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,
  2010




 ̈
            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)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  ̈  ̈




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
                     ̈
                    Accelerated
      filer  ̈Non-accelerated
      filer
                     ̈
                    Smaller
      reporting company  x(Do
      not check if a smaller reporting company)
  
 
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈   No  x
  Number of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 90,502,606 shares of common stock, $0.00001 par value per share, as of May
14, 2010.
 2
 
  NOVELOS
THERAPEUTICS, INC.




FORM
10-Q INDEX




PART
      I.  FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements
                    4Item
      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
                    18Item
      3.
                    Defaults
      Upon Senior Securities
                    19Item
      5.
                    Other
      Information
                    19Item
      6.
                    Exhibits
                    20


3





PART
I.  FINANCIAL INFORMATION




Item
1.  Financial Statements


NOVELOS
THERAPEUTICS, INC.


BALANCE
SHEETS


March
      31,
                                    
                                    
                                    December
      31,2010
                                      (unaudited)
                                    
                                    
                                    2009ASSETSCURRENT
      ASSETS:Cash
      and equivalents
                                    
                                    $
                                    5,611,732
                                    
                                    
                                    $
                                    8,769,529Prepaid
      expenses and other current assets
                                    
                                    
                                    150,497
                                    
                                    
                                    
                                    102,923Total
      current assets
                                    
                                    
                                    5,762,229
                                    
                                    
                                    
                                    8,872,452FIXED
      ASSETS, NET
                                    
                                    
                                    16,807
                                    
                                    
                                    
                                    44,097DEPOSITS
                                    
                                    
                                    15,350
                                    
                                    
                                    
                                    15,350TOTAL
      ASSETS
                                    
                                    $
                                    5,794,386
                                    
                                    
                                    $
                                    8,931,899LIABILITIES, REDEEMABLE PREFERRED STOCK AND
      STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                                    
                                    $
                                    2,895,457
                                    
                                    
                                    $
                                    3,299,217Accrued
      compensation
                                    
                                    
                                    7,689
                                    
                                    
                                    
                                    245,711Accrued
      dividends
                                    
                                    
                                    2,924,673
                                    
                                    
                                    
                                    2,902,963Derivative
      liability (see Note 2)
                                    
                                    
                                    4,756
                                    
                                    
                                    
                                    10,486,594Deferred
      revenue – current
                                    
                                    
                                    33,333
                                    
                                    
                                    
                                    33,333Total
      current liabilities
                                    
                                    
                                    5,865,908
                                    
                                    
                                    
                                    16,967,818DEFERRED
      REVENUE – NONCURRENT
                                    
                                    
                                    391,667
                                    
                                    
                                    
                                    400,000COMMITMENTS
      AND CONTINGENCIESREDEEMABLE
      PREFERRED STOCK:Series
      E convertible preferred stock, $0.00001 par value; 735 shares designated;
      408.264045 and 548.26078125 shares issued and outstanding at March 31,
      2010 and December 31, 2009, respectively (liquidation preference
      $22,505,555 at March 31, 2010)
                                    
                                    
                                    13,770,026
                                    
                                    
                                    
                                    18,459,619STOCKHOLDERS’
      DEFICIENCY:Preferred
      Stock, $0.00001 par value; 7,000 shares authorized: Series C cumulative
      convertible preferred stock; 272 shares designated; 204 shares issued and
      outstanding at March 31, 2010 and December 31, 2009 (liquidation
      preference $3,280,320 at March 31, 2010)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Common
      stock, $0.00001 par value; 225,000,000 shares
      authorized;  90,385,939 and 69,658,002 shares issued and
      outstanding at March 31, 2010 and December 31, 2009,
      respectively
                                    
                                    
                                    904
                                    
                                    
                                    
                                    697Additional
      paid-in capital
                                    
                                    
                                    56,487,847
                                    
                                    
                                    
                                    49,175,853Accumulated
      deficit
                                    
                                    
                                    (70,721,966
                                    )
                                    
                                    
                                    (76,072,088
                                    )Total
      stockholders’ deficiency
                                    
                                    
                                    (14,233,215
                                    )
                                    
                                    
                                    (26,895,538
                                    )TOTAL
      LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
      DEFICIENCY
                                    
                                    $
                                    5,794,386
                                    
                                    
                                    $
                                    8,931,899




See
notes to financial statements.




4




NOVELOS THERAPEUTICS,
INC.


STATEMENTS
OF OPERATIONS


(Unaudited)





Three
      Months Ended March  31,2010
                                      
                                      
                                      2009REVENUE
                                      
                                      $
                                      8,333
                                      
                                      
                                      $
                                      30,968COSTS
      AND EXPENSES:Research
      and development
                                      
                                      
                                      1,910,889
                                      
                                      
                                      
                                      1,783,832General
      and administrative
                                      
                                      
                                      644,763
                                      
                                      
                                      
                                      476,197Total
      costs and expenses
                                      
                                      
                                      2,555,652
                                      
                                      
                                      
                                      2,260,029LOSS
      FROM OPERATIONS
                                      
                                      
                                      (2,547,319
                                      )
                                      
                                      
                                      (2,229,061)OTHER
      INCOME:Interest
      income
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,013Gain
      on derivative warrants (see Note 1)
                                      
                                      
                                      7,897,441
                                      
                                      
                                      
                                      412,120Miscellaneous
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,483Total
      other income
                                      
                                      
                                      7,897,441
                                      
                                      
                                      
                                      415,616NET
      INCOME (LOSS)
                                      
                                      
                                      5,350,122
                                      
                                      
                                      
                                      (1,813,445)PREFERRED
      STOCK DIVIDENDS
                                      
                                      
                                      (656,635
                                      )
                                      
                                      
                                      (768,183)PREFERRED
      STOCK DEEMED DIVIDENDS
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (714,031)NET
      INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
                                      
                                      $
                                      4,693,487
                                      
                                      
                                      $
                                      (3,295,659)BASIC
      NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
                                      
                                      $
                                      0.06
                                      
                                      
                                      $
                                      (0.07)SHARES
      USED IN COMPUTING BASIC NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
      STOCKHOLDERS PER COMMON SHARE
                                      
                                      
                                      79,919,670
                                      
                                      
                                      
                                      43,975,656




DILUTED
      NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
                  
                  $
                  0.02
                  
                  
                  $
                  (0.07)SHARES
      USED IN COMPUTING DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
      STOCKHOLDERS PER COMMON SHARE
                  
                  
                  134,925,138
                  
                  
                  
                  43,975,656




See
notes to financial statements.




5


NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF CASH FLOWS


(Unaudited)





Three
      months ended March 31,2010
                                  
                                  
                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                  
                                  $
                                  5,350,122
                                  
                                  
                                  $
                                  (1,813,445
                                  )Adjustments
      to reconcile net income (loss) to cash used in operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  27,290
                                  
                                  
                                  
                                  6,231Stock-based
      compensation
                                  
                                  
                                  (97,479
                                  )
                                  
                                  
                                  126,587Gain
      on derivative warrants
                                  
                                  
                                  (7,897,441
                                  )
                                  
                                  
                                  (412,120
                                  )Changes
      in:Prepaid
      expenses and other current assets
                                  
                                  
                                  (47,574
                                  )
                                  
                                  
                                  41,290Accounts
      payable and accrued liabilities
                                  
                                  
                                  (403,760
                                  )
                                  
                                  
                                  (1,260,400
                                  )Accrued
      compensation
                                  
                                  
                                  (238,022
                                  )
                                  
                                  
                                  (172,381
                                  )Deferred
      revenue
                                  
                                  
                                  (8,333
                                  )
                                  
                                  
                                  (8,333
                                  )Cash
      used in operating activities
                                  
                                  
                                  (3,315,197
                                  )
                                  
                                  
                                  (3,492,571
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of Series E convertible preferred stock and warrants,
      net
                                  
                                  
                                  —
                                  
                                  
                                  
                                  9,204,531Proceeds
      from exercise of stock options
                                  
                                  
                                  157,400
                                  
                                  
                                  
                                  —Cash
      provided by financing activities
                                  
                                  
                                  157,400
                                  
                                  
                                  
                                  9,204,531INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
                                  
                                  
                                  (3,157,797
                                  )
                                  
                                  
                                  5,711,960CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                                  
                                  
                                  8,769,529
                                  
                                  
                                  
                                  1,262,452CASH
      AND EQUIVALENTS AT END OF PERIOD
                                  
                                  $
                                  5,611,732
                                  
                                  
                                  $
                                  6,974,412SUPPLEMENTAL
      DISCLOSURES OF NON-CASH FINANCING ACTIVITIESDividends
      accumulated on shares of Series E preferred stock exchanged or converted
      into shares of common stock
                                  
                                  $
                                  634,925
                                  
                                  
                                  $
                                  1,597,144Fair
      value of derivative warrants upon adoption of new accounting
      principle
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  998,945Fair
      value of derivative warrants reclassified to additional paid-in capital
      upon cashless exercise
                                  
                                  $
                                  2,584,397
                                  
                                  
                                  $
                                  —Carrying
      value of redeemable preferred stock converted into common
      stock
                                  
                                  $
                                  4,689,593
                                  
                                  
                                  $
                                  —Exchange
      of Series D for Series E preferred stock
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  13,904,100Relative
      fair value of warrants issued to stockholders
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  2,907,208




See
notes to financial statements.




6





Novelos
Therapeutics, Inc.


Notes
to Financial Statements





1.    NATURE
OF BUSINESS, BASIS OF PRESENTATION





Novelos
Therapeutics, Inc. (‘‘Novelos’’ or the ‘‘Company’’) is a biopharmaceutical
company developing oxidized glutathione-based compounds for the treatment
of cancer and hepatitis. Novelos is also seeking to expand its product pipeline
by licensing or acquiring clinical stage compounds or technologies for oncology
indications.  Novelos owns exclusive worldwide intellectual property
rights (excluding Russia and other states of the former Soviet Union (the
“Russian Territory”), but including Estonia, Latvia and Lithuania) 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 small
biopharmaceutical companies.  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.





On
February 24, 2010, the Company announced that its Phase 3 clinical trial for
NOV-002 in non-small cell lung cancer (“NSCLC”) (the “Phase 3 Trial”) did not
meet its primary endpoint of a statistically significant increase in median
overall survival.  Following evaluation of the detailed trial data, on
March 18, 2010, the Company announced that the secondary endpoints had also not
been met in the Phase 3 Trial and that it had discontinued development of
NOV-002 for NSCLC in combination with first-line paclitaxel and carboplatin
chemotherapy, although development for other indications is
continuing.





The
Company has generated insignificant revenues and has incurred operating losses
since inception in devoting substantially all of its efforts toward research and
development. The process of developing new 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 it has adequate cash to fund these ongoing activities into early in the
first quarter of 2011.  The Company’s ability to execute its operating
plan beyond early in the first quarter of 2011 is dependent on its ability to
obtain additional capital, during 2010, principally through the sale of equity
and/or debt securities.  The negative outcome of the Phase 3 Trial, as
well as continuing difficult conditions in the capital markets globally, may
adversely affect the ability of the Company to obtain funding in a timely
manner.  If the Company is unable to obtain sufficient additional
funding, it will be required, beginning in mid- to late-2010, to scale back its
administrative and clinical development activities and may be required to cease
its operations entirely. The Company plans to continue to actively pursue
financing alternatives, but there can be no assurance that it will obtain the
necessary capital.  In the interim, the Company is continuously
evaluating measures to reduce costs to preserve existing capital.





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 for other quarterly periods
or for the entire year ending December 31, 2010. 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, 2009 on Form 10-K, which was filed with the Securities
and Exchange Commission (“SEC”) on March 30, 2010. The report from the
Company’s independent registered public accounting firm dated March 23, 2010 and
included with its annual report on Form 10-K indicated that factors exist that
raised substantial doubt about the Company’s ability to continue as a going
concern.





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





7


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 the
Derivatives and Hedging Topic of the Financial Accounting Standards Board
Accounting Standards Codification (“FASB ASC”),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 issuances of stock
at prices below the then-effective exercise price of the
warrants.  The number of such warrants was 5,710,027 at March 31,
2010.  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
recorded as a component of gain or loss on derivatives in each reporting period.
If these instruments subsequently meet the requirements for equity
classification, the Company reclassifies the fair value to equity.  At
March 31, 2010, these warrants represent the only outstanding derivative
instruments issued or held by the Company.  As a result of the
significant decline in the Company’s stock price following the announcement of
the results of the Phase 3 Trial, the Company recorded a gain of approximately
$7,897,000 during the three months ended March 31, 2010 in connection of
revaluation of the derivative liability balance at March 31, 2010.





2.FAIR
VALUES OF ASSETS AND LIABILITIES





In
accordance with Fair Value Measurements and Disclosures Topic of the FASB ASC,
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 or supported by
      an active market.





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




March
      31, 2010Level
      1
                                        
                                        
                                        Level
      2
                                        
                                        
                                        Level
      3
                                        
                                        
                                        Fair
      ValueLiabilities:Warrants
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        4,756
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        4,756




December
      31, 2009Level
      1
                                        
                                        
                                        Level
      2
                                        
                                        
                                        Level
      3
                                        
                                        
                                        Fair
      ValueLiabilities:Warrants
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,486,594
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,486,594




The fair value of warrants has been
estimated using the Black-Scholes option pricing model based on the closing
price of the common stock at the valuation date, estimated volatility of 90%,
terms ranging from four to eleven months at March 31, 2010 and three to fourteen
months at December 31, 2009 and risk-free interest rates ranging from 0.02%
to 0.47% at March 31, 2010 and 0.04% to 0.47% at December 31, 2009.




3.    COLLABORATION
AGREEMENTS





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 Pharm”).  Pursuant to this agreement,
Lee’s Pharm obtained an exclusive license to develop, manufacture and
commercialize NOV-002 and NOV-205 in China, Hong Kong, Taiwan and Macau (the
“Chinese 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 Pharm.  This initial $500,000
payment received is being amortized over the estimated term of this agreement,
15 years.  Accordingly, $8,000 of license revenue was recognized in
each of the three-month periods ended March 31, 2010 and 2009.




8


The Lee’s
Pharm agreement provides that the Company receive royalty payments of 20-25% of
net sales of NOV-002 in the Chinese Territory and receive royalty payments of
12-15% of net sales of NOV-205 in the Chinese Territory.  Lee’s Pharm
is obligated to reimburse the Company for the manufacturing cost of
pharmaceutical products provided to Lee’s Pharm in connection with the
agreement.  Lee’s Pharm 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.




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, on an exclusive
basis, Licensed Products (as defined in the Collaboration Agreement), which
includes the Company’s lead compound, NOV-002, in Europe (other than the Russian
Territory), Asia (other than the Chinese Territory) and Australia (collectively
referred to as the “Mundipharma Territory”).  Mundipharma is an independent
associated company of Purdue Pharma, L.P. (“Purdue”).  The
Collaboration Agreement provides for Mundipharma to pay the Company royalties
and fixed milestone payments based on sales and commercial launches in the
licensed territories.





For
countries in which patents are held, the Collaboration Agreement expires on a
country-by-country basis within the Mundipharma 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 Mundipharma 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.





Concurrently
with the execution of the Collaboration Agreement, Novelos completed a private
placement of Series E preferred stock and common stock purchase warrants to
Purdue.





The
Company expects that the negative results of its Phase 3 Trial will adversely
affect development and commercialization of NOV-002 under the collaboration
agreements with Lee’s Pharm and Mundipharma.




4.
  STOCKHOLDERS’ DEFICIENCY





Registration
Rights Agreements





Simultaneous
with the execution of the Series E preferred stock purchase agreement in 2009,
the Company entered into a registration rights agreement (the “Series E
Registration Agreement”) with Purdue and the investors in the Company’s Series D
preferred stock (the “Series D Investors”).  The Series E Registration
Agreement replaced a prior agreement dated April 11, 2008 between Novelos and
the Series D Investors.  The Series E Registration Agreement required
Novelos to file with the Securities and Exchange Commission (“SEC”) no later
than 5 business days following the six-month anniversary of the execution of the
Series E purchase agreement (the “Filing Deadline”), 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 during 2008 that are included on a prior registration statement) and (ii)
an aggregate of 21,096,150 shares of common stock issuable upon exercise of
warrants issued in connection with Series B, Series D and Series E preferred
stock.  Novelos was 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 of the Series E purchase
agreement.  Purdue and the Series D Investors consented to extend the
Filing Deadline to September 15, 2009.  The registration statement was
filed on that date. The Series E Registration Agreement was amended on January
21, 2010 principally to consent to a reduction in the number of shares offered.
The registration statement covering the resale of a total of 19,000,000 shares
of the Company’s common stock was declared effective on February 12, 2010 and a
post-effective amendment was declared effective on May 3, 2010.  The
use of the registration statement may be suspended for not more than 15
consecutive days or for a total of not more than 30 days in any 12-month
period.  The Company will use its reasonable best efforts to register
the shares excluded from the registration statement as may be permitted by the
SEC until such time as all of these shares either have been registered or may be
sold without restriction in reliance on Rule 144 under the Securities
Act.





9


As part
of a common stock private placement in August 2009, the Company entered into a
registration rights agreement with Purdue (the “Purdue Registration
Agreement”).  The Purdue Registration Agreement requires the Company
to file with the SEC no later than May 17, 2010, a registration statement
covering the resale of all the shares of common stock issued pursuant to the
August 2009 purchase agreement and all shares of common stock issuable upon
exercise of the warrants issued pursuant to the August 2009 purchase
agreement.  The Company is 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 final
closing.  In the event the Company fails to file the registration
statement timely, it will be required to pay Purdue 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 common stock until the delinquent
registration statement is filed.  The Company will be allowed to
suspend the use of the registration for not more than 15 consecutive days or for
a total of not more than 30 days in any 12-month period.  As of March
31, 2010, 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.





Conversions of
Preferred Stock –During the three months ended March 31, 2010, 140
shares of the Company’s Series E preferred stock, having an aggregate stated
value of $7,000,000, and accumulated dividends thereon, were converted into
11,745,779 shares of common stock.  The associated carrying value of
the converted shares totaling approximately $4,690,000 was reclassified to
permanent equity from temporary equity.





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,
2010:


Offering
                                  
                                  Outstanding
                                    (as adjusted)
                                  
                                  
                                  Exercise
                                    Price
                                    (as adjusted)
                                  
                                  Expiration Date2005
      Issuance of Common Stock – placement agents
                                  
                                  
                                  243,476
                                  
                                  
                                  $
                                  0.65
                                  
                                  August
      9, 2010Series
      A Preferred Stock
                                  
                                  
                                  909,090
                                  
                                  
                                  $
                                  0.65
                                  
                                  September
      30, 20102006
      Issuance of Common Stock
                                  
                                  
                                  4,557,461
                                  
                                  
                                  $
                                  1.72
                                  
                                  March
      7, 2011Series
      B Preferred Stock – placement agents
                                  
                                  
                                  825,000
                                  
                                  
                                  $
                                  1.25
                                  
                                  May
      2, 2012Series
      C Exchange
                                  
                                  
                                  1,250,000
                                  
                                  
                                  $
                                  1.25
                                  
                                  May
      2, 2012Series
      E Preferred Stock
                                  
                                  
                                  9,230,769
                                  
                                  
                                  $
                                  0.65
                                  
                                  December
      31, 2015August
      2009 Private Placement
                                  
                                  
                                  4,772,730
                                  
                                  
                                  $
                                  0.66
                                  
                                  December
      31, 2015Total
                                  
                                  
                                  21,788,526




During
the three months ended March 31, 2010, a total of 8,182,158 shares of the
Company’s common stock were issued upon the cashless exercise of warrants to
purchase 13,732,580 shares of the Company’s common stock.  The Company
reclassified a total of $2,584,000 from derivative liability to additional
paid-in capital upon the exercise of warrants.  The following is a
summary of the exercises:




10


Original
      private placement
                                                            
                                                            Shares
      of Common Stock Issued
                                                            
                                                            Warrants
      Exercised
                                                            
                                                            Exercise
                                                              Price2005
      Bridge Financing
                                                            
                                                            314,982
                                                            
                                                            
                                                            400,000
                                                            
                                                            $
                                                            0.6252005
      Issuance of Common Stock – placement agents
                                                            
                                                            226,544
                                                            
                                                            
                                                            317,350
                                                            
                                                            $
                                                            0.652006
      Issuance of Common Stock
                                                            
                                                            366,492
                                                            
                                                            
                                                            991,516
                                                            
                                                            $
                                                            1.72Series
      B Preferred Stock – purchasers
                                                            
                                                            4,545,447
                                                            
                                                            
                                                            7,500,000
                                                            
                                                            $
                                                            0.65Series
      B Preferred Stock – placement agents
                                                            
                                                            35,106
                                                            
                                                            
                                                            75,000
                                                            
                                                            $
                                                            1.25Series
      D Preferred Stock
                                                            
                                                            2,645,685
                                                            
                                                            
                                                            4,365,381
                                                            
                                                            $
                                                            0.65Series
      C Exchange
                                                            
                                                            47,902
                                                            
                                                            
                                                            83,333
                                                            
                                                            $
                                                            1.25Total
                                                            
                                                            8,182,158
                                                            
                                                            
                                                            13,732,580





5.  STOCK-BASED
COMPENSATION




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


Three
      Months Ended
                                    March
      31,2010
                                  
                                  
                                  2009Employee
      and director stock option grants:Research
      and development
                                  
                                  $
                                  57,113
                                  
                                  
                                  $
                                  36,260General
      and administrative
                                  
                                  
                                  82,928
                                  
                                  
                                  
                                  82,015140,041
                                  
                                  
                                  
                                  118,275Non-employee
      consultant stock option grants:Research
      and development
                                  
                                  
                                  (210,825
                                  )
                                  
                                  
                                  3,329General
      and administrative
                                  
                                  
                                  (26,695
                                  )
                                  
                                  
                                  4,983(237,520
                                  )
                                  
                                  
                                  8,312Total
      stock-based compensation
                                  
                                  $
                                  (97,479
                                  )
                                  
                                  $
                                  126,587





There
were no stock option grants during the three months ended March 31, 2010 or
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 January 1, 2010
                            
                            
                            9,219,825
                            
                            
                            $
                            0.63
                            
                            
                            
                            7.5
                            
                            
                            $
                            17,650,255Options
      exercised
                            
                            
                            (800,000
                            )
                            
                            $
                            0.20Options
      cancelled
                            
                            
                            (150,000
                            )
                            
                            $
                            2.20Outstanding
      at March 31, 2010
                            
                            
                            8,269,825
                            
                            
                            $
                            0.64
                            
                            
                            
                            7.6
                            
                            
                            $
                            230,992Exercisable
      at March 31, 2010
                            
                            
                            5,044,805
                            
                            
                            $
                            0.67
                            
                            
                            
                            6.7
                            
                            
                            $
                            230,992




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.  During the three months ended March 31, 2010, the
total intrinsic value of options exercised was $636,000 and the total amount of
cash received from exercise of these options was $157,000.





11


As of
March 31, 2010, there was approximately $1,115,000 of total unrecognized
compensation cost related to unvested stock-based compensation arrangements. Of
this total amount, 41%, 41% and 18% is expected to be recognized during 2010,
2011 and 2012, respectively.  The Company expects 3,225,020 in
unvested options to vest in the future.  The weighted-average
grant-date fair value of both vested and unvested options outstanding at March
31, 2010 was $0.41.





In April
2010, options to purchase 116,667 shares of common stock at an exercise price of
$0.01 per share were exercised. These options had an intrinsic value of $26,000
on the date of exercise.





6.
  NET INCOME (LOSS) PER SHARE





Basic net
income (loss) per share is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share is computed by
dividing net income attributable to common stockholders by the sum of 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 and accumulated
dividends.  Since the Company has a net loss for the three months
ended March 31, 2009, the inclusion of common stock equivalents in the
computation would be antidilutive. Accordingly, basic and diluted net loss per
share are the same for the three months ended March 31, 2009.




The
following table sets forth the shares and net income used in the diluted
earnings per share computation for the three months ended March 31,
2010:




Numerator:Net
      income available to common stockholders used in basic earnings per share
      calculation
                      
                      $
                      4,693,487Derivative
      gain recorded on dilutive warrants
                      
                      
                      (2,340,515)Dividends
      on convertible preferred stock
                      
                      
                      656,635Net
      income available to common stockholders used in diluted earnings per share
      calculation
                      
                      $
                      3,009,607Denominator:Weighted
      average shares of common stock used in the computation of basic earnings
      per share
                      
                      
                      79,919,670Dilutive
      effect of stock options
                      
                      
                      4,043,826Dilutive
      effect of warrants to purchase common stock
                      
                      
                      12,185,984Dilutive
      effect of convertible preferred stock
                      
                      
                      38,775,658Shares
      used in computation of diluted earnings per share
                      
                      
                      134,925,138




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




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Stock
      options
                  
                  
                  607,463
                  
                  
                  
                  7,279,825Warrants
                  
                  
                  6,632,461
                  
                  
                  
                  38,445,170Conversion
      of preferred stock
                  
                  
                  —
                  
                  
                  
                  54,670,982





12


7.
  INCOME TAXES





The
Company accounts for income taxes in accordance with the Income Taxes Topic of
the FASB ASC. Under this guidance, 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 income tax expense or benefit is based on changes in
the asset or liability from period to period. The Company did not record a
provision or benefit for federal, state or foreign income taxes for the three
months ended March 31, 2010 because the Company has experienced losses since
inception. The net income reported for the three months ended March 31, 2010 is
a result of the gain recorded on the revaluation of derivative warrant liability
during that period, which is a nontaxable item. The
Company has not recorded deferred tax assets as their realization is
uncertain.





8.  LITIGATION





A purported class action
complaint was filed on March 5, 2010 in the United States District Court for the
District of Massachusetts by an alleged shareholder of the Company, on behalf of
himself and all others who purchased or otherwise acquired the Company’s common
stock in the period between December 14, 2009 and February 24, 2010, against the
Company and its President and Chief Executive Officer, Harry S.
Palmin.  On April 7, 2010, Novelos and Mr. Palmin filed a motion for
an order to establish that their response to the complaint will not be due until
some time after the court appoints a lead plaintiff and affords the lead
plaintiff an opportunity to file a consolidated and amended
complaint.  On May 4, 2010, motions were filed on behalf of three
different individuals or groups, each seeking to be appointed lead
plaintiff.  The court is expected to rule on those motions and appoint
a lead plaintiff by June 2, 2010.  The complaint claims that the
Company violated Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder in connection with alleged
disclosures related to the Phase 3 clinical trial of NOV-002 for non-small cell
lung cancer.  The Company believes the allegations are without merit
and intends to defend vigorously against the allegations.  Legal costs
related to the complaint will be expensed as incurred.





9. SUBSEQUENT
EVENTS





Retention
Agreements





On May
14, 2010, the Company entered into retention agreements with each of its four
vice-president executive officers.  The agreements provide for the
lump-sum payment of six months’ base salary and benefits to each officer
following a termination without cause or a resignation with good reason
occurring on or before November 14, 2011.  The agreements further
provide that if the executives remain employed with the Company as of October 1,
2010, they will receive a payment of two months’ base salary as a retention
bonus on that date. The amount paid as a retention bonus will be deducted from
the severance amounts that may become payable upon a subsequent involuntary
termination. The agreements expire November 14, 2011.  The total
amounts that may become payable to the named executive officers pursuant to the
retention agreements are approximately $132,000 to Christopher Pazoles and
$129,000 to Elias Nyberg. Concurrently
with the execution of the retention agreements, the employment agreement between
the Company and Christopher Pazoles dated July 15, 2005 was
terminated.  The employment agreement between the Company and Harry S.
Palmin, the Company’s chief executive officer, remains unchanged.





On May
14, 2010, the Company entered into retention agreements with each of its three
non-executive employees. The agreements provide for the lump-sum payment of six
months’ base salary and benefits to each employee following a termination
without cause or a resignation with good reason occurring on or before November
14, 2011.  The agreements expire November 14, 2011.





13





Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of 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, 2009 on Form 10-K, which was filed with the Securities and
Exchange Commission (“SEC”) on March 30, 2010. 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 developing oxidized glutathione-based compounds
for the treatment of cancer and hepatitis.  We are also seeking to
expand our product pipeline by licensing or acquiring clinical stage compounds
or technologies for oncology indications.




NOV-002,
our lead compound, is a small-molecule compound based on a proprietary
formulation of oxidized glutathione that has been administered to approximately
1,000 cancer patients in clinical trials and is in Phase 2 development for solid
tumors in combination with chemotherapy.  According to Cancer Market
Trends (2008-2012, URCH Publishing), Datamonitor (July 3, 2006) and PharmaLive
(October 9, 2009), the global market for cancer pharmaceuticals reached an
estimated $66 billion in 2007, nearly doubling from $35 billion in 2005, and is
expected to grow to $80 billion by 2012.





From
November 2006 through January 2010, we conducted a Phase 3 trial of NOV-002 plus
first-line chemotherapy in advanced non-small cell lung cancer
(“NSCLC”).  The Phase 3 trial enrolled 903 patients, 452 of whom
received NOV-002.  On February 24, 2010, we announced that the primary
endpoint of improvement in overall survival compared to first-line chemotherapy
alone was not met in this pivotal Phase 3 trial of NOV-002 plus first-line
chemotherapy in advanced NSCLC.  Following evaluation of the detailed
trial data, we announced on March 18, 2010 that the secondary endpoints also
were not met in the trial and that adding NOV-002 to paclitaxel and carboplatin
chemotherapy was not statistically or meaningfully different in terms of
efficacy-related endpoints or recovery from chemotherapy toxicity versus
chemotherapy alone. However, NOV-002 was safe and did not add to the overall
toxicity of chemotherapy.  Based on the results from the Phase 3
trial, we have determined to discontinue development of NOV-002 for NSCLC in
combination with first-line paclitaxel and carboplatin
chemotherapy.





NOV-002
is being developed to treat early-stage breast cancer.  In June 2007
we commenced enrollment in a U.S. Phase 2 neoadjuvant breast cancer trial, which
is ongoing at The University of Miami to evaluate the ability of NOV-002 to
enhance the effectiveness of chemotherapy in HER-2 negative
patients.  An interim analysis of the trial was presented at the San
Antonio Breast Cancer Symposium in December 2008.  Six pathologic
complete responses (“pCR”) occurred in the first 15 women (40%) who completed
chemotherapy and underwent surgery, which is a much higher rate than the
historical control of less than 20% pCR in this patient
population.  Furthermore, patients experienced decreased hematologic
toxicities.  We expect to present results from this trial in the third
quarter of 2010.




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, in combination with 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.  Furthermore, patients
experienced decreased hematologic toxicities.  These results were
presented at the American Society of Clinical Oncology in May 2008.





14


NOV-205,
our second glutathione-based compound, acts as a hepatoprotective agent with
immunomodulating and anti-inflammatory properties.  NOV-205 has been
administered to approximately 200 hepatitis patients in clinical trials and is
in Phase 2 development for chronic hepatitis C non-responders.  An
Investigational New Drug Application (“IND”) for NOV-205 as a monotherapy for
chronic hepatitis C was accepted by the FDA in 2006.  A U.S. Phase 1b
clinical trial with NOV-205 in patients who previously failed treatment with
pegylated interferon plus ribavirin was completed in December
2007.  Based on favorable safety results of that trial, in March 2010
we initiated a multi-center U.S. Phase 2 trial evaluating NOV-205 as monotherapy
in up to 40 chronic hepatitis C genotype 1 patients who previously failed
treatment with pegylated interferon plus ribavirin.  We expect to have
preliminary results from this longer duration, proof-of-concept trial in the
third quarter of 2010.





As
evidenced by our Phase 3 trial in NSCLC, although promising Phase 2 results may
advance the clinical development of compounds, such results are not necessarily
determinative that the efficacy and safety of the compounds will be successfully
demonstrated in a Phase 3 clinical trial.





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 (the “Russian Territory”), but including Estonia, Latvia and
Lithuania) 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.




We
entered into a collaboration agreement with Mundipharma International
Corporation Limited (“Mundipharma”) to develop, manufacture and commercialize
NOV-002 in Europe, excluding the Russian Territory, most of Asia (other than
China, Hong Kong, Taiwan and Macau, the “Chinese Territory”) and
Australia.  We have a collaboration agreement with Lee’s
Pharmaceutical (HK) Ltd. (“Lee’s Pharm”) to develop, manufacture and
commercialize NOV-002 and NOV-205 in the Chinese Territory.  We expect
that the negative results of our Phase 3 trial in advanced NSCLC will adversely
affect development and commercialization of NOV-002 under the collaboration
agreements.




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
and development
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.  We are currently developing two
proprietary compounds, 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.





Quarters
Ended March 31, 2010 and 2009





Revenue.During
the three months ended March 31, 2010 and 2009, we recognized $8,000 in license
fees in each of the three-month periods in connection with our collaboration
agreement with Lee’s Pharm.  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 in that
period.




15





Research and
Development.  Research and development expense for the three
months ended March 31, 2010 was $1,911,000, compared to $1,784,000 for the same
period in 2009.  The $127,000, or 7%, increase in research and
development expense was due to a combination of factors.  In
anticipation of the results of our Phase 3 clinical trial of NOV-002 in advanced
NSCLC, announced in February 2010, we increased certain preclinical research and
manufacturing activities in preparation of a possible filing of a new drug
application later in 2010. As a result, consulting costs related to preclinical
and manufacturing work increased by $922,000.  In addition, clinical
development costs for NOV-205 increased by $107,000 as a result of the
commencement, in March 2010, of a Phase 2 trial evaluating NOV-205 in chronic
hepatitis patients.  These increased costs were partially offset by a
$687,000 decrease in clinical development costs for NOV-002 as a result of the
completion of the Phase 3 trial in February 2010. Stock based compensation
decreased $193,000 as a result of the decline in our stock price following the
Phase 3 trial results. Salaries and overhead costs declined by $22,000 as a
result of efforts to contain costs.





General and
Administrative.  General and administrative expense for the
three months ended March 31, 2010 was $645,000 compared to $476,000 in the same
period in 2009.  The $169,000, or 36%, increase is due to a number of
factors. First, professional fees increased by $135,000 principally due to
increased corporate legal costs relating to the resale and registration of our
securities.  Overhead costs increased by $64,000 principally resulting
from an increase in liability insurance premium costs.  These
increases were offset in part by a $30,000 decrease in stock compensation
following a decline in our stock price in the first quarter of
2010.





Gain on Derivative
Warrants.  Effective January 1, 2009, we adopted the guidance
of Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC), Topic 815-40, Derivatives and Hedging and,
as a result, we recorded a gain on derivative warrants of $7,897,000 and
$412,000 during the three months ended March 31, 2010 and 2009,
respectively.  This amount represents the decrease in fair value,
during the respective periods, of outstanding warrants which contain
“down-round” anti-dilution 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 issuances of stock at prices below the
then-effective exercise prices of the warrants.  The large decrease in
value of the liability during the three months ended March 31, 2010 is a result
of the significant drop in our stock price following the announcement of
negative Phase 3 Trial results on February 24, 2010. This gain is not taxable;
accordingly, no tax provision has been recorded.





Preferred Stock
Dividends.  During the three months ended March 31, 2010, we
accrued $657,000 in dividends with respect to our Series C and E preferred
stock.  During the three months ended March 31, 2009, we accrued
$768,000 in dividends with respect to our Series C, D and E preferred
stock.  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 2009 prior to the exchange) were exchanged for approximately
445.5 shares of Series E preferred stock.  During the three months
ended March 31, 2009, we also recorded deemed dividends on preferred stock
totaling $714,000.  This amount was recorded in connection with the
financing that occurred in February 2009 and represents the value attributed to
the modification of certain warrants less the net adjustment required to record
the newly issued shares of Series E preferred stock at fair value.





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 of March 31, 2010, we had $5,612,000 in cash and
equivalents.




During
the three months ended March 31, 2010, approximately $3,315,000 in cash was used
in operations.  We reported $5,350,000 in net
income.  However, this included the following non-cash items: a
$7,897,000 gain on derivative warrants, a $97,000 credit recorded for
stock-based compensation and $27,000 in depreciation and amortization expense.
After adjustment for these non-cash items, we used $642,000 in cash for payment
of accounts payable and accrued liabilities.  Other changes in working
capital used cash of $56,000.




During
the three months ended March 31, 2010, we received $157,000 upon the exercise of
stock options.





On
February 24, 2010, we announced that our Phase 3 clinical trial for NOV-002 in
NSCLC (the “Phase 3 Trial”) did not meet its primary endpoint of a statistically
significant increase in median overall survival.  On March 18, 2010,
we announced that the secondary endpoints had also not been met in the Phase 3
Trial and that we had discontinued development of NOV-002 for NSCLC in
combination with first-line paclitaxel and carboplatin
chemotherapy.




We are
continuing development of NOV-002 in cancer indications other than NSCLC,
continuing development of NOV-205 in hepatitis and are seeking to expand our
product pipeline by acquiring or licensing clinical stage compounds or
technologies for oncology indications.  We expect that these
activities, together with general and administrative costs, will result in
continuing operating losses for the foreseeable future.  We believe
that we have adequate cash to fund these ongoing activities into early in the
first quarter of 2011. Our ability to execute our operating plan beyond early in
the first quarter of 2011 is dependent on our ability to obtain additional
capital, during 2010, principally through the sale of equity and/or debt
securities.  The negative outcome of the Phase 3 Trial, as well as
continuing difficult conditions in the capital markets globally, may adversely
affect our ability to obtain funding in a timely manner.   If we
are unable to obtain sufficient additional funding, we will be required,
beginning in mid- to late-2010, to scale back our administrative and clinical
development activities and may be required to cease our operations
entirely.  We plan to continue to actively pursue financing
alternatives, but there can be no assurance that we will obtain the necessary
capital. In the interim, we are continuously evaluating measures to reduce our
costs to preserve existing capital.




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, 2010.  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, 2010,
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 2010 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







A purported class action
complaint was filed on March 5, 2010 in the United States District Court for the
District of Massachusetts by an alleged shareholder on behalf of himself and all
others who purchased or otherwise acquired our common stock in the period
between December 14, 2009 and February 24, 2010, against Novelos and our
President and Chief Executive Officer, Harry S. Palmin.  On April 7,
2010, Novelos and Mr. Palmin filed a motion for an order to establish that their
response to the complaint will not be due until some time after the court
appoints a lead plaintiff and affords the lead plaintiff an opportunity to file
a consolidated and amended complaint.  On May 4, 2010, motions were
filed on behalf of three different individuals or groups, each seeking to be
appointed lead plaintiff.  The court is expected to rule on those
motions and appoint a lead plaintiff by June 2, 2010.  The complaint
claims that we violated Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder in connection with alleged
disclosures related to the Phase 3 clinical trial for NOV-002 in non-small cell
lung cancer (“NSCLC”) (the “Phase 3 Trial”).  We believe the
allegations are without merit and intend to defend vigorously against the
allegations.





Item
1A.  Risk Factors





We
will require additional capital to continue operations beyond early in the first
quarter of 2011.




On
February 24, 2010, we announced that our Phase 3 Trial did not meet its primary
endpoint of a statistically significant increase in median overall
survival.  On March 18, 2010, we announced that the secondary
endpoints had not been met in the Phase 3 Trial and that we had discontinued
development of NOV-002 for NSCLC in combination with first-line paclitaxel and
carboplatin chemotherapy.  We are continuing development of
NOV-002  in cancer indications other than NSCLC, continuing
development of NOV-205 in hepatitis and are seeking to expand our product
pipeline by acquiring or licensing clinical stage compounds or technologies for
oncology indications.  We expect that these activities, together with
general and administrative costs, will result in continuing operating losses for
the foreseeable future.  We believe that we have adequate cash to fund
these ongoing activities into early in the first quarter of
2011.  Our ability to execute our operating plan beyond early in the
first quarter of 2011 is dependent on our ability to obtain additional capital,
during 2010, principally through the sale of equity and/or debt
securities.  The negative outcome of the Phase 3 Trial, as well as
continuing difficult conditions in the capital markets globally, may adversely
affect our ability to obtain funding in a timely manner. If we are unable to
obtain sufficient additional funding, we will be required, beginning in mid- to
late-2010, to scale back our administrative and clinical development activities
and may be required to cease our operations entirely.  We plan to
actively pursue financing alternatives during 2010, but there can be no
assurance that we will obtain the necessary capital.  In the interim,
we are continuously evaluating measures to reduce our costs to preserve existing
capital.





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





From
January 1, 2010 through March 31, 2010:





·
            We
      issued 11,745,779 shares of our common stock upon conversion of
      approximately 140 shares of our Series E preferred stock, having an
      aggregate stated value of approximately $7,000,000, and accumulated
      undeclared dividends thereon.





·
            We
      issued 7,191,132 shares of our common stock upon the cashless exercise of
      warrants to purchase 11,865,381 shares of common stock.  The
      warrants had an expiration date of December 31, 2015 and an exercise price
      of $0.65 per share.





·
            We
      issued 226,544 shares of our common stock upon the cashless exercise of
      warrants to purchase 317,350 shares of common stock.  The
      warrants had an expiration date of August 9, 2010 and an exercise price of
      $0.65 per share.





18


·
            We
      issued 35,106 shares of our common stock upon the cashless exercise of
      warrants to purchase 75,000 shares of common stock.  The
      warrants had an expiration date of May 2, 2012 and an exercise price of
      $1.25 per share.





·
            We
      issued 366,492 shares of our common stock upon the cashless exercise of
      warrants to purchase 991,516 shares of common stock. The warrants had an
      expiration date of March 7, 2011 and an exercise price of $1.72 per
      share.





·
            We
      issued 47,902 shares of our common stock upon the cashless exercise of
      warrants to purchase 83,333 shares of common stock.  The
      warrants had an expiration date of May 2, 2012 and an exercise price of
      $1.25 per share.





·
            We
      issued 314,982 shares of our common stock upon the cashless exercise of
      warrants to purchase 400,000 shares of common stock. The warrants had an
      expiration date of April 1, 2010 and an exercise price of $0.625 per
      share.





Item
3.    Defaults Upon Senior Securities





None.




Item
5.    Other Information





On May
14, 2010, we entered into retention agreements with each of our four
vice-president executive officers.  The agreements provide for the
lump-sum payment of six months’ base salary and benefits to each officer
following a termination without cause or a resignation with good reason
occurring on or before November 14, 2011.  The agreements further
provide that if the executives remain employed with us as of October 1,
2010, they will receive a payment of two months’ base salary as a retention
bonus on that date. The amount paid as a retention bonus will be deducted from
the severance amounts that may become payable upon a subsequent involuntary
termination. The agreements expire November 14, 2011.  The total
amounts that may become payable to the named executive officers pursuant to the
retention agreements are approximately $132,000 to Christopher Pazoles and
$129,000 to Elias Nyberg.  Concurrently with the execution of the
retention agreements, the employment agreement between us and Christopher
Pazoles dated July 15, 2005 was terminated.  The employment agreement
between us and Harry S. Palmin, the Company’s chief executive officer, remains
unchanged.





On May
14, 2010, we entered into retention agreements with each of our three
non-executive employees. The agreements provide for the lump-sum payment of six
months’  base salary and benefits to each employee following a termination
without cause or a resignation with good reason occurring on or before November
14, 2011.  The agreements expire November 14, 2011.





19


Item
6.   Exhibits


Filed
                                    with
                                    this
                                  
                                  Incorporated by ReferenceExhibit
                                    No.
                                  
                                  Description
                                  
                                  Form
                                    10-Q
                                  
                                  Form
                                  
                                  FilingDate
                                  
                                  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
                                  
                                  Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      November 3, 2009
                                  
                                  
                                  
                                  10-Q
                                  
                                  November
      16, 2009
                                  
                                  3.73.8
                                  
                                  Amended
      and Restated By-Laws
                                  
                                  
                                  
                                  8-K
                                  
                                  August
      26, 2009
                                  
                                  3.110.1
                                  
                                  Summary
      of Phase 3 Clinical Trial Bonus Plan adopted on December 8,
      2009
                                  
                                  
                                  
                                  S-1/A
                                  
                                  January
      26, 2010
                                  
                                  10.4610.2
                                  
                                  Consent
      and Amendment Agreement dated January 21, 2010
                                  
                                  
                                  
                                  S-1/A
                                  
                                  January
      26, 2010
                                  
                                  10.4710.3
                                  
                                  Form
      of Executive Retention Agreement dated May 14, 2010
                                  
                                  X10.4
                                  
                                  Letter
      dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
      between the Company and Christopher J. Pazoles
                                  
                                  X31.1
                                  
                                  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
      17, 2010
              By:
              /s/ Harry
      S. PalminHarry
      S. PalminPresident
      and Chief Executive Officer





21




EXHIBIT
INDEX


Filed
                                      with
                                      this
                                    
                                    Incorporated by ReferenceExhibit
                                      No.
                                    
                                    Description
                                    
                                    Form
                                      10-Q
                                    
                                    Form
                                    
                                    FilingDate
                                    
                                    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
                                    
                                    Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      November 3, 2009
                                    
                                    
                                    
                                    10-Q
                                    
                                    November
      16, 2009
                                    
                                    3.73.8
                                    
                                    Amended
      and Restated By-Laws
                                    
                                    
                                    
                                    8-K
                                    
                                    August
      26, 2009
                                    
                                    3.110.1
                                    
                                    Summary
      of Phase 3 Clinical Trial Bonus Plan adopted on December 8,
      2009
                                    
                                    
                                    
                                    S-1/A
                                    
                                    January
      26, 2010
                                    
                                    10.4610.2
                                    
                                    Consent
      and Amendment Agreement dated January 21, 2010
                                    
                                    
                                    
                                    S-1/A
                                    
                                    January
      26, 2010
                                    
                                    10.4710.3
                                    
                                    Form
      of Executive Retention Agreement dated May 14, 2010
                                    
                                    X10.4
                                    
                                    Letter
      dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
      between the Company and Christopher J. Pazoles
                                    
                                    X31.1
                                    
                                    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