##### Table of Contents





UNITED STATES

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, 2008

or



| ̈ | 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 000-23776





DARA BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 04-3216862                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                                       |  |           
|------------------------------------------------------ |  | ----------
|8601 Six Forks Road, Suite 160 Raleigh, North Carolina |  | 27615     
|(Address of principal executive offices)               |  | (Zip Code)

Registrants telephone number, including area code: (919) 872-5578



(Former Address if Changed Since Last Report)





Securities registered pursuant to Section 12(b) of the Act:

Common
Stock, Par Value $.01 Per Share

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)





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   ̈

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
definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a 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
Act).    Yes   ̈    No  x

The number of shares outstanding of the Registrants common stock as of August 12, 2008 was approximately 27,625,366









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##### Table of Contents

Table of Contents



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                        |  | Financial Statements                                                                  |  | 3   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 24  
|Item 4.                        |  | Controls and Procedures                                                               |  | 24  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 25  
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 25  
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 25  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|Item 5.                        |  | Other Information                                                                     |  | 25  
|Item 6.                        |  | Exhibits                                                                              |  | 25  



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                            |  | June 30,2008 |             |   | December 31,2007 |  
|Assets                                                                                                                                                                                                                                                                                                                                                                                                      |  |              |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                                                                                                                                                                                                                                             |  |              |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                   |  | $            | 4,277,222   |   |                  | $ | 8,263,006   |  
|Interest receivable                                                                                                                                                                                                                                                                                                                                                                                         |  |              | 10          |   |                  |   | 44,439      |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                   |  |              | 507,137     |   |                  |   | 34,648      |  
|Investment securities available for sale                                                                                                                                                                                                                                                                                                                                                                    |  |              | 1,604,408   |   |                  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                                                                                                                                                                                                                        |  |              | 6,388,777   |   |                  |   | 8,342,093   |  
|Furniture, fixtures, and equipment, net                                                                                                                                                                                                                                                                                                                                                                     |  |              | 116,686     |   |                  |   | 60,299      |  
|Prepaid license fee, net                                                                                                                                                                                                                                                                                                                                                                                    |  |              | 520,000     |   |                  |   | 580,000     |  
|Deferred stock issuance                                                                                                                                                                                                                                                                                                                                                                                     |  |              | 114,300     |   |                  |   |            |  
|Investments                                                                                                                                                                                                                                                                                                                                                                                                 |  |              | 222,479     |   |                  |   | 222,879     |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                |  | $            | 7,362,242   |   |                  | $ | 9,205,271   |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Liabilities, minority interest in subsidiary and stockholders equity                                                                                                                                                                                                                                                                                                                                       |  |              |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                        |  |              |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                                                                                                                                                                                                                            |  | $            | 902,015     |   |                  | $ | 344,597     |  
|Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                         |  |              | 858,613     |   |                  |   | 430,215     |  
|Income tax liability                                                                                                                                                                                                                                                                                                                                                                                        |  |              | 246,571     |   |                  |   | 237,548     |  
|Capital lease obligation, current                                                                                                                                                                                                                                                                                                                                                                           |  |              | 8,405       |   |                  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                   |  |              | 2,015,604   |   |                  |   | 1,012,360   |  
|Deferred lease obligation                                                                                                                                                                                                                                                                                                                                                                                   |  |              | 1,978       |   |                  |   | 4,918       |  
|Capital lease obligation, less current portion                                                                                                                                                                                                                                                                                                                                                              |  |              | 42,662      |   |                  |   |            |  
|Patent obligation                                                                                                                                                                                                                                                                                                                                                                                           |  |              | 30,260      |   |                  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                                                                                                                                                                                                                                                           |  |              | 2,090,504   |   |                  |   | 1,017,278   |  
|Minority interest in subsidiary                                                                                                                                                                                                                                                                                                                                                                             |  |              | 828,600     |   |                  |   | 978,174     |  
|Stockholders equity:                                                                                                                                                                                                                                                                                                                                                                                       |  |              |             |   |                  |   |             |  
|Preferred stock, $0.01 par value; 1,000,000 shares authorized no shares issued and outstanding at June 30, 2008 and December 31,
2007                                                                                                                                                                                                                                                                       |  |              |            |   |                  |   |            |  
|Series A convertible preferred stock, $0.001 par value; no shares authorized, issued or outstanding at June 30, 2008 and 5,000,000 shares
authorized, issued and outstanding at December 31, 2007                                                                                                                                                                                                           |  |              |            |   |                  |   | 5,000       |  
|Series B convertible preferred stock, $0.001 par value; no shares authorized, issued or outstanding at June 30, 2008 and 8,500,000 shares
authorized, 6,350,333 issued and outstanding at December 31, 2007                                                                                                                                                                                                 |  |              |            |   |                  |   | 6,350       |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |             
|Common stock, $.01 par value: 75,000,000 shares authorized, 27,595,829 shares issued and 27,590,366 outstanding at June 30, 2008 (5,463
shares held in treasury), no shares authorized, issued or outstanding at December 31, 2007; $0.001 par value; no shares authorized, issued or outstanding at June 30, 2008 and 40,000,000 shares authorized, 14,087,824 issued and outstanding
at December 31, 2007 |  |              | 275,904     |   |                  |   | 14,088      |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                  |  |              | 21,044,193  |   |                  |   | 20,164,976  |  
|Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                                                                      |  | $            | 1,604,008   |   |                  |   |            |  
|Deficit accumulated during the development stage                                                                                                                                                                                                                                                                                                                                                            |  |              | (18,480,967 | ) |                  |   | (12,980,595 | )
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                                                                                                                                                                                                                                  |  |              | 4,443,138   |   |                  |   | 7,209,819   |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  
|Total liabilities, minority interest in subsidiary and stockholders equity                                                                                                                                                                                                                                                                                                                                 |  | $            | 7,362,242   |   |                  | $ | 9,205,271   |  
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |             |   |                  |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



3



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##### Table of Contents

DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ------------------------------------------- |  | - | ---------- | - |  | ------------- | ---------- | - |  | - | ----------- | -
|                                                                                           |  | Three monthsended June 30, |            |   | Six monthsended June 30, |   |            | Period fromJune 22, 2002(inception) through | 
|                                                                                           |  | 2008                       |            |   | 2007                     |   |            | 2008                                        |  |   | 2007       |   |  | June 30, 2008 |           
|Operating expenses:                                                                        |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Research and development                                                                   |  | $                          | 2,030,369  |   |                          | $ | 564,235    |                                             |  | $ | 3,492,481  |   |  | $             | 1,363,818  |   |  | $ | 13,540,249  |  
|General and administrative                                                                 |  |                            | 1,044,769  |   |                          |   | 529,221    |                                             |  |   | 2,266,301  |   |  |               | 1,063,083  |   |  |   | 14,189,856  |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Total operating expenses                                                                   |  |                            | 3,075,138  |   |                          |   | 1,093,456  |                                             |  |   | 5,758,782  |   |  |               | 2,426,901  |   |  |   | 27,730,105  |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Loss from operations                                                                       |  |                            | (3,075,138 | ) |                          |   | (1,093,456 | )                                           |  |   | (5,758,782 | ) |  |               | (2,426,901 | ) |  |   | (27,730,105 | )
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Other income, net:                                                                         |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Gain on distribution of nonmonetary asset                                                  |  |                            |           |   |                          |   |           |                                             |  |   |           |   |  |               | 2,658,251  |   |  |   | 4,669,043   |  
|Other (expense) income, net                                                                |  |                            | (18,964    | ) |                          |   | 16,879     |                                             |  |   | (18,964    | ) |  |               | 33,150     |   |  |   | 116,935     |  
|Interest (expense) income, net                                                             |  |                            | (60,304    | ) |                          |   | 90,348     |                                             |  |   | 127,798    |   |  |               | 211,647    |   |  |   | 793,946     |  
|Gain on sale of marketable securities                                                      |  |                            |           |   |                          |   |           |                                             |  |   |           |   |  |               | 1,773,087  |   |  |   | 5,649,632   |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Other (expense) income, net                                                                |  |                            | (79,268    | ) |                          |   | 107,227    |                                             |  |   | 108,834    |   |  |               | 4,676,135  |   |  |   | 11,229,556  |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|(Loss) income before undistributed loss in equity method investments and minority interest |  |                            | (3,154,406 | ) |                          |   | (986,229   | )                                           |  |   | (5,649,948 | ) |  |               | 2,249,234  |   |  |   | (16,500,549 | )
|Minority interest                                                                          |  |                            | 75,144     |   |                          |   | 107,761    |                                             |  |   | 149,576    |   |  |               | 188,349    |   |  |   | 613,350     |  
|Undistributed loss in equity method investments                                            |  |                            |           |   |                          |   |           |                                             |  |   |           |   |  |               |           |   |  |   | (2,374,422  | )
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Net (loss) income attributable to common stockholders                                      |  | $                          | (3,079,262 | ) |                          | $ | (878,468   | )                                           |  | $ | (5,500,372 | ) |  | $             | 2,437,583  |   |  | $ | (18,261,621 | )
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Basic net (loss) income per common share                                                   |  | $                          | (0.11      | ) |                          | $ | (0.06      | )                                           |  | $ | (0.20      | ) |  | $             | 0.17       |   |  |   |             |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Shares used in computing basic net (loss) income per common share                          |  |                            | 27,331,397 |   |                          |   | 14,528,755 |                                             |  |   | 27,281,120 |   |  |               | 14,526,101 |   |  |   |             |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Diluted net (loss) income per common share                                                 |  | $                          | (0.11      | ) |                          | $ | (0.06      | )                                           |  | $ | (0.20      | ) |  | $             | 0.09       |   |  |   |             |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  
|Shares used in computing diluted net (loss) income per common share                        |  |                            | 27,331,397 |   |                          |   | 14,528,755 |                                             |  |   | 27,281,120 |   |  |               | 26,998,697 |   |  |   |             |  
|                                                                                           |  |                            |            |   |                          |   |            |                                             |  |   |            |   |  |               |            |   |  |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                     |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|------------------------------------------------------------------------------------ |  | -------------------------------- | ---------- | - | ------------------------------------------- | - | ---------- | ------------- |  | - | ----------- | -
|                                                                                     |  | For the six months endedJune 30, |            |   | Period fromJune 22, 2002(inception) through |  
|                                                                                     |  | 2008                             |            |   | 2007                                        |   |            | June 30, 2008 | 
|Operating activities                                                                 |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Net (loss) income                                                                    |  | $                                | (5,500,372 | ) |                                             | $ | 2,437,583  |               |  | $ | (18,261,621 | )
|Adjustments to reconcile net (loss) income to net cash used in operating activities: |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Depreciation and amortization                                                        |  |                                  | 74,440     |   |                                             |   | 14,400     |               |  |   | 175,615     |  
|Forgiveness of stock subscription receivable                                         |  |                                  |           |   |                                             |   |           |               |  |   | 242,500     |  
|Recognition of expense related to nonmonetary asset                                  |  |                                  |           |   |                                             |   |           |               |  |   | 1,035,589   |  
|Minority interest in subsidiary                                                      |  |                                  | (149,576   | ) |                                             |   | (188,349   | )             |  |   | (613,350    | )
|Loss from equity investment                                                          |  |                                  |           |   |                                             |   |           |               |  |   | 2,374,422   |  
|Accretion of debt discount                                                           |  |                                  | 290        |   |                                             |   | 14,490     |               |  |   | 406,649     |  
|Shares issued to directors for services                                              |  |                                  | 71,574     |   |                                             |   |           |               |  |   | 87,574      |  
|Share-based compensation                                                             |  |                                  | 428,852    |   |                                             |   | 244,205    |               |  |   | 2,763,065   |  
|Expense of warrants issued with convertible notes                                    |  |                                  |           |   |                                             |   |           |               |  |   | 4,860       |  
|Loss on disposal of furniture, fixtures and equipment                                |  |                                  | 19,339     |   |                                             |   |           |               |  |   | 37,378      |  
|Gain on distribution of investments                                                  |  |                                  |           |   |                                             |   | (2,658,251 | )             |  |   | (4,669,043  | )
|Gain on sale of marketable securities                                                |  |                                  |           |   |                                             |   | (1,773,087 | )             |  |   | (5,649,632  | )
|Deferred lease obligation                                                            |  |                                  | (2,940     | ) |                                             |   | (4,040     | )             |  |   | 1,979       |  
|Changes in operating assets and liabilities:                                         |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Interest receivable                                                                  |  |                                  | 44,429     |   |                                             |   | 28,105     |               |  |   | (10         | )
|Other receivables                                                                    |  |                                  |           |   |                                             |   | 900        |               |  |   |            |  
|Prepaid license fee and other prepaid expenses                                       |  |                                  | 8,148      |   |                                             |   |           |               |  |   | (626,500    | )
|Due from affiliates                                                                  |  |                                  |           |   |                                             |   | 80,640     |               |  |   |            |  
|Accounts payable                                                                     |  |                                  | 557,418    |   |                                             |   | (24,697    | )             |  |   | 572,015     |  
|Accrued liabilities                                                                  |  |                                  | (480,201   | ) |                                             |   | 173,361    |               |  |   | 57,960      |  
|                                                                                     |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Net cash used in operating activities                                                |  |                                  | (4,928,599 | ) |                                             |   | (1,655,740 | )             |  |   | (22,060,550 | )
|Investing activities                                                                 |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Purchases of furniture, fixtures, and equipment                                      |  |                                  | (16,019    | ) |                                             |   | (4,932     | )             |  |   | (176,490    | )
|Proceeds from sale of furniture, fixtures, and equipment                             |  |                                  | 375        |   |                                             |   |           |               |  |   | 1,333       |  
|Cash acquired in reverse merger                                                      |  |                                  | 771,671    |   |                                             |   |           |               |  |   | 771,671     |  
|Payments on Capital Leases                                                           |  |                                  | (1,766     | ) |                                             |   |           |               |  |   | (1,766      | )
|Purchase of investments in affiliates                                                |  |                                  |           |   |                                             |   |           |               |  |   | (2,471,400  | )
|Issuance of notes receivable                                                         |  |                                  |           |   |                                             |   |           |               |  |   | (1,400,000  | )
|Payments on notes receivable                                                         |  |                                  |           |   |                                             |   |           |               |  |   | 711,045     |  
|Proceeds from sale of marketable securities                                          |  |                                  |           |   |                                             |   | 1,773,087  |               |  |   | 1,773,087   |  
|Proceeds from sale of investments in affiliates                                      |  |                                  |           |   |                                             |   |           |               |  |   | 3,905,692   |  
|                                                                                     |  |                                  |            |   |                                             |   |            |               |  |   |             |  
|Net cash provided by investing activities                                            |  |                                  | 754,261    |   |                                             |   | 1,768,155  |               |  |   | 3,113,172   |  



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

(Unaudited)



|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------------------- | ---- | - | ------------- |  | - | ---------- | -
|                                                                                  |  | For the six months endedJune 30, |            | Period fromJune 22, 2002 (inception) through |     
|                                                                                  |  | 2008                             |            |                                              | 2007 |   | June 30, 2008 | 
|Financing Activities                                                              |  |                                  |            |                                              |      |   |               |  |   |            |  
|Proceeds from issuance of notes payable                                           |  |                                  |           |                                              |      |   |              |  |   | 105,000    |  
|Principal payments on notes payable                                               |  |                                  |           |                                              |      |   |              |  |   | (255,000   | )
|Proceeds from exercise of options and warrants                                    |  |                                  |           |                                              |      |   |              |  |   | 80,051     |  
|Proceeds from issuance of preferred stock and common stock, net of issuance costs |  |                                  | 188,554    |                                              |      |   |              |  |   | 23,294,549 |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|Net cash provided by financing activities                                         |  |                                  | 188,554    |                                              |      |   |              |  |   | 23,224,600 |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|Net (decrease) increase in cash and cash equivalents                              |  |                                  | (3,985,784 | )                                            |      |   | 112,415       |  |   | 4,277,222  |  
|Cash and cash equivalents at beginning of period                                  |  |                                  | 8,263,006  |                                              |      |   | 12,274,641    |  |   |           |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                                | 4,277,222  |                                              |      | $ | 12,387,056    |  | $ | 4,277,222  |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|Non-cash investing and financing activities:                                      |  |                                  |            |                                              |      |   |               |  |   |            |  
|                                                                                  |  |                                  |           
|Equipment purchased through financing                                             |  | $                                | 52,543     |                                              |      | $ |              |  | $ | 73,061     |  
|Advances to stockholders for stock issued                                         |  |                                  |           |                                              |      |   |              |  |   | 1,040      |  
|Payable accrued for stock issuance                                                |  |                                  |           |                                              |      |   |              |  |   | 350,000    |  
|Note issued for stock issuance                                                    |  |                                  |           |                                              |      |   |              |  |   | 150,000    |  
|Note issued for prepaid license fee                                               |  |                                  |           |                                              |      |   |              |  |   | 1,000,000  |  
|Note received for stock issuance                                                  |  |                                  |           |                                              |      |   |              |  |   | (242,500   | )
|Stock received for consideration of outstanding loans                             |  |                                  |           |                                              |      |   |              |  |   | (427,280   | )
|Unrealized gain on available-for-sale securities                                  |  |                                  | 1,604,008  |                                              |      |   |              |  |   | 1,604,008  |  
|Forgiveness of stock subscription receivable                                      |  |                                  |           |                                              |      |   |              |  |   | 242,500    |  
|Shares issued to directors for services                                           |  |                                  | 71,574     |                                              |      |   |              |  |   | 87,574     |  
|Conversion of note into equity of subsidiary                                      |  |                                  |           |                                              |      |   | 1,441,948     |  |   | 1,441,948  |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  
|                                                                                  |  | $                                | 1,964,126  |                                              |      | $ | 1,441,948     |  | $ | 4,516,352  |  
|                                                                                  |  |                                  |            |                                              |      |   |               |  |   |            |  



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. The Company and Basis of
Presentation

On February 12, 2008, DARA BioSciences, Inc., formerly known as Point Therapeutics, Inc. (the Company), completed the
merger transaction (the Merger) contemplated by the Agreement and Plan of Merger dated October 9, 2007, as amended December 19, 2007 (the Merger Agreement), among the Company, DP Acquisition Corp., a wholly-owned
subsidiary of the Company (Merger Sub), and DARA BioSciences, Inc., a privately held development stage pharmaceutical company based in Raleigh, North Carolina (DARA). Pursuant to the Merger, each share of DARA common stock
and preferred stock issued and outstanding immediately prior to the effective time of the Merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of Company common stock, plus cash in lieu of any fractional
shares. As a result of the transaction, the former DARA stockholders received 96.4% of the Companys outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned
subsidiary of the Company. Upon consummation of the Merger, the Company changed its name to DARA BioSciences, Inc.

For accounting purposes, the Merger was
treated as a reverse acquisition with DARA being the accounting acquirer. Accordingly, the historical financial information in these financial statements prior to the Merger is that of DARA and its consolidated subsidiaries and all references to the
Company in these financial statements relating to periods prior to the Merger refer to DARA.

The Company, headquartered in Raleigh, North
Carolina, was incorporated on June 22, 2002. The Company is a development stage company that acquires therapeutic drug candidates for development and subsequent licensing or sale to pharmaceutical companies.

The activities of the Company have primarily consisted of establishing offices, recruiting personnel, conducting research and development, performing business and
financial planning and raising capital. Accordingly, the Company is considered to be in the development stage. The Company has incurred losses since inception through June 30, 2008 of $18,261,621 and expects to continue to incur losses and
require additional financial resources to achieve commercialization of its products.

The Companys business is subject to significant risks
consistent with specialty pharmaceutical and biotechnology companies that are developing technologies and eventually products for human therapeutic use. These risks include, but are not limited to, uncertainties regarding research and development,
access to capital, obtaining and enforcing patents, receiving regulatory approval and competition with other biotechnology and pharmaceutical companies.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates The accompanying unaudited interim
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable Securities and Exchange Commission (SEC) regulations for interim financial information. These
financial statements are unaudited and, in the opinion of management, include all adjustments



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(consisting of normal recurring accruals) necessary to present fairly the balance sheets, statements of operations and statements of cash flows for the
periods presented in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of DARA BioSciences, Inc. and its majority-owned subsidiaries: MIKKO Pharmaceuticals; DARA Therapeutics, Inc.;
OnsetThera, Inc.; Signum Pharmaceuticals, Inc.; and NYVARA Pharmaceuticals, Inc. The Company has control of all subsidiaries, and as such they are all consolidated in the presentation of the consolidated financial statements. All significant
intercompany transactions have been eliminated in the consolidation.

Effective December 18, 2006, the Company filed certificates of dissolution for
both Onset Thera, Inc. and NYVARA Pharmaceuticals, Inc.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents approximate their fair value.

Investments and Marketable Securities

The Company accounts for its investment in marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity
Securities. Management determines the appropriate classification of securities at time of purchase. To date, all marketable securities have been classified as available-for-sale, and are carried at fair value with unrealized gains and losses
reported as a component of accumulated other comprehensive income (loss) in stockholders equity. The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all
marketable securities as short-term.

The Companys other investments include investments in privately-held companies. Pursuant to APB 18, The
Equity Method of Accounting for Investments in Common Stock, the Company accounts for these investments either at historical cost, or if the Company has significant influence over the investee, the Company accounts for these investments using
the equity method of accounting. The Company reviews all investments for indicators of impairment. In making impairment determinations for investments in privately-held companies, the Company considers certain factors, including each companys
cash position, financing needs, earnings, revenue outlook, operational performance, management or ownership changes as well as competition. In making impairment determinations for investments of available-for-sale securities, the Company also
reviews the current market price for other-than-temporary declines in values following the guidance required by Financial Accounting Standards Board (FASB) Staff Position 115-1, The Meaning of Other-Than Temporary Impairment and Its Application
to Certain Investments.



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Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are stated at cost and depreciated over the estimated useful lives of the assets (five years) using the straight-line method.

Research and Development Costs

The Company expenses research and
development costs as incurred. Research and development costs include personnel and personnel related costs, costs associated with clinical trials, including amounts paid to contract research organizations and clinical investigators, manufacturing,
process development and clinical product supply costs, research costs and other consulting and professional services, and allocated facility and related expenses.

Share-Based Compensation

Share-based compensation is accounted for using the fair value based method prescribed by SFAS No. 123R,
Accounting for Share-Based Payment (SFAS 123R). For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in
which services are performed in exchange for the Companys common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued,
whichever is more readily measurable at the date of issuance.

Income Taxes

The Company uses the liability method in accounting for income taxes as required by SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under this method, deferred tax assets and liabilities
are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such
assets will be realized.

On January 1, 2007, the Company adopted Financial Accounting Standards Interpretation No. 48, Accounting for
Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS
109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosures and transition. The Companys policy is to classify any interest or penalties recognized in accordance with FIN 48 as interest expense or an expense other than
income tax expense, respectively.



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Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions
in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.

Comprehensive Income (Loss)

SFAS No. 130, Reporting
Comprehensive Income, requires components of other comprehensive income, including gains and losses on available-for-sale investments, to be included as part of total comprehensive income. The Company displays comprehensive income (loss) and its
components as part of the statement of stockholders equity in its annual financial statements. Comprehensive income (loss) consists of net loss and unrealized gains and losses on available-for-sale investments. Comprehensive income (loss) for
the three and six months ended June 30, 2008 consists of net income and unrealized gain on available-for-sale investments. Comprehensive income (loss) for the three and six months ended June 30, 2007 was equal to net income as there was no
unrealized gains (losses) on such investments.

(Loss) Earnings Per Share

Basic (loss) earnings per share is calculated in accordance with SFAS 128, Earnings Per Share,by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares
outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted (loss) earnings per share is computed by dividing the earnings or loss applicable to
common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using
the treasury-stock method. For purposes of this calculation, options and warrants to purchase common stock are considered to be common stock equivalents but have been excluded from the three months and six months ended June 30, 2008 calculation
of diluted net loss per share as their effect is anti-dilutive. For the three months and six months ended June 30, 2007, 177,951 warrants have been excluded from the calculation of diluted earnings per share because their inclusion would be
anti-dilutive.



|                                                                              |  |                            |            |   |      |   |            |  
|----------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                              |  | Three months endedJune 30, |           
|                                                                              |  | 2008                       |            |   | 2007 |  
|Net loss attributable to common stockholders                                  |  | $                          | (3,079,262 | ) |      | $ | (878,468   | )
|                                                                              |  |                            |            |   |      |   |            |  
|Basic and diluted net loss per share:                                         |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing basic net loss per share            |  |                            | 27,331,397 |   |      |   | 14,528,755 |  
|                                                                              |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing diluted net loss per share          |  |                            | 27,331,397 |   |      |   | 14,528,755 |  
|                                                                              |  |                            |            |   |      |   |            |  
|Basic net loss per common share                                               |  | $                          | (0.11      | ) |      | $ | (0.06      | )
|                                                                              |  |                            |            |   |      |   |            |  
|Diluted net loss per common share                                             |  | $                          | (0.11      | ) |      | $ | (0.06      | )
|                                                                              |  |                            |            |   |      |   |            |  
|                                                                              | 
|                                                                              |  | Six months endedJune 30,   |           
|                                                                              |  | 2008                       |            |   | 2007 |  
|Net (loss) income attributable to common stockholders                         |  | $                          | (5,500,372 | ) |      | $ | 2,437,583  |  
|                                                                              |  |                            |            |   |      |   |            |  
|Basic and diluted net (loss) income per share:                                |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing basic net (loss) income per share   |  |                            | 27,281,120 |   |      |   | 14,526,101 |  
|Dilutive effect of conversion of preferred stock                              |  |                            |           |   |      |   | 11,706,802 |  
|Dilutive effect of options and warrants                                       |  |                            |           |   |      |   | 765,794    |  
|                                                                              |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing diluted net (loss) income per share |  |                            | 27,281,120 |   |      |   | 26,998,697 |  
|                                                                              |  |                            |            |   |      |   |            |  
|Basic net (loss) income per common share                                      |  | $                          | (0.20      | ) |      | $ | 0.17       |  
|                                                                              |  |                            |            |   |      |   |            |  
|Diluted net (loss) income per common share                                    |  | $                          | (0.20      | ) |      | $ | 0.09       |  
|                                                                              |  |                            |            |   |      |   |            |  



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New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under GAAP
and expands fair value financial statement disclosure requirements. SFAS 157 does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that
relate to share-based payments (SFAS 123R, Share Based Payment).

SFAS 157s valuation techniques are based on observable and unobservable
inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The Standard classifies these inputs into the following hierarchy:

Level 1 Inputs Quoted prices for identical instruments in active markets.

Level 2 Inputs Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant
value drivers are observable.

Level 3 Inputs Instruments with primarily unobservable value drivers.

The Standard is effective for fiscal years beginning after November 15, 2007. Effective January 1, 2008, the Company adopted the provisions of SFAS
No. 157. The adoption of the Standard had no effect on the consolidated financial statements.

Effective January 1, 2008, the Company adopted
Emerging Issues Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3). Nonrefundable advance
payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the services are
performed, or when the goods or services are no longer expected to be provided. The Companys adoption of EITF 07-3 did not have a material effect on the Companys consolidated results of operations and financial position.

3. Investments in Marketable Securities

The Companys
investment securities available-for-sale consists of equity securities in MiMedx Group, Inc., formerly Spine Medica, Inc., a privately held company. MiMedx subsequently merged with Alynx and became public as of February 8, 2008. The Company had
carried the investment at cost of $400. As of June 30, 2008, the estimated fair value was $1,604,408 based on the number of shares held and the quoted market price at that date. For the three and six months ended June 30, 2008, the Company
recorded a gross unrealized gain of $1,604,008.

Fair Value Measurement

As stated in note 2. Summary of Significant Accounting Policies, on January 1, 2008, the Company adopted the methods of determining fair value as described in SFAS 157 to value its financial assets and
liabilities. In determining fair value, the Company utilizes techniques to optimize the use of observable inputs, when available, and minimize the use of unobservable inputs to the extent possible. As such, the Company uses valuation models in
determining fair value. Based on this valuation technique, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or risks inherent in the inputs.

The following is a description of the Companys valuation methodologies used to measure and disclose the fair values of its assets and liabilities on
a recurring basis:

Available-for-sale securities: Securities classified as available-for-sales are recorded at fair value on a recurring basis
utilizing Level 3 inputs. The Company measured its available-for-sale securities using unobservable inputs that reflect the reporting entitys own assumptions that market participants would use in estimating the fair value of an asset or
liability.

The Companys valuation was based on Level 3 inputs, management determined that the Level 3 inputs were the most significant to the
overall fair value measurement, particularly the volatility, interest rate, and liquidity.

The changes in Level 3 assets measured at fair value on a
recurring basis resulted in an unrealized gain of $1,604,008 as of June 30, 2008.

The Company does not have any other assets measured at fair value that
would require non-recurring fair value adjustments (for example, where there is evidence of impairment).

4. Merger with Point

On February 12, 2008, DARA and Point completed the Merger as described in Note 1. The boards of directors of Point and DARA, respectively, believed that by combining
Point and DARA, the combined company would generate improved long-term operating and financial results and establish a stronger



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competitive position in the industry by gaining access to greater resources, diversification and increased access to capital. In merging with Point, the DARA
board also considered the potential for increased liquidity for its stockholders expected as the result of the Merger.

Following the effectiveness of the
Merger, Point changed its corporate name to DARA BioSciences, Inc. and changed its ticker symbol on The NASDAQ Capital Market to DARA. The Merger was intended, among other things, to allow the business of privately-held DARA to be
conducted by the Company given that DARAs business became the primary business of the Company following the Merger.

The Merger was accounted for as
a reverse acquisition under the purchase method of accounting for business combinations in accordance with GAAP. Under this method of accounting, Point is treated as the acquired company for financial reporting purposes. On February 12, 2008,
Point had approximately $762,000 in cash. Under the terms of the Merger Agreement, as of the closing of the Merger, the former holders of DARA equity securities acquired 96.4% of the capital stock of the Company (on a fully diluted basis).
Immediately following the Merger, the Board of Directors of the Company consisted of six directors, all of whom were former directors of DARA. In addition, the senior management team of DARA manages the operations of the Company, with the exception
of the Chairman of the Board of Directors and Chief Executive Officer who resigned from the Company as of March 21, 2008. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the Merger was treated as the equivalent of the Company issuing stock for the net assets of Point. The net assets of Point were stated at fair value, which approximates historical cost, with no
goodwill or other intangible assets recorded. The Companys deficit accumulated in the development stage was carried forward after the Merger. Following is the allocation of the purchase price to the net assets of Point based on fair values:



|                                  |  |   |           |  
|--------------------------------- |  | - | --------- | -
|Cash                              |  | $ | 771,671   |  
|Other current assets              |  |   | 480,638   |  
|Fixed assets, net of depreciation |  |   | 21,979    |  
|Accrued liabilities               |  |   | (803,324  | )
|Merger transaction cost expensed  |  |   | 1,271,950 |  
|                                  |  |   |           |  
|Total purchase price              |  | $ | 1,742,914 |  
|                                  |  |   |           |  

The Merger had no effect on loss per share.

5. Income Taxes

The Company recorded no tax expense in either of the three and six months ended June 30, 2008
or June 30, 2007. The Company maintains the same assumptions regarding the valuation allowance and recognition of deferred tax assets as December 31, 2007.

The Company adopted the provisions of FIN 48 as of January 1, 2007. As of December 31, 2007 the Company had approximately $237,548 of unrecognized tax liabilities. As of June 30, 2008, the Company has
accrued $9,023 of unrecognized tax liabilities. The total balance of unrecognized liabilities at June 30, 2008 of $246,571, if recognized, would affect the effective tax rate. Consistent with prior periods, the Company recognized interest and
penalties within its interest expense.

6. Equity

Pursuant to the merger, each share of DARA common stock and preferred stock issued and outstanding immediately prior to the effective time of the merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of
post-merger Company common stock, plus cash in lieu of any



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fractional shares. Additionally, outstanding options and warrants to purchase shares of DARA common stock became options and warrants to purchase shares of
post-merger Company common stock adjusted as follows: the number of shares acquirable upon exercise was multiplied by 1.031406 and the exercise price per share was divided by 1.031406. As a result of the transaction, the former DARA stockholders
received 96.4% of the Companys outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of the Company. Upon consummation of the merger, the Company
changed its name to DARA BioSciences, Inc.

7. Stock-Based Compensation

With the adoption of SFAS 123R as of January 1, 2006, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted. Share price volatility is based on an
analysis of historical stock price data reported for a peer group of public companies. The expected life is the length of time options are expected to be outstanding before being exercised. The Company estimates expected life using the
simplified method as allowed under the provision of the Securities and Exchange Commissions Staff Accounting Bulletin No. 107, Share-Based Payment. The simplified method uses an average of the option vesting
period and the options original contractual term. The Company uses the implied yield of U.S. Treasury instruments with terms consistent with the expected life of options as the risk-free interest rate. SFAS 123R requires companies to estimate
a forfeiture rate for options and accordingly reduce the compensation expense reported. The Company used historical data among other factors to estimate the forfeiture rate.

Prior to February 12, 2008 the Company was a privately-held company and its common stock was not publicly traded. The fair value of stock options granted from January 2006 through completion of the Merger, and
related stock-based compensation expense was determined based upon the price the board determined at time of grant, the exchange ratio of the shares in the Merger.

The weighted average assumptions utilized to determine fair value are summarized in the following table:



|                                          |  |                            |   |  |                          |   |  |      |   |  |      |  
|----------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                          |  | Three months endedJune 30, |   |  | Six months endedJune 30, |  
|                                          |  | 2008                       |   |  | 2007                     |   |  | 2008 |   |  | 2007 |  
|Dividend yield                            |  |                           |   |  |                         |   |  |     |   |  |     |  
|Volatility                                |  | 79                         | % |  | 75                       | % |  | 77   | % |  | 75   | %
|Weighted-average expected life (in years) |  | 5.8                        |   |  | 5.8                      |   |  | 5.8  |   |  | 5.8  |  
|Risk free interest rate                   |  | 1.9                        | % |  | 4.5                      | % |  | 2.6  | % |  | 4.5  | %
|Forfeiture rate                           |  | 10                         | % |  | 10                       | % |  | 10   | % |  | 10   | %



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The adoption of SFAS No. 123R had a significant impact on our results of operations. The Companys consolidated
statements of operations for the three months and six months ended June 30, 2008 and 2007, respectively, includes the following stock-based compensation expense related to issuances of stock options which the Company recognized as stock-based
compensation expense as follows:



|                               |  |                            |         |                          |   |         |  |      |         |  |   |        
|------------------------------ |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                               |  | Three months endedJune 30, |         | Six months endedJune 30,
|                               |  | 2008                       |         | 2007                     |   | 2008    |  | 2007
|Research and development       |  | $                          | 83,402  |                          | $ | 45,744  |  | $    | 172,145 |  | $ | 54,937 
|General and administrative     |  |                            | 69,813  |                          |   | 94,972  |  |      | 256,707 |  |   | 189,268
|                               |  |                            |         |                          |   |         |  |      |         |  |   |        
|Total stock-based compensation |  | $                          | 153,215 |                          | $ | 140,716 |  | $    | 428,852 |  | $ | 244,205
|                               |  |                            |         |                          |   |         |  |      |         |  |   |        

Unrecognized stock-based compensation expense, including time-based options, performance-based options and
restricted stock awards, expected to be recognized over an estimated weighted-average amortization period of 2.0 years was $1,164,400 at June 30, 2008.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services, using a fair-value approach. The equity instruments, consisting of stock options and warrants granted to lenders and consultants, are valued using the Black-Scholes
valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the term of the related financing or the period over which services are
received.

The Company recognized $44,074 stock-based compensation expense for restricted shares issued to two board directors in the three month period
ending June 30, 2008. Each board director was awarded 35,000 restricted shares, with 25% vesting immediately. The remaining issued shares vest pro rata over the next three years on the anniversary of the directors appointment. The Company
recognized $71,574 stock-based compensation expense for the six month period ending June 30, 2008. The Company recognized stock-based compensation expense for awards to non-employees totaling $1,706 for both the three and six months ended
June 30 2007.

A summary of activity under the Companys stock option plans for the three and six months period ended June 30, 2008 is as
follows (adjusted for the effect of the merger):



|                                                  |  |                         |   |  |                     |   |  |                               |     
|------------------------------------------------- |  | ----------------------- | - |  | ------------------- | - |  | ----------------------------- | ----
|                                                  |  |                         |   |  | Options Outstanding
|                                                  |  | SharesAvailableto Grant |   |  | Number ofShares     |   |  | Weighted-AverageExercisePrice
|Balance at December 31, 2007                      |  | 687,352                 |   |  | 2,750,530           |   |  | $                             | 1.78
|Options granted                                   |  | (15,471                 | ) |  | 15,471              |   |  |                               | 2.62
|Additional shares authorized on February 12, 2008 |  | 4,606,246               |   |  |                    |   |  |                               |    
|Cancelled and forfeited                           |  | 6,188                   |   |  | (6,188              | ) |  |                               | 2.33
|                                                  |  |                         |   |  |                     |   |  |                               |     
|Balance at March 31, 2008                         |  | 5,284,315               |   |  | 2,759,813           |   |  | $                             | 1.79
|Options exercised                                 |  |                        |   |  | 290,083             |   |  |                               | 0.65
|Shares issued to directors                        |  | (70,000                 | ) |  |                    |   |  |                               |    
|Options granted                                   |  | (10,000                 | ) |  | 10,000              |   |  |                               | 2.19
|Cancelled and forfeited                           |  | 701,355                 |   |  | (701,355            | ) |  |                               | 2.15
|                                                  |  |                         |   |  |                     |   |  |                               |     
|Balance at June 30, 2008                          |  | 5,905,670               |   |  | 2,358,541           |   |  | $                             | 2.44
|                                                  |  |                         |   |  |                     |   |  |                               |     



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##### Table of Contents

Additionally, the Company has reserved 17,920 shares of common stock with a weighted-average exercise price of $137.20
for issuance under Points 1994 Plan, 1997 Plan, and 2003 Directors Plan.

8. Comprehensive Loss

As of June 30, 2008, an unrealized gain of $1,604,008 has been recorded in accumulated other comprehensive income in the accompanying Consolidated Balance Sheet. The
Company displays comprehensive loss and its components as part of the statement of stockholders equity. Comprehensive loss consists of net loss and unrealized gains and losses on available-for-sale investments. Comprehensive loss was
$1,475,254 and $3,896,364 for the three and six month periods ended June 30, 2008, respectively.

9. Commitments and Contingencies

In the ordinary course of business, the Company is exposed to various claims, threats, and legal proceedings. Management was aware of no such matters as of the date of
these financial statements.



15



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information
contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report includes forward-looking statements based on our current managements expectations. There can be no
assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history,
unpredictability of future program dispositions and operating results, competitive pressures and the other potential risks and uncertainties discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31,
2007.

Merger Transaction

On February 12,
2008, DARA BioSciences, Inc., formerly known as Point Therapeutics, Inc. (we, us and our or the Company), completed the merger transaction (the Merger) contemplated by the Agreement and
Plan of Merger dated October 9, 2007, as amended December 19, 2007, among the Company, DP Acquisition Corp., a wholly-owned subsidiary of the Company (Merger Sub), and DARA BioSciences, Inc., a privately-held development stage
pharmaceutical company based in Raleigh, North Carolina (DARA).

Pursuant to the Merger, each share of DARA common stock and preferred stock
issued and outstanding immediately prior to the effective time of the Merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of Company common stock, plus cash in lieu of any fractional shares. As a result of the
transaction, the former DARA stockholders received 96.4% of the Companys outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of the Company.
Upon consummation of the Merger, the Company changed its name to DARA BioSciences, Inc.

For accounting purposes, the Merger was treated as a reverse
acquisition with DARA being the accounting acquirer. Accordingly, the historical financial information in this Form 10-Q prior to the Merger is that of DARA and its consolidated subsidiaries and all references to the Company in this Form
10-Q relating to periods prior to the Merger refer to DARA.

Overview

We are a Raleigh, North Carolina-based development stage pharmaceutical company that acquires promising therapeutic drug candidates from third parties and advances their clinical development for later sale or license
to pharmaceutical companies. We operate a business model that focuses on the following:

Obtaining patents for innovative drug candidates which we believe
have value in the marketplace;

Utilizing a small group of talented employees to develop those ideas through proof of concept in patients (generally
through phase 2a clinical trials) by working with strategic outsource partners; and

Licensing the resulting product to a strong pharmaceutical partner to
commercialize. We do not intend to fully develop, obtain clearance from the U.S. Food and Drug Administration (FDA) and then market the drug candidates we are developing.



16



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##### Table of Contents

We hire experts with strong project management skills in specific disciplines we believe are important to maintain within
our company. We contract with and manage strong outsource partners to complete the necessary development work. This permits us to avoid incurring the cost of buying or building laboratories, manufacturing facilities or clinical research operation
sites. It allows us to control our annual expenses and to optimize resources.

After we establish proof of concept for an innovative drug candidate, we
seek a strong pharmaceutical partner to license the drug candidate and to commercialize it after regulatory approval. The success of our business is highly dependent on the marketplace value of our drug candidates, the related patents we obtain and
our ability to find strong commercial partners to successfully commercialize the drug candidates.

We generally license drug candidates that are prepared
to enter pre-clinical studies prior to being submitted for an Investigational New Drug application (IND) (which is part of the process to get approval from the FDA for marketing a new prescription drug in the U.S.). Operationally we
advance the development of our drug candidates from the stage we in-license the compound, typically at the pre-clinical stage of development, to obtain FDA approval of an IND application, test the drug candidates in Phase 1 and Phase 2 clinical
trials and seek to license the drug candidate or find a collaborative partner who would further the development of the compound in later stage trials and commercialize it. Key indicators to evaluate our success are how our drug candidates advance
through the drug development process, and ultimately, if we are successful in negotiating collaborations, licenses, or sales agreements with larger pharmaceutical companies for our drug candidates. In order to successfully achieve these goals,
having sufficient liquidity is important since we do not have a recurring sales or revenue stream to provide such working capital.

We have not generated
any revenue from operations to date. We have liquidated or distributed to our stockholders some of our investments made in other companies. To date, we have received net proceeds from the sale of those assets in the amount of approximately
$5,650,000. These proceeds together with capital raised from the sale of our securities have been our primary source of working capital.

We expect to
continue to incur operating losses over the next several years as we complete the development of our current portfolio of drug candidates and acquire and develop new drug candidates. Our results may vary depending on many factors, including
pre-clinical and clinical test results, the performance of our strategic outsource partners and the progress of licensing activities with pharmaceutical partners.

During the first quarter of 2008, we relocated our facilities to a new office building and entered a lease agreement with a five-year term for the property. These facilities are expected to accommodate future growth, including the
anticipated hiring of two to four employees in the next twelve months in anticipation of our projected growth over the next five years.

Status of
our Drug Candidates

We currently have a portfolio of five programs with drug candidates for the treatment of neuropathic pain, type 2 diabetes and
psoriasis. Based on our present working capital, we believe that we have sufficient working capital to maintain our existing programs into the fourth quarter of 2008 and that we will require additional funding to meet our working capital needs to
progress those programs to a liquidity event through a collaboration, sale or out-license. A brief discussion of the status of each of our drug candidates follows.



17



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##### Table of Contents

KRN5500

KRN5500 is a drug
candidate for the treatment of neuropathic pain. An active component of KRN5500 has been shown to inhibit nerve cell pain signals. The primary segment of this market being targeted is chemotherapy-induced neuropathic pain. The drug candidate is
presently being tested in a Phase 2a clinical trial in cancer patients with neuropathic pain to assess its safety and efficacy. This trial is expected to be completed in the fourth quarter of 2008. A second larger Phase 2 trial is expected to
commence during fourth quarter of 2008 assuming additional funding is secured.

We incurred approximately $212,000 and $602,000 in development costs
associated with the development of KRN5500 for the three and six month periods ended June 30, 2008, respectively, and we have incurred costs of approximately $2.6 million from inception to date. We estimate the market potential for
chemotherapy-induced neuropathy to be roughly $1.6 billion in 2014.

DB959

DB959 is a PPAR

LOGO agonist for the treatment of type 2 diabetes. This compound activates genes involved in the metabolism of sugars and fats thereby improving the bodys ability to regulate blood sugar. We are developing this drug
candidate as a once-daily oral therapy. Our review of non-clinical data indicates that this drug candidate is a potential leading successor to Avandia® and Actos® because, among other indications, it increases good HDL cholesterol and lowers
triglycerides better than Avandia® with greater cardiac safety. We expect to file an IND application to the FDA during the fourth quarter of 2008. Our development work is being conducted under an exclusive worldwide license to develop and
commercialize the drug candidate from Bayer Pharmaceuticals Corp. This license, which was entered into in October 2007, gives the Company rights to over 2,000 compounds with agonist activities toward multiple PPAR sub-types.

We incurred approximately $599,000 and $801,000 in direct outside development costs associated with the development of DB959 for the three and six month periods ended
June 30, 2008, respectively, and we have incurred costs of approximately $838,000 from inception to date. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $5.4 billion in 2010.

DB160

DB160 is a DPP-IV inhibitor for the treatment of type 2 diabetes.
DDP-IV is an enzyme that inactivates a key hormone involved in promoting control of blood sugar levels thus giving diabetics better control of their blood sugar levels. The Company is developing this drug candidate as a once-daily oral therapy. We
are currently evaluating the competitive environment for DB160 and potential positioning of the compound for other indications. During this ongoing evaluation we have focused our resources on other drug development programs. If our evaluation
concludes that further development is warranted we would expect to file an IND application to the FDA during second quarter of 2009 assuming additional funding is secured. Our development work is being conducted under an exclusive worldwide license
to develop and commercialize the drug candidate from Nuada, LLC.

We incurred approximately $704,000 and $1,027,000 in direct outside development costs
associated with the development of DB160 for the three and six month periods ended June 30, 2008, respectively, and we have incurred costs of approximately $2 million from inception to date. We estimate the market potential for the DPP-IV
inhibitor segment of the type 2 diabetes market to be roughly $5.1 billion in 2016.



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##### Table of Contents

DB900

DB900 is a series of
compounds which are PPARLOGO agonists for the treatment of type 2 diabetes. This compound activates genes involved in the metabolism of sugars and fats thereby improving the bodys ability to regulate blood sugar. A clinical candidate
will be selected from a number of strong lead compounds. These compounds have the potential to raise good HDL cholesterol, lower bad LDL cholesterol and lower triglycerides with potential greater efficacy than DB959 as well as the potential to
deliver weight loss. We expect to file an IND application to the FDA during third quarter of 2009 assuming additional funded is secured. Our development work is being conducted under an exclusive worldwide license to develop and commercialize the
drug candidate from Bayer Pharmaceuticals Corp.

We incurred approximately $43,000 and $63,000 in direct outside development costs associated with the
development of DB900 series compounds for the three and six month periods ended June 30, 2008, respectively, and we have incurred costs of approximately $69,000 from inception to date. We estimate the market potential for the PPAR agonist
segment of type 2 Diabetes market to be roughly $5.4 billion in 2010.

DB200

DB200 refers to a series of compounds we have which are inhibitors of CPT-1 for the topical treatment of psoriasis. This drug candidate has the potential to inhibit inflammation and the proliferation of skin cells
thus resulting in decreased reddening and less flaking of the skin. A clinical candidate will be selected from a number of strong lead compounds. We expect to file an IND application to the FDA during fourth quarter of 2009 assuming additional
funding is secured. There are no third party licenses associated with this program.

We incurred approximately $82,000 and $148,000 in direct development
costs associated with the development of DB200 series compounds for the three and six month periods ended June 30, 2008, respectively, and we have incurred costs of approximately $183,000 from inception to date. We estimate the market potential
for the topical agent segment of the psoriasis market to be roughly $3.6 billion in 2014.

Other

Prior to the Merger, we studied talabostat (acquired in the merger with Point Therapeutics) in a number of human clinical trials as a potential therapy in late-stage
cancers. In May 2007, the talabostat clinical development program was put on clinical hold by the FDA as a result of interim clinical results related to Phase 3 talabostat studies as a potential treatment for patients in advanced non-small cell lung
cancer. We are currently evaluating talabostat to determine the viability of further studies but at this point do not expect it to become a significant part of our drug development program.

Investments

Prior to 2007, we made investments in several
companies. As a result, we currently hold investments in the following companies:



| |  |  | Surgi-Vision is developing real-time devices to be used with Functional MRI Technology. The company is targeting clinical solutions in areas such as
MRI-guided deep brain stimulation and cardiac ablation to treat atrial fibrillation. This investment represents approximately 10% of the outstanding shares of Surgi-Vision at June 30, 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Cardiovascular Solutions, Inc., formerly known as Medeikon Corporation is developing technology focusing on the diagnostics of vulnerable plaque using an optical
detection system. This investment represents approximately 25.4% of the outstanding shares of Cardiovascular Solutions, Inc. at June 30, 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | MiMedx Group, Inc. (MDXG.OB) is developing products primarily for use by musculoskeletal specialists in both surgical and non-surgical therapy. This investment
represents approximately 1.5 % of the outstanding shares of MiMedx Group, Inc. at June 30, 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting
Policies and Significant Judgments and Estimates

This Managements Discussion and Analysis of Financial Condition and Results of Operations is
based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those
related to research and development expenses, accrued expenses and share-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

We expense research and development expenses when incurred. The cost of certain research programs, such
as patient recruitment and related supporting functions for clinical trials, are based on reports and invoices submitted by the contract research organization (CRO) assisting us in conducting the clinical trial. These expenses are based
on patient enrollment as well as costs consisting primarily of payments made to the CRO, clinical centers, investigators, testing facilities and patients for participating in our clinical trials. Certain research and development costs must be
prepaid which, if the research and development work ceases to progress for whatever reason, are not repayable to us. In such cases, those costs are expensed when paid.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued
expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost
incurred for the service when invoices have not yet been sent and we have not otherwise been notified of actual cost. The majority of our service providers invoice monthly in arrears for services performed. We make estimates of accrued expenses as
of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued
expenses include:



| |  |  | fees paid to CROs in connection with preclinical and toxicology studies and clinical trials;
| | - |  | --------------------------------------------------------------------------------------------



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| |  |  | fees paid to investigative sites in connection with clinical trials;
| | - |  | --------------------------------------------------------------------



| |  |  | fees paid to contract manufacturers in connection with the production of raw materials, drug substance and drug products; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | professional service fees.
| | - |  | --------------------------

Share-Based
Compensation

Share-based compensation is accounted for using the fair value based method prescribed by SFAS No. 123R, Accounting for Share-Based
Payment (SFAS 123R). For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for
the Companys common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of
issuance. Our Companys share-based compensation transactions resulted in compensation expense of $153,215 and $140,716 for the three months ended June 30, 2008 and 2007, respectively, and $428,852 and $244,205 for the six months ended
June 30, 2008 and 2007, respectively. The Company recognized $44,074 stock-based compensation expense for restricted shares issued to two board directors in the three month period ending June 30, 2008. Each board director was awarded 35,000
restricted shares, with 25% vesting immediately. The remaining issued shares vest pro rata over the next three years on the anniversary of the directors appointment. The Company recognized $71,574 stock-based compensation expense for the six
month period ending June 30, 2008.

Significant Judgments and Estimates

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts and disclosure
of certain assets and liabilities at our balance sheet date. Such estimates include the carrying value of property and equipment and the value of certain liabilities. Actual results may differ from such estimates.

Results of Operations

Three Months Ended June 30,
2008 Compared to Three Months Ended June 30, 2007

Research and development expenses increased from approximately $564,000 for the three months
ended June 30, 2007 to approximately $2,030,000 for the corresponding 2008 period, primarily as a result of increased expenses incurred in continuing development of the neuropathic pain compound and initiating the development of the following
new programs that the Company did not have in the three months ended June 30, 2007: DB959, DB200 and DB900.

General and administrative expenses
consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions and patent costs. In addition, general and administrative expenses include allocated
facility, basic operational and support costs and insurance costs. General and administrative expenses increased from approximately $529,000 for the three months ended June 30, 2007 to approximately $1,045,000 for the corresponding 2008 period,
primarily as a result of the substantial expenses we incurred in the first quarter of 2008 in connection with the Merger, as well as an increase of two employees and associated overhead.

Other income, net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies. Other income, net decreased from approximately $107,000 for
the three months ended June 30, 2007 to a loss of approximately $79,000 for the corresponding 2008 period. This decrease was due to market returns on investments.



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Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Research and development expenses increased from approximately $1,364,000 for the six months ended June 30, 2007 to approximately $3,492,000 for the corresponding
2008 period, primarily as a result of increased expenses incurred in continuing development of the neuropathic pain compound and initiating the development of the following new programs that the Company did not have in the six months ended
June 30, 2007: DB959, DB200 and DB900.

General and administrative expenses consist primarily of salaries and benefits, professional fees related to
administrative, finance, human resource, legal and information technology functions and patent costs. In addition, general and administrative expenses include allocated facility, basic operational and support costs and insurance costs. General and
administrative expenses increased from approximately $1,063,000 for the six months ended June 30, 2007 to approximately $2,266,000 for the corresponding 2008 period, primarily as a result of the substantial expenses we incurred in the first
quarter of 2008 in connection with the Merger, as well as an increase of two employees, the increase in occupancy costs associated with the new office facilities and the associated overhead.

Other income, net reflects non-operating activities having to do with investments and dispositions on investments made in collaborations with other companies. Other
income, net decreased from approximately $4,676,000 for the six months ended June 30, 2007 to approximately $109,000 for the corresponding 2008 period. This decrease was primarily due to there being no recognized gains on nonmonetary assets or
from the sale of securities in the six months ended June 30, 2008 compared to recognizing (1) a gain on nonmonetary assets of approximately $2,658,000 as a result of our distribution of a dividend of shares of Surgi-Vision stock to
stockholders and option holders and (2) a gain from the sale of securities of approximately $1,773,000 as a result of our sale of our remaining investment in Medivation, Inc. during the six months ended June 30, 2007.

Liquidity and Capital Resources

At June 30, 2008, our
principal sources of liquidity were our cash and cash equivalents which totaled approximately $4,277,000. It should be noted that in accordance with applicable accounting rules, our balance sheet at June 30, 2008 includes investment securities
available for sale in the amount of $1,604,408. However, these securities will not be freely saleable by us until February 2009.

During the six month
period ended June 30, 2008, our cash and cash equivalents decreased by approximately $3,986,000 as compared to December 31, 2007. This decrease in cash from operations was primarily due to the operating loss offset in part by non-cash
stock-based compensation of approximately $500,000 and depreciation and amortization of approximately $74,000. Prepaid expenses increased by approximately $8,000 for the six month period ended June 30, 2008, primarily representing prepaid
insurance coverage. Accounts payable increased by approximately $557,000 and accrued expenses increased by approximately $480,000 during the six month period ended June 30, 2008.

Our investing activities provided net cash of approximately $754,000 for the six month period ended June 30, 2008 primarily as a result of cash of approximately $772,000 received in connection with the Merger.



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We entered into a lease for new facilities in the first quarter of 2008. The new facilities are approximately 7,520
square feet compared to our previous space of 4,038 square feet. In connection with entry into this new lease, our annual lease costs have increased by approximately $100,000.

Related Party Transactions

The Company incurred expenses of approximately $15,200 during the year to date and
the three months ended June 30, 2008 related to aircraft usage from an entity owned by the Co-Chairman of the Board.

Capital Resources

From inception through June 30, 2008, we have financed our operations primarily from the net proceeds of (1) private placements of equity
securities, through which we raised approximately $23,106,000, and (2) the sale of securities held in subsidiary companies, through which we raised approximately $5,650,000.

As of June 30, 2008, we had net working capital of approximately $4,373,000. Our cash resources have been used to acquire licenses, fund research and development activities, capital expenditures, and general and
administrative expenses. Over the next several years, we expect to incur substantial additional research and development costs, including costs related to preclinical and clinical trials, increased administrative expenses to support our research and
development operations and increased capital expenditures, and various equipment needs and facility improvements.

We believe we have sufficient working
capital to pursue our current operations into the fourth quarter of 2008. We will require additional funds to pursue our business plan. Our working capital requirements will depend upon numerous factors, including the progress of our research and
development programs (which may vary as product candidates are added or abandoned), preclinical testing and clinical trials, timing and cost of seeking as well as the achievement of regulatory milestones, the status of competitive programs, and the
ability to sell or license our technologies to third parties. In any event, we will require substantial funds in addition to those presently available to develop all of our programs to meet our business objectives. To ensure the continued level of
research development and funding of our operations, we are currently exploring various possible financing options that may be available to us, which may include a sale of our securities or the sale of certain of our investments. We have no
commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If we are unable to obtain such needed capital, we may not be able to:



| |  |  | execute our growth plan;
| | - |  | ------------------------



| |  |  | take advantage of future opportunities, including synergistic acquisitions; or
| | - |  | ------------------------------------------------------------------------------



| |  |  | continue to remain in operation.
| | - |  | --------------------------------

Off-Balance
Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2008.



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Cautionary Information regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. When used in this Form 10-Q, the words believe, anticipates, intends, plans, estimates, and similar expressions are forward-looking statements. Such
forward-looking statements contained in this Form 10-Q are based on managements current expectations. These statements and expectations are based on currently available competitive, financial and economic data along with our operating plans,
and are subject to future events and uncertainties that could cause anticipated events not to occur or actual results to differ materially from historical or anticipated results. Forward-looking statements may address the following subjects: results
of operations; development of drug candidates; operating expenses, including research and development expense; capital resources and access to financing; and results of clinical trials. We caution investors that there can be no assurance that actual
results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, the potential risks and uncertainties described in our
Annual Report on Form 10-K for the year ended December 31, 2007 under Part I, Item 1A  Risk Factors.

You should also carefully consider
the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission (the SEC). Except as required by law, we undertake no obligation to update any forward-looking statements.

In this Form 10-Q, we refer to information regarding potential markets for our drug candidates and other industry data. We believe that all such
information has been obtained from reliable sources that are customarily relied upon by companies in our industry. However, we have not independently verified any such information.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Not
applicable.



|Item 4. | Controls and Procedures
|------- | -----------------------

As required by Rule 13a-15(b) under the
Securities Exchange Act of 1934, our management, including our Chief Operating Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Operating Officer and Chief Financial Officer have concluded that, except as described below, these disclosure controls and
procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods
specified in Securities and Exchange Commission rules and forms. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have
designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, our Chief Operating Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at reaching that level of reasonable assurance, except as described below.

In connection with the audit
committees review of our interim financial statements for the period ended June 30, 2008, we discovered that in the balance sheet as of March 31, 2008 included in our Quarterly Report on Form 10-Q we incorrectly valued our investment in MiMedx
Group, Inc. at cost instead of at fair value. Due to a reverse merger transaction completed in the quarter ended March 31, 2008, our shares representing our investment in MiMedx began to be quoted on the OTC Bulletin Board. Accordingly, as of March
31, 2008 and June 30, 2008, such shares should have been classified as available-for-sale in accordance with Statement of Accounting Standards No. 115, Accounting for certain Investments in Debt and Equity Securities(SAS 115),
and carried at fair value.

As a result, we expect to restate the financial statements included in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008. The restatement is expected to increase the value of our MiMedx shares as reflected on our balance sheet as of March 31, 2008 by approximately $2,196,011 and also add accumulated other comprehensive income to the balance sheet in the
same amount. In conducting our evaluation of our disclosure controls and procedures as of June 30, 2008, we considered this error on our March 31, 2008 balance sheet and the fact that we will need to restate the financial statements included in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 to correct the error and concluded we had a control deficiency insofar as we had insufficient resources knowledgeable with regard to the application of SAS 115 to our investments. We
have remediated the control deficiency described above by reclassifying our investment in MiMedx on our balance sheet as of June 30, 2008 included herein, and plan to further remediate this deficiency by filing an amendment to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2008 to restate the balance sheet included therein to reflect this reclassification. In addition, we have implemented procedures to ensure that in the future we properly classify our investments as
required under SAS 115.

As a result of the Merger (described above in Managements Discussion and Analysis of Financial Condition and Results of
Operations  Merger Transaction), our internal control over financial reporting was materially affected in that upon the effective date of the Merger, DARAs internal control over financial reporting became ours. DARA was a private company
and therefore was not subject to Section 404 of the Sarbanes-Oxley Act of 2002 which requires companies to include in their annual report an assessment of internal control over financial reporting and the related auditor attestation report. We have
recently engaged the services of Monaghan Group to assist us in completing a work plan so that we may complete an evaluation of our internal control over financial reporting as of December 31, 2008 and include our internal control assessment and the
related auditor attestation report in a 2008 Form 10-Q.



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PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

As of August 13, 2008, we had no
outstanding material legal proceedings.



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

Not
applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



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

Not
applicable.



|Item 5. | Other Information
|------- | -----------------

Not applicable.



|Item 6. | Exhibits
|------- | --------

The exhibits required to be filed as a part of this
report are listed in the Exhibit Index.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                      |  |  |  |                        |  |                                      
|--------------------- |  |  |  | ---------------------- |  | -------------------------------------
|                      |  |  |  | DARA BIOSCIENCES, INC.
|                      |  |  | 
|Date: August 14, 2008 |  |  |  | By:                    |  | /s/ John Didsbury                    
|                      |  |  |  |                        |  | John Didsbury                        
|                      |  |  |  |                        |  | President and Chief Operating Officer
|                      |  |  | 
|Date: August 14, 2008 |  |  |  | By:                    |  | /s/ John C. Thomas, Jr.              
|                      |  |  |  |                        |  | John C. Thomas, Jr.                  
|                      |  |  |  |                        |  | Chief Financial Officer              



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##### Table of Contents

EXHIBIT INDEX



|Item 15(c) | Exhibits:
|---------- | ---------



|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                           
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002                
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002                
|            | 
|32          |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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