




None.




Item 5.Other Information




None.




19




Item 6.Exhibits




Incorporated by
      ReferenceExhibit
      No.
              
              Description
              
              Filed with this Form
      10-Q
              
              Form
              
              Filing Date
              
              Exhibit
  No.2.1
              
              Agreement and plan of merger among
      Common Horizons, Inc., Nove Acquisition, Inc. and Novelos Therapeutics,
      Inc. dated May 26, 2005
              
              
              
              8-K
              
              June 2,
2005
              
              99.22.2
              
              Agreement and plan of merger
      between Common Horizons and Novelos Therapeutics, Inc. dated June 7,
      2005
              
              
              
              10-QSB
              
              August 15,
    2005
              
              2.23.1
              
              Amended and Restated Certificate
      of Incorporation filed as Exhibit A to the Certificate of Merger merging
      Nove Acquisition, Inc. with and into Novelos Therapeutics, Inc. dated May
      26, 2005
              
              
              
              10-QSB
              
              August 10,
    2007
              
              3.13.2
              
              Certificate of Merger merging
      Common Horizons, Inc. with and into Novelos Therapeutics, Inc. dated June
      13, 2005
              
              
              
              10-QSB
              
              August 10,
    2007
              
              3.23.3
              
              Certificate of Correction dated
      March 3, 2006
              
              
              
              10-QSB
              
              August 10,
    2007
              
              3.33.4
              
              Certificate of Amendment to
      Amended and Restated Certificate of Incorporation dated July 16,
      2007
              
              
              
              10-QSB
              
              August 10,
    2007
              
              3.43.5
              
              Certificate of Designations of
      Series C cumulative convertible preferred
stock
              
              
              
              10-QSB
              
              August 10,
    2007
              
              3.63.6
              
              Certificate of Designations of
      Series E  convertible preferred stock
              
              
              
              8-K
              
              February 18,
      2009
              
              4.13.7
              
              By-Laws
              
              
              
              8-K
              
              June 17,
    2005
              
              210.1
              
              Securities
      Purchase Agreement dated February 11, 2009
              
              
              
              8-K
              
              February
      18, 2009
              
              10.110.2
              
              Registration
      Rights Agreement dated February 11, 2009
              
              
              
              8-K
              
              February
      18, 2009
              
              10.210.3
              
              Series
      D Preferred Stock Consent and Agreement to Exchange dated February 10,
      2009
              
              
              
              8-K
              
              February
      18, 2009
              
              10.310.4
              
              Warrant
      Amendment Agreements dated February 11, 2009
              
              
              
              8-K
              
              February
      18, 2009
              
              10.410.5
              
              Amendment
      No. 2 to Registration Rights Agreement dated February 11,
    2009
              
              
              
              8-K
              
              February
      18, 2009
              
              10.510.6
              
              Collaboration
      Agreement dated February 11, 2009
              
              
              
              10-K
              
              March
      30, 2009
              
              10.3931.1
              
              Certification of the chief
      executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
              
              X31.2
              
              Certification of the chief
      financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
              
              X32.1
              
              Certification Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
              
              X






20




SIGNATURES




In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.




NOVELOS THERAPEUTICS,
      INC.Date:  May 15,
      2009
            By:
            /s/ Harry S.
      PalminHarry S.
PalminPresident and Chief Executive
      Officer





21




EXHIBIT INDEX




Incorporated by
      ReferenceExhibit
      No.
                
                Description
                
                Filed with this Form
      10-Q
                
                Form
                
                Filing Date
                
                Exhibit
  No.2.1
                
                Agreement and plan of merger among
      Common Horizons, Inc., Nove Acquisition, Inc. and Novelos Therapeutics,
      Inc. dated May 26, 2005
                
                
                
                8-K
                
                June 2,
2005
                
                99.22.2
                
                Agreement and plan of merger
      between Common Horizons and Novelos Therapeutics, Inc. dated June 7,
      2005
                
                
                
                10-QSB
                
                August 15,
    2005
                
                2.23.1
                
                Amended and Restated Certificate
      of Incorporation filed as Exhibit A to the Certificate of Merger merging
      Nove Acquisition, Inc. with and into Novelos Therapeutics, Inc. dated May
      26, 2005
                
                
                
                10-QSB
                
                August 10,
    2007
                
                3.13.2
                
                Certificate of Merger merging
      Common Horizons, Inc. with and into Novelos Therapeutics, Inc. dated June
      13, 2005
                
                
                
                10-QSB
                
                August 10,
    2007
                
                3.23.3
                
                Certificate of Correction dated
      March 3, 2006
                
                
                
                10-QSB
                
                August 10,
    2007
                
                3.33.4
                
                Certificate of Amendment to
      Amended and Restated Certificate of Incorporation dated July 16,
      2007
                
                
                
                10-QSB
                
                August 10,
    2007
                
                3.43.5
                
                Certificate of Designations of
      Series C cumulative convertible preferred
stock
                
                
                
                10-QSB
                
                August 10,
    2007
                
                3.63.6
                
                Certificate of Designations of
      Series E  convertible preferred stock
                
                
                
                8-K
                
                February 18,
      2009
                
                4.13.7
                
                By-Laws
                
                
                
                8-K
                
                June 17,
    2005
                
                210.1
                
                Securities
      Purchase Agreement dated February 11, 2009
                
                
                
                8-K
                
                February
      18, 2009
                
                10.110.2
                
                Registration
      Rights Agreement dated February 11, 2009
                
                
                
                8-K
                
                February
      18, 2009
                
                10.210.3
                
                Series
      D Preferred Stock Consent and Agreement to Exchange dated February 10,
      2009
                
                
                
                8-K
                
                February
      18, 2009
                
                10.310.4
                
                Warrant
      Amendment Agreements dated February 11, 2009
                
                
                
                8-K
                
                February
      18, 2009
                
                10.410.5
                
                Amendment
      No. 2 to Registration Rights Agreement dated February 11,
    2009
                
                
                
                8-K
                
                February
      18, 2009
                
                10.510.6
                
                Collaboration
      Agreement dated February 11, 2009
                
                
                
                10-K
                
                March
      30, 2009
                
                10.3931.1
                
                Certification of the chief
      executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
                
                X31.2
                
                Certification of the chief
      financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002
                
                X32.1
                
                Certification Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                
                X
   22