U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




[mark
one]





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




For
      the quarterly period ended:  June 30,
  2010




o
            TRANSITION
      REPORT PURSUANT TO 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


(Registrant’s telephone number,
including area code)





(Former name, former address and
former fiscal year, 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.  Yes  x   No
o





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).        Yes  o     No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


(Check
one):





Large
accelerated filer   o                                                                                                       Accelerated
filer o





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










Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  o   No x





Number of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 111,931,182 shares of common stock, $0.00001 par value per share, as of
August 11, 2010.








2


NOVELOS
THERAPEUTICS, INC.




FORM
10-Q INDEX




PART
      I.
              FINANCIAL
      INFORMATION
              4Item
      1.
              Financial
      Statements
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              15Item
      4.
              Controls
      and Procedures
              19PART
      II. OTHER INFORMATION
              20Item
      1.
              Legal
      Proceedings
              20Item
      1A.
              Risk
      Factors
              20Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              20Item
      3.
              Defaults
      Upon Senior Securities
              20Item
      5.
              Other
      Information
              21Item
      6.
              Exhibits
              21





3




PART
I.  FINANCIAL INFORMATION




Item
1. Financial Statements


NOVELOS
THERAPEUTICS, INC.


BALANCE
SHEETS




June
      30,
            
            
            December
      31,2010
            
            
            2009(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and equivalents
            
            $
            3,394,933
            
            
            $
            8,769,529Prepaid
      expenses and other current assets
            
            
            79,721
            
            
            
            102,923Total
      current assets
            
            
            3,474,654
            
            
            
            8,872,452FIXED
      ASSETS, NET
            
            
            13,775
            
            
            
            44,097DEPOSITS
            
            
            15,350
            
            
            
            15,350TOTAL
      ASSETS
            
            $
            3,503,779
            
            
            $
            8,931,899LIABILITIES, REDEEMABLE PREFERRED STOCK AND
      STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
            
            $
            1,352,009
            
            
            $
            3,299,217Accrued
      compensation
            
            
            55,568
            
            
            
            245,711Accrued
      liquidated damages (see Note 4)
            
            
            504,000
            
            
            
            —Accrued
      dividends
            
            
            3,506,370
            
            
            
            2,902,963Derivative
      liability (see Note 2)
            
            
            39
            
            
            
            10,486,594Deferred
      revenue – current
            
            
            33,333
            
            
            
            33,333Total
      current liabilities
            
            
            5,451,319
            
            
            
            16,967,818DEFERRED
      REVENUE – NONCURRENT
            
            
            383,333
            
            
            
            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 June 30, 2010
      and December 31, 2009, respectively (liquidation preference $22,964,853 at
      June 30, 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 June 30, 2010 and December 31, 2009 (liquidation preference
      $3,402,720 at June 30, 2010)
            
            
            —
            
            
            
            —Common
      stock, $0.00001 par value; 225,000,000 shares
      authorized;  90,502,606 and 69,658,002 shares issued and
      outstanding at June 30, 2010 and December 31, 2009,
      respectively
            
            
            905
            
            
            
            697Additional
      paid-in capital
            
            
            56,051,285
            
            
            
            49,175,853Accumulated
      deficit
            
            
            (72,153,089
            )
            
            
            (76,072,088
            )Total
      stockholders’ deficiency
            
            
            (16,100,899
            )
            
            
            (26,895,538
            )TOTAL
      LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
      DEFICIENCY
            
            $
            3,503,779
            
            
            $
            8,931,899




See
notes to financial statements.




4




NOVELOS THERAPEUTICS,
INC.


STATEMENTS
OF OPERATIONS


(Unaudited)





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009REVENUE
                
                $
                8,333
                
                
                $
                32,313
                
                
                $
                16,667
                
                
                $
                63,281COSTS
      AND EXPENSES:Research
      and development
                
                
                197,018
                
                
                
                1,588,458
                
                
                
                2,107,907
                
                
                
                3,372,290General
      and administrative
                
                
                743,155
                
                
                
                506,747
                
                
                
                1,387,919
                
                
                
                982,943Total
      costs and expenses
                
                
                940,173
                
                
                
                2,095,205
                
                
                
                3,495,826
                
                
                
                4,355,233LOSS
      FROM OPERATIONS
                
                
                (931,840
                )
                
                
                (2,062,892
                )
                
                
                (3,479,159
                )
                
                
                (4,291,952
                )OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,013Gain
      (loss) on derivatives
                
                
                4,717
                
                
                
                (2,795,710
                )
                
                
                7,902,158
                
                
                
                (2,383,590
                )Liquidated
      damages (see Note 4)
                
                
                (504,000
                )
                
                
                —
                
                
                
                (504,000
                )
                
                
                —Miscellaneous
                
                
                —
                
                
                
                2,250
                
                
                
                —
                
                
                
                4,732Total
      other income (expense)
                
                
                (499,283
                )
                
                
                (2,793,460
                )
                
                
                7,398,158
                
                
                
                (2,377,845
                )NET
      INCOME (LOSS)
                
                
                (1,431,123
                )
                
                
                (4,856,352
                )
                
                
                3,918,999
                
                
                
                (6,669,797
                )PREFERRED
      STOCK DIVIDENDS
                
                
                (581,697
                )
                
                
                (884,723
                )
                
                
                (1,238,332
                )
                
                
                (1,652,906
                )PREFERRED
      STOCK DEEMED DIVIDENDS
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (714,031
                )NET
      INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
                
                $
                (2,012,820
                )
                
                $
                (5,741,075
                )
                
                $
                2,680,667
                
                
                $
                (9,036,734
                )BASIC
      NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
                
                $
                (0.02
                )
                
                $
                (0.13
                )
                
                $
                0.03
                
                
                $
                (0.21
                )SHARES
      USED IN COMPUTING BASIC NET INCOME (LOSS) ATTRIBUTABLE TOCOMMON
      STOCKHOLDERS PER COMMON SHARE
                
                
                90,483,375
                
                
                
                44,142,669
                
                
                
                85,230,704
                
                
                
                44,059,624DILUTED
      NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON
      SHARE
                
                $
                (0.02
                )
                
                $
                (0.13
                )
                
                $
                0.01
                
                
                $
                (0.21
                )SHARES
      USED IN COMPUTING DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
      STOCKHOLDERS PER COMMON SHARE
                
                
                90,483,375
                
                
                
                44,142,669
                
                
                
                129,649,853
                
                
                
                44,059,624




See
notes to financial statements.




5




NOVELOS
THERAPEUTICS, INC.


STATEMENTS
OF CASH FLOWS


(Unaudited)





Six
      months ended June 30,2010
            
            
            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            3,918,999
            
            
            $
            (6,669,797
            )Adjustments
      to reconcile net income (loss) to cash used in operating
      activities:Depreciation
      and amortization
            
            
            30,322
            
            
            
            15,515Stock-based
      compensation
            
            
            46,490
            
            
            
            360,089(Gain)
      loss on derivative warrants
            
            
            (7,902,158
            )
            
            
            2,383,590Changes
      in:Prepaid
      expenses and other current assets
            
            
            23,202
            
            
            
            44,117Accounts
      payable and accrued liabilities
            
            
            (1,947,208
            )
            
            
            (1,957,437
            )Accrued
      compensation
            
            
            (190,143
            )
            
            
            (115,270
            )Accrued
      liquidated damages
            
            
            504,000
            
            
            
            —Deferred
      revenue
            
            
            (16,667
            )
            
            
            (16,666
            )Cash
      used in operating activities
            
            
            (5,533,163
            )
            
            
            (5,955,859
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of fixed assets
            
            
            —
            
            
            
            (18,000
            )Cash
      used in financing activities
            
            
            —
            
            
            
            (18,000
            )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
            
            
            158,567
            
            
            
            —Cash
      provided by financing activities
            
            
            158,567
            
            
            
            9,204,531INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
            
            
            (5,374,596
            )
            
            
            3,230,672CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            8,769,529
            
            
            
            1,262,452CASH
      AND EQUIVALENTS AT END OF PERIOD
            
            $
            3,394,933
            
            
            $
            4,493,124SUPPLEMENTAL
      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 completed a
financing in July 2010 for net proceeds of $1,250,000 (see Note 10) and believes
that it has adequate cash to fund these ongoing activities into the second
quarter of 2011.  The Company’s ability to execute its operating plan
beyond early in the second quarter of 2011 is dependent on its ability to obtain
additional funding, during 2010, via the sale of equity and/or debt securities,
a strategic transaction or otherwise.  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 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
funding necessary to continue its operations.  In the interim, the
Company is continuously evaluating measures to reduce costs to conserve its
limited cash resources.





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.





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 because the agreements contain “down-round” provisions whereby the
number of shares for which the warrants are exercisable and/or the exercise
price of the warrants are 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 June 30,
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
June 30, 2010, these warrants represented 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
$7,902,000 during the six months ended June 30, 2010 in connection with the
revaluation of the derivative liability balance at June 30, 2010.




7





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:




June
      30, 2010Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Fair
      ValueLiabilities:Warrants
              
              $
              -
              
              
              $
              39
              
              
              $
              -
              
              
              $
              39
  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 one to eight months at June 30, 2010 and three to fourteen
months at December 31, 2009 and risk-free interest rates ranging from 0.17% to
0.27% at June 30, 2010 and 0.04% to 0.47% at December 31, 2009.




3. COLLABORATION
AGREEMENTS





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




8




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 and $17,000 of license revenue was
recognized in each of the three- and six-month periods, respectively, ended June
30, 2010 and 2009.




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 have filed 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.  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.  The Company failed to timely
file the registration statement and as of June 30, 2010, and through the date of
this filing, the registration statement has not been filed. The registration
rights agreement provides for 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 estimates that the earliest date at
which time the registration statement may be filed is in early September
2010 and has accrued $504,000 in the three months ended June 30, 2010 which
represents management’s best estimate of the probable total liquidated damages.
This amount has been included as a component of other income
(expense).





Conversions of
Preferred Stock –During the six months ended June 30, 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 at a conversion
price of $0.65 per share of common stock 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 June 30,
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





See Note
10 for a description of warrants issued in connection with a financing completed
in July 2010 and adjustments that were made to certain of the above warrants as
a result of that financing.




10





During
the six months ended June 30, 2010, 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
$2,584,000 from derivative liability to additional paid-in capital upon the
exercise of warrants.  The following is a summary of the
exercises:




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 June 30,
            
            
            Six
      Months EndedJune
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Employee
      and director stock option grants:Research
      and development
            
            $
            57,478
            
            
            $
            35,286
            
            
            $
            114,591
            
            
            $
            71,546General
      and administrative
            
            
            91,914
            
            
            
            75,304
            
            
            
            174,842
            
            
            
            157,319149,392
            
            
            
            110,590
            
            
            
            289,433
            
            
            
            228,865Non-employee
      consultant stock option grants:Research
      and development
            
            
            (4,816
            )
            
            
            75,504
            
            
            
            (215,641
            )
            
            
            78,833General
      and administrative
            
            
            (607
            )
            
            
            47,408
            
            
            
            (27,302
            )
            
            
            52,391(5,423
            )
            
            
            122,912
            
            
            
            (242,943
            )
            
            
            131,224Total
      stock-based compensation
            
            $
            143,969
            
            
            $
            233,502
            
            
            $
            46,490
            
            
            $
            360,089





There
were no stock option grants during the three or six months ended June 30, 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
            
            
            (916,667
            )
            
            $
            0.17Options
      cancelled
            
            
            (150,000
            )
            
            $
            2.20Outstanding
      at June 30, 2010
            
            
            8,153,158
            
            
            $
            0.65
            
            
            
            7.4
            
            
            $
            124,211Exercisable
      at June 30, 2010
            
            
            5,169,805
            
            
            $
            0.68
            
            
            
            6.6
            
            
            $
            124,211





11





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 and six months ended June 30,
2010, the total intrinsic value of options exercised was $28,000 and $663,000,
respectively, and the total amount of cash received from exercise of these
options was $1,200 and $158,600, respectively.





As of
June 30, 2010, there was approximately $951,000 of total unrecognized
compensation cost related to unvested stock-based compensation arrangements. Of
this total amount, 31%, 48% and 21% is expected to be recognized during 2010,
2011 and 2012, respectively.  The Company expects 2,983,353 in
unvested options to vest in the future.  The weighted-average
grant-date fair value of both vested and unvested options outstanding at June
30, 2010 was $0.42 and $0.41.





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 the
weighted average number of shares of common stock and the dilutive potential
common stock equivalents then outstanding. Potential common stock equivalents
consist of stock options, warrants and convertible preferred stock and
accumulated dividends.  Since the Company has a net loss for the three
and six months ended June 30, 2009 and the three months ended June 30, 2010, the
inclusion of common stock equivalents in the computation for those periods would
be antidilutive. Accordingly, basic and diluted net loss per share are the same
for those periods.




The
following table sets forth the shares and net income used in the diluted
earnings per share computation for the six months ended June 30,
2010:




Numerator:Net
      income available to common stockholders used in basic earnings per share
      calculation
                
                $
                2,680,667Derivative
      gain recorded on dilutive warrants
                
                
                (2,340,516
                )Dividends
      on convertible preferred stock
                
                
                1,238,332Net
      income available to common stockholders used in diluted earnings per share
      calculation
                
                $
                1,578,483Denominator:Weighted
      average shares of common stock used in the computation of basic earnings
      per share
                
                
                85,230,704Dilutive
      effect of stock options
                
                
                2,295,036Dilutive
      effect of warrants to purchase common stock
                
                
                3,348,455Dilutive
      effect of convertible preferred stock
                
                
                38,775,658Shares
      used in computation of diluted earnings per share
                
                
                129,649,853




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




12




Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Stock
      options
                
                
                8,153,158
                
                
                
                7,279,825
                
                
                
                3,451,057
                
                
                
                7,279,825Warrants
                
                
                21,788,526
                
                
                
                38,424,340
                
                
                
                6,632,461
                
                
                
                38,424,340Conversion
      of preferred stock
                
                
                40,565,494
                
                
                
                56,593,880
                
                
                
                —
                
                
                
                56,593,880




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
and six months ended June 30, 2010 because the Company has experienced losses
since inception. The net income reported for the six months ended June 30, 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,
although two of the three motions were withdrawn on May 18, 2010.  The
court has not yet appointed a lead plaintiff.  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.





On June
28, 2010, the Company received a letter from counsel to ZAO BAM and ZAO BAM
Research Laboratories (collectively, “BAM”) alleging that the Company modified
the chemical composition of NOV-002 without prior notice to or approval from
BAM, constituting a material breach of a technology and assignment agreement the
Company had entered into with BAM on June 20, 2000.  The letter
references the Company’s amendment, submitted to the FDA on August 30, 2005, to
its investigational new drug application dated August 1999 as the basis for
BAM’s claims and demands the transfer of all intellectual property rights
concerning NOV-002 to BAM.  Mark Balazovsky, a director of Novelos
from June 1996 until November 2006 and a shareholder of Novelos through at least
June 25, 2010, is, to the Company’s knowledge, still the general director and
principal shareholder of ZAO BAM.  The Company believes the
allegations are without merit and intends to defend vigorously against any
proceedings that BAM may initiate as to these allegations.





9. COMMITMENTS





Retention
Agreements





On May
14, 2010, the Company entered into retention agreements with each of its four
vice-president executive officers other than its Chief Executive Officer,
Harry S. Palmin.  The agreements provide for the lump-sum payment of
six months’ base salary and benefits to each such 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 Company’s 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.




13





On May
14, 2010, the Company also 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.





10. SUBSEQUENT
EVENTS





Sale
of Common Stock and Warrants





On July
27, 2010, pursuant to securities purchase agreements entered into with
institutional investors on July 21, 2010, the Company completed the sale, in an
offering registered under the Securities Act of 1933, as amended, of an
aggregate of 21,428,576 shares of its common stock and five-year warrants to
purchase up to an aggregate of 16,071,434 shares of its common stock at an
exercise price of $0.07 per share, for gross proceeds of
$1,500,000.  The warrant exercise price is subject to adjustment in
certain circumstances. After deducting transaction costs, the Company estimates
that the net proceeds will be approximately $1,250,000.





Since the
securities in this financing were issued at a price less than $0.66 per share,
the Company obtained the consent of its preferred stockholders pursuant to a
consent and waiver dated July 6, 2010, as amended on July 21,
2010.  In connection with obtaining this consent, the Company issued
five-year warrants (the “Incentive Warrants”) to its preferred stockholders for
the purchase of up to an aggregate of 16,071,434 shares of common stock at an
exercise price of $0.105 per share. No adjustments to the conversion price of
the preferred stock or warrants held by preferred stockholders were made in
connection with the financing.   The consent requires that the
Company seek the approval of its stockholders, not later than January 1, 2011,
of an amendment to its certificate of incorporation in order to authorize a
number of additional shares of common stock sufficient to cover the full
exercise of the Incentive Warrants.  In the event the Company is
unable to secure this approval by January 1, 2011, the consent provides that
liquidated damages are immediately payable to each preferred stockholder in an
amount equal to 12% of the liquidation preference applicable to the shares of
preferred stock they then hold, and additional liquidated damages of 2% of such
liquidation preference for each month after such date until the requisite
amendment is filed.





The
financing resulted in adjustments to certain warrants pursuant to their
terms.  Warrants issued in 2005 that were exercisable for 243,476
shares at an exercise price of $0.65 per share as of immediately prior to the
transaction became exercisable for 2,260,845 shares at an exercise price of
$0.07 per share, and warrants issued in 2006 that were exercisable for 4,557,461
shares at an exercise price of $1.72 per share as of immediately prior to the
transaction became exercisable for 5,136,191 shares at an exercise price of
$1.53 per share.  The 2005 warrants expired unexercised on August 9,
2010, and the 2006 warrants will expire in March 2011.




14





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 breast cancer in combination with chemotherapy. 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.  On July 12, 2010, we announced the 12th
pathologic complete response (pCR), which is the minimum number of pCRs required
in order for NOV-002 to be declared active, in the first 31 patients (39%) who
completed chemotherapy and underwent surgery in the Phase 2 breast cancer
trial.  The historical control pCR rate is in the range of
10-20%.  We submitted the trial results for presentation to the AACR
Breast Cancer Symposium taking place in San Antonio, TX, in December
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.




15





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.  Safety was
established in the first group of 10 patients receiving 30mg of NOV-205 daily
for 49 days, triggering enrollment of another group of 10 patients who will
receive 60mg NOV-205 daily for 49 days. We expect to have further results from
this trial by the end 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
Lithuana) 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 June 30, 2010 and 2009





Revenue.During
the three months ended June 30, 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 June 30,
2009, we also recognized $24,000 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.




16





Research and
Development.  Research and development expense for the three
months ended June 30, 2010 was $197,000, compared to $1,588,000 for the same
period in 2009.  The $1,391,000, or 88%, decrease in research and
development expense was due to a combination of factors.  In February
2010, we completed our Phase 3 trial in NSCLC.  Following the
completion of that trial, contract research costs related to the trial decreased
$1,381,000 in the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009.  This reduction in Phase 3 clinical
research costs includes the effect of a $518,000 reduction in the accrual of
estimated amounts due to a large vendor, following a negotiated payment
settlement during the three months ended June 30, 2010.  Preclinical
research and drug manufacturing costs decreased by
$97,000.  Stock-based compensation decreased $58,000 as a result of
the decline in our stock price following the Phase 3 trial
results.  Salaries and overhead costs decreased by $33,000 as a result
of efforts to contain costs.  These decreases were partially offset by
a $178,000 increase in clinical development costs for NOV-205 as a result of the
commencement, in March 2010, of a Phase 2 trial evaluating NOV-205 in chronic
hepatitis patients.





General and
Administrative.  General and administrative expense for the
three months ended June 30, 2010 was $743,000 compared to $507,000 in the same
period in 2009.  The $236,000, or 47%, increase is due to a number of
factors. First, professional fees increased by $194,000 principally due to
increased corporate legal costs relating to securities activities and legal
defense costs.  Overhead costs increased by $73,000 principally
resulting from an increase in liability insurance premium
costs.  These increases were offset in part by a $31,000 decrease in
stock-based compensation as a result of the decline in our stock price following
the Phase 3 trial results.





Gain (Loss) 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 $5,000 during the
three months ended June 30, 2010 and recorded a loss on derivative warrants of
$2,796,000 in the same period of the previous year. This amount represents the
change 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.





Liquidated
Damages.During the three months ended June 30, 2010, we
accrued $504,000 in estimated liquidated damages as a result of our failure to
file, on a timely basis, a registration statement covering the resale of shares
of common stock sold pursuant to the August 2009 purchase agreement with Purdue
Pharma, L.P. (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 accrual of $504,000 represents our best
estimate of damages, pursuant to the terms of the applicable registration
rights, from May 17, 2010 through the anticipated date of filing of the
registration statement.





Preferred Stock
Dividends.  During the three months ended June 30, 2010 and
2009, we accrued $582,000 and $885,000, respectively, in dividends accumulating
on our Series C and E preferred stock.  No dividends were paid during
those periods.





Six
Months Ended June 30, 2010 and 2009





Revenue.During
the six months ended June 30, 2010 and 2009, we recognized $17,000 in license
fees in each of the six-month periods in connection with our collaboration
agreement with Lee’s Pharm.  During the six months ended June 30,
2009, we also recognized $46,000 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.





Research and
Development.  Research and development expense for the six
months ended June 30, 2010 was $2,108,000, compared to $3,372,000 for the same
period in 2009.  The $1,264,000, or 37%, decrease in research and
development expense was due to a combination of factors.  In February
2010, we completed our Phase 3 trial in NSCLC.  Following the
completion of that trial, contract research costs related to the trial decreased
$2,061,000 in the six months ended June 30, 2010 as compared to the six months
ended June 30, 2009.  This reduction in Phase 3 clinical research
costs includes the effect of a $518,000 reduction in the accrual of estimated
amounts owed to a large vendor, following a negotiated payment settlement during
the six months ended June 30, 2010.  Stock-based compensation also
decreased $251,000 as a result of the decline in our stock price following the
Phase 3 trial results.  Salaries and overhead costs decreased by
$55,000 as a result of efforts to contain costs.  These decreases were
partially offset by a $822,000 increase in consulting costs related to
preclinical and manufacturing work. 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. There
was also a $281,000 increase in clinical development costs for NOV-205 as a
result of the commencement, in March 2010, of a Phase 2 trial evaluating NOV-205
in chronic hepatitis patients.




17





General and
Administrative.  General and administrative expense for the six
months ended June 30, 2010 was $1,388,000 compared to $983,000 in the same
period in 2009.  The $405,000, or 41%, increase is due to a number of
factors. First, professional fees increased by $329,000 principally due to
increased corporate legal costs relating to the resale and registration of our
securities and legal defense costs.  Overhead costs increased by
$138,000 principally resulting from an increase in liability insurance premium
costs.  These increases were offset in part by a $62,000 decrease in
stock-based compensation as a result of the decline in our stock price following
the Phase 3 trial results.





Gain (Loss) 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 $7,902,000 during the
six months ended June 30, 2010 and recorded a loss on derivative warrants of
$2,384,000 in the same period of the previous year. This amount represents the
change 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 six months ended June 30, 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.





Liquidated
Damages.During the six months ended June 30, 2010, we accrued
$504,000 in estimated liquidated damages as a result of our failure to file, on
a timely basis, a registration statement covering the resale of shares of common
stock, and the shares of common stock underlying warrants, sold pursuant to the
August 2009 purchase agreement with Purdue Pharma, L.P.  The accrual
of $504,000 represents our best estimate of damages, pursuant to the terms of
the applicable registration rights agreement, through the anticipated date of
filing of the registration statement.





Preferred Stock
Dividends.  During the six months ended June 30, 2010 and 2009,
we accrued $1,238,000 and $1,653,000, respectively, in dividends accumulating on
our Series C, D and E preferred stock.  No dividends were paid during
those periods.  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 six months ended
June 30, 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 via the sale of securities and the
issuance of debt (which was subsequently paid off or converted into
equity).  As of June 30, 2010, we had approximately $3,395,000 in cash
and cash equivalents.




During
the six months ended June 30, 2010, approximately $5,533,000 in cash was used in
operations.  During this period we reported $3,919,000 in net
income.  However, this included the following non-cash items: a
$7,902,000 gain on derivative warrants, $46,000 in stock-based compensation and
$30,000 in depreciation and amortization expense. After adjustment for these
non-cash items, we used $2,137,000 in cash for the payment of accounts payable
and accrued liabilities and accrued $504,000 in estimated liquidated damages for
registration rights penalties.  Other changes in working capital
provided cash of $6,000.




During
the six months ended June 30, 2010, we received $159,000 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 completed
a financing in July 2010 for net proceeds of $1,250,000 (see Note 10 to the
financial statements) and believe that we have adequate cash to fund these
ongoing activities into early in the second quarter of 2011.




In the
recently passed Patient Protection and Affordable Care Act, H.R. 3590, a new
incentive for biotechnology companies like ours was provided: the Qualifying
Therapeutic Discovery Project Credit, or Therapeutic Credit.  The
Therapeutic Credit allows small businesses to apply for a grant in an amount
equal to 50% of their investment in qualifying therapeutic discovery projects
for 2009 and 2010.  Qualifying therapeutic discovery projects, among
others include those designed to treat or prevent diseases or conditions by
conducting pre-clinical or clinical activities for the purpose of securing FDA
approval of a product.  We have applied for certification of
approximately $8.0 million of expenditures during 2009 and 2010 under this
program.  If our application is approved in full, we could receive a
cash grant of approximately $4.0 million during 2011.  We believe
there will be many applicants for this grant, and given the level of competition
expected we cannot forecast what proceeds, if any, will be awarded to
us.  We expect notification from the Internal Revenue Service of
acceptance or denial by the end of October 2010.




Our
ability to execute our operating plan beyond early in the second quarter of 2011
is dependent on our ability to obtain additional funding, during 2010, via the
sale of equity and/or debt securities, a strategic transaction, or
otherwise.  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 before the end of 2010, we
will be required, beginning in 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 conserve our limited cash resources.




18





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 June 30, 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 June 30, 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 second
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.





19




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,
although two of the three motions were withdrawn on May 18, 2010.  The
court has not yet appointed a lead plaintiff. 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.





On June
28, 2010, we received a letter from counsel to ZAO BAM and ZAO BAM Research
Laboratories (collectively, “BAM”) alleging that we modified the chemical
composition of NOV-002 without prior notice to or approval from BAM,
constituting a material breach of a technology and assignment agreement we had
entered into with BAM on June 20, 2000.  The letter references our
amendment, submitted to the FDA on August 30, 2005, to our investigational new
drug application dated August 1999 as the basis for BAM’s claims and demands the
transfer of all intellectual property rights concerning NOV-002 to
BAM.  Mark Balazovsky, a director of Novelos from June 1996 until
November 2006 and a shareholder of Novelos through at least June 25, 2010, is,
to our knowledge, still the general director and principal shareholder of ZAO
BAM.  We believe the allegations are without merit and intend to
defend vigorously against any proceedings that BAM may initiate as to these
allegations





Item
1A.  Risk Factors





We
will require additional capital to continue operations beyond early in the
second 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 completed a financing in July 2010 for net proceeds of
$1,250,000 (see Note 10 to the financial statements) and believe that we have
adequate cash to fund these ongoing activities into the second quarter of
2011.  Our ability to execute our operating plan beyond early in the
second quarter of 2011 is dependent on our ability to obtain additional funding,
during 2010, via the sale of equity and/or debt securities, a strategic
transaction or otherwise.  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 before the end of 2010, we will
be required, beginning in 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 conserve our limited cash resources.





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





None.





Item
3. Defaults Upon Senior Securities





During the three months ended June 30, 2010, no
dividends were paid or converted into common stock, dividends of $459,297
accrued with respect to our Series E Convertible Preferred Stock and dividends
of $122,400 accrued with respect to our Series C Convertible Preferred
Stock.  As of June 30, 2010, there is a total of $2,551,650 in
accumulated unpaid dividends with respect to our Series E Convertible Preferred
Stock and a total of $954,720 in accumulated unpaid dividends with respect to
our Series C Convertible Preferred Stock.




20




Item
5. Other Information





None.





Item
6. Exhibits




Filed with this
            
            Incorporated
      by ReferenceExhibit
      No.
            
            Description
            
            Form
      10-Q
            
            Form
            
            Filing
      Date
            
            Exhibit
      No.2.1
            
            Agreement
      and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
      Novelos Therapeutics, Inc. dated May 26, 2005
            
            
            
            8-K
            
            June
      2, 2005
            
            99.22.2
            
            Agreement
      and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
      dated June 7, 2005
            
            
            
            10-QSB
            
            August
      15, 2005
            
            2.23.1
            
            Amended
      and Restated Certificate of Incorporation filed as Exhibit A to the
      Certificate of Merger merging Nove Acquisition, Inc. with and into Novelos
      Therapeutics, Inc. dated May 26, 2005
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.13.2
            
            Certificate
      of Merger merging Common Horizons, Inc. with and into Novelos
      Therapeutics, Inc. dated June 13, 2005
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.23.3
            
            Certificate
      of Correction dated March 3, 2006
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.33.4
            
            Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      July 16, 2007
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.43.5
            
            Certificate
      of Designations of Series C  cumulative convertible preferred
      stock
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.63.6
            
            Certificate
      of Designations of Series E  convertible preferred
      stock
            
            
            
            8-K
            
            February
      18, 2009
            
            4.13.7
            
            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
            
            Form
      of Executive Retention Agreement dated May 14, 2010
            
            
            
            10-Q
            
            May
      17, 2010
            
            10.310.2
            
            Letter
      dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
      between the Company and Christopher J. Pazoles
            
            
            
            10-Q
            
            May
      17, 2010
            
            10.4




21




Filed with this
            
            Incorporated
      by ReferenceExhibit
      No.
            
            Description
            
            Form
      10-Q
            
            Form
            
            Filing
      Date
            
            Exhibit
      No.


31.1
            
            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




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:  August
      13, 2010
              By:
              /s/ Harry
      S. PalminHarry
      S. PalminPresident
      and Chief Executive Officer





23




EXHIBIT
INDEX




Filed with
      this
            
            Incorporated
      by ReferenceExhibit
      No.
            
            Description
            
            Form
10-Q
            
            Form
            
            Filing
      Date
            
            Exhibit
      No.2.1
            
            Agreement
      and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and
      Novelos Therapeutics, Inc. dated May 26, 2005
            
            
            
            8-K
            
            June
      2, 2005
            
            99.22.2
            
            Agreement
      and plan of merger between Common Horizons and Novelos Therapeutics, Inc.
      dated June 7, 2005
            
            
            
            10-QSB
            
            August
      15, 2005
            
            2.23.1
            
            Amended
      and Restated Certificate of Incorporation filed as Exhibit A to the
      Certificate of Merger merging Nove Acquisition, Inc. with and into Novelos
      Therapeutics, Inc. dated May 26, 2005
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.13.2
            
            Certificate
      of Merger merging Common Horizons, Inc. with and into Novelos
      Therapeutics, Inc. dated June 13, 2005
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.23.3
            
            Certificate
      of Correction dated March 3, 2006
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.33.4
            
            Certificate
      of Amendment to Amended and Restated Certificate of Incorporation dated
      July 16, 2007
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.43.5
            
            Certificate
      of Designations of Series C  cumulative convertible preferred
      stock
            
            
            
            10-QSB
            
            August
      10, 2007
            
            3.63.6
            
            Certificate
      of Designations of Series E  convertible preferred
      stock
            
            
            
            8-K
            
            February
      18, 2009
            
            4.13.7
            
            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
            
            Form
      of Executive Retention Agreement dated May 14, 2010
            
            
            
            10-Q
            
            May
      17, 2010
            
            10.310.2
            
            Letter
      dated May 14, 2010 terminating Employment Agreement dated July 15, 2005
      between the Company and Christopher J. Pazoles
            
            
            
            10-Q
            
            May
      17, 2010
            
            10.431.1
            
            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





24