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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 September 30, 2010

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 of
incorporation or organization) |  | (I.R.S. Employer Identification 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 Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    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 November 11, 2010 was approximately 3,676,004.









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Table of Contents



|                                                                                              |  |      |    | 
|--------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                              |  | Page |   
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  |      | 3  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |  |      | 15 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  |      | 21 | 
|Item 4. Controls and Procedures                                                               |  |      | 21 | 
|PART II - OTHER INFORMATION                                                                   |  |      |    | 
|Item 1. Legal Proceedings                                                                     |  |      | 21 | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  |      | 22 | 
|Item 3. Defaults Upon Senior Securities                                                       |  |      | 22 | 
|Item 4. (Removed and Reserved)                                                                |  |      | 22 | 
|Item 5. Other Information                                                                     |  |      | 22 | 
|Item 6. Exhibits                                                                              |  |      | 22 | 



2



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DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                          |  | September 30,2010 |             |   | December 31,2009 |  
|                                                                                                                                                                                          |  | (unaudited)       |             |   |                  |  
|Assets                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                           |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                 | 874,577     |   |                  | $ | 3,167,302   |  
|Prepaid expenses and other assets, current portion                                                                                                                                        |  |                   | 328,966     |   |                  |   | 149,040     |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                      |  |                   | 1,203,543   |   |                  |   | 3,316,342   |  
|                                                                                                                                                                                          |  |                  
|Furniture, fixtures and equipment, net                                                                                                                                                    |  |                   | 67,111      |   |                  |   | 56,213      |  
|Restricted cash                                                                                                                                                                           |  |                   | 51,401      |   |                  |   | 78,757      |  
|Prepaid expenses and other assets, net of current portion                                                                                                                                 |  |                   | 164,664     |   |                  |   | 216,664     |  
|Prepaid license fee, net                                                                                                                                                                  |  |                   | 250,000     |   |                  |   | 340,000     |  
|Deferred stock issuance costs                                                                                                                                                             |  |                   | 220,455     |   |                  |   |            |  
|Investments                                                                                                                                                                               |  |                   | 130,468     |   |                  |   | 130,468     |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                                                                              |  | $                 | 2,087,642   |   |                  | $ | 4,138,444   |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|                                                                                                                                                                                          |  |                  
|Liabilities and stockholders equity                                                                                                                                                      |  |                   |             |   |                  |   |             |  
|                                                                                                                                                                                          |  |                  
|Accounts payable                                                                                                                                                                          |  | $                 | 763,832     |   |                  | $ | 374,565     |  
|Accrued liabilities                                                                                                                                                                       |  |                   | 498,350     |   |                  |   | 284,567     |  
|Capital lease obligation, current portion                                                                                                                                                 |  |                   | 12,766      |   |                  |   | 6,338       |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                 |  |                   | 1,274,948   |   |                  |   | 665,470     |  
|                                                                                                                                                                                          |  |                  
|Deferred lease obligation                                                                                                                                                                 |  |                   | 12,032      |   |                  |   | 10,968      |  
|Other liability                                                                                                                                                                           |  |                   | 277,022     |   |                  |   | 268,622     |  
|Capital lease obligation, net of current portion                                                                                                                                          |  |                   | 34,893      |   |                  |   | 22,009      |  
|Patent obligation                                                                                                                                                                         |  |                   | 7,895       |   |                  |   | 17,895      |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                                         |  |                   | 1,606,790   |   |                  |   | 984,964     |  
|                                                                                                                                                                                          |  |                  
|Stockholders equity                                                                                                                                                                      |  |                   |             |   |                  |   |             |  
|Common stock, $0.01 par value, 75,000,000 shares authorized, 3,063,337 shares issued and outstanding at
September 30, 2010, 2,789,526 shares issued and outstanding at December 31, 2009. |  |                   | 30,633      |   |                  |   | 27,895      |  
|                                                                                                                                                                                          | 
|                                                                                                                                                                                          | 
|Additional paid-in capital                                                                                                                                                                |  |                   | 32,963,357  |   |                  |   | 30,588,276  |  
|Deficit accumulated during the development stage                                                                                                                                          |  |                   | (32,721,175 | ) |                  |   | (27,893,552 | )
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|                                                                                                                                                                                          |  |                  
|Total stockholders equity before noncontrolling interest                                                                                                                                 |  |                   | 272,815     |   |                  |   | 2,722,619   |  
|Noncontrolling interest                                                                                                                                                                   |  |                   | 208,037     |   |                  |   | 430,861     |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|                                                                                                                                                                                          |  |                  
|Total stockholders equity                                                                                                                                                                |  |                   | 480,852     |   |                  |   | 3,153,480   |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|                                                                                                                                                                                          |  |                  
|Total liabilities and stockholders equity                                                                                                                                                |  | $                 | 2,087,642   |   |                  | $ | 4,138,444   |  
|                                                                                                                                                                                          |  |                   |             |   |                  |   |             |  

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



3



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DARA BIOSCIENCES,
INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | --------- | ------------------ |  | - | ---------- | - |  | ------------------------------------- | ---------- | - |  | - | ----------- | -
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  | Period from June 22,
2002 (inception) |           
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  | through                               |           
|                                                                     |  | Three months ended September 30, |            |   | Nine months ended September 30, |   |           | September 
30,2010 | 
|                                                                     |  | 2010                             |            |   | 2009                            |   |           | 2010               |  |   | 2009       |   | 
|                                                                     |  |                                  |            |   |                                
|Operating expenses:                                                  |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Research and development                                             |  | $                                | 1,189,101  |   |                                 | $ | 295,945   |                    |  | $ | 2,814,580  |   |  | $                                     | 1,449,404  |   |  | $ | 22,072,864  |  
|General and administrative                                           |  |                                  | 610,832    |   |                                 |   | 562,950   |                    |  |   | 2,234,924  |   |  |                                       | 2,099,873  |   |  |   | 21,690,610  |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Total operating expenses                                             |  |                                  | 1,799,933  |   |                                 |   | 858,895   |                    |  |   | 5,049,504  |   |  |                                       | 3,549,277  |   |  |   | 43,763,474  |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Loss from operations                                                 |  |                                  | (1,799,933 | ) |                                 |   | (858,895  | )                  |  |   | (5,049,504 | ) |  |                                       | (3,549,277 | ) |  |   | (43,763,474 | )
|                                                                     |  |                                  |            |   |                                
|Other (expense) income:                                              |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Gain on distribution of nonmonetary asset                            |  |                                  |           |   |                                 |   |          |                    |  |   |           |   |  |                                       | 551,410    |   |  |   | 4,760,953   |  
|Gain on sale of marketable securities                                |  |                                  |           |   |                                 |   |          |                    |  |   |           |   |  |                                       | 177,724    |   |  |   | 6,780,147   |  
|Other (expense) income                                               |  |                                  |           |   |                                 |   | 325       |                    |  |   | (160       | ) |  |                                       | (1,885     | ) |  |   | 110,183     |  
|Interest (expense) income                                            |  |                                  | (2,912     | ) |                                 |   | (14,723   | )                  |  |   | (783       | ) |  |                                       | (38,579    | ) |  |   | 750,873     |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Other (expense) income                                               |  |                                  | (2,912     | ) |                                 |   | (14,398   | )                  |  |   | (943       | ) |  |                                       | 688,670    |   |  |   | 12,402,156  |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|                                                                     |  |                                  |            |   |                                
|Loss before undistributed loss in equity method investments          |  |                                  | (1,802,845 | ) |                                 |   | (873,293  | )                  |  |   | (5,050,447 | ) |  |                                       | (2,860,607 | ) |  |   | (31,361,318 | )
|Undistributed loss in equity method investments                      |  |                                  |           |   |                                 |   |          |                    |  |   |           |   |  |                                       |           |   |  |   | (2,374,422  | )
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Consolidated net loss                                                |  |                                  | (1,802,845 | ) |                                 |   | (873,293  | )                  |  |   | (5,050,447 | ) |  |                                       | (2,860,607 | ) |  |   | (33,735,740 | )
|                                                                     |  |                                  |            |   |                                
|Net loss attributable to non controlling interest                    |  |                                  | 99,142     |   |                                 |   | 48,117    |                    |  |   | 222,824    |   |  |                                       | 138,750    |   |  |   | 1,233,912   |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|                                                                     |  |                                  |            |   |                                
|Net loss attributable to controlling interest                        |  | $                                | (1,703,703 | ) |                                 | $ | (825,176  | )                  |  | $ | (4,827,623 | ) |  | $                                     | (2,721,857 | ) |  | $ | (32,501,828 | )
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|                                                                     |  |                                  |            |   |                                
|Basic and diluted net loss per common share                          |  | $                                | (0.56      | ) |                                 | $ | (0.38     | )                  |  | $ | (1.61      | ) |  | $                                     | (1.37      | ) |  |   |             |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  
|Shares used in computing basic and diluted net loss per common share |  |                                  | 3,062,318  |   |                                 |   | 2,182,046 |                    |  |   | 3,006,670  |   |  |                                       | 1,992,864  |   |  |   |             |  
|                                                                     |  |                                  |            |   |                                 |   |           |                    |  |   |            |   |  |                                       |            |   |  |   |             |  

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



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DARA BIOSCIENCES,
INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                            |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ------------------------------------------------------- | - | ---------- | ---- |  | - | ----------- | -
|                                                                            |  | Nine months endedSeptember 30, |            |   | Period FromJune 22,
2002(inception)throughSeptember 30, |  
|                                                                            |  | 2010                           |            |   | 2009                                                    |   |            | 2010 | 
|Operating activities                                                        |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Consolidated net loss                                                       |  | $                              | (5,050,447 | ) |                                                         | $ | (2,860,607 | )    |  | $ | (33,735,740 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Depreciation and amortization                                               |  |                                | 108,842    |   |                                                         |   | 118,578    |      |  |   | 524,673     |  
|Forgiveness of stock subscription receivable                                |  |                                |           |   |                                                         |   |           |      |  |   | 242,500     |  
|Recognition of expense related to nonmonetary asset                         |  |                                |           |   |                                                         |   |           |      |  |   | 1,035,589   |  
|Loss from equity investment                                                 |  |                                |           |   |                                                         |   |           |      |  |   | 2,374,422   |  
|Accretion of debt discount                                                  |  |                                |           |   |                                                         |   |           |      |  |   | 406,359     |  
|Share-based compensation                                                    |  |                                | 518,274    |   |                                                         |   | 324,783    |      |  |   | 5,033,879   |  
|Expense of warrants issued with convertible notes                           |  |                                |           |   |                                                         |   |           |      |  |   | 4,860       |  
|Expense of warrants issued to placement agent                               |  |                                |           |   |                                                         |   | 47,706     |      |  |   | 230,920     |  
|Loss on disposal of capital assets                                          |  |                                |           |   |                                                         |   |           |      |  |   | 19,930      |  
|Gain on extinguishment of capital lease obligation                          |  |                                |           |   |                                                         |   |           |      |  |   | (12,240     | )
|Loss on disposal of furniture, fixtures and equipment                       |  |                                | 160        |   |                                                         |   | 1,885      |      |  |   | 36,065      |  
|Sale of investment as payment for interest expense                          |  |                                |           |   |                                                         |   |           |      |  |   | 36,712      |  
|Distribution of investment for compensation                                 |  |                                |           |   |                                                         |   | 100,000    |      |  |   | 100,000     |  
|Gain on distribution of nonmonetary asset                                   |  |                                |           |   |                                                         |   | (551,410   | )    |  |   | (4,760,953  | )
|Gain on sale of marketable securities                                       |  |                                |           |   |                                                         |   | (177,724   | )    |  |   | (6,780,147  | )
|Deferred lease obligation                                                   |  |                                | 1,064      |   |                                                         |   | 4,016      |      |  |   | 12,033      |  
|Changes in operating assets and liabilities:                                |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Prepaid license fee and other prepaid expenses                              |  |                                | (127,926   | ) |                                                         |   | (31,842    | )    |  |   | (612,993    | )
|Accounts payable                                                            |  |                                | 389,267    |   |                                                         |   | 192,672    |      |  |   | 433,832     |  
|Accrued liabilities                                                         |  |                                | 185,122    |   |                                                         |   | (59,886    | )    |  |   | (246,557    | )
|Other liability                                                             |  |                                | 8,400      |   |                                                         |   | 11,549     |      |  |   | 39,474      |  
|                                                                            |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Net cash used in operating activities                                       |  |                                | (3,967,244 | ) |                                                         |   | (2,880,280 | )    |  |   | (35,617,382 | )
|                                                                            |  |                                |           
|Investing activities                                                        |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Purchases of furniture, fixtures, and equipment                             |  |                                | (4,151     | ) |                                                         |   | (2,747     | )    |  |   | (197,210    | )
|Proceeds from sale of furniture, fixtures, and equipment                    |  |                                | 350        |   |                                                         |   | 1,050      |      |  |   | 5,716       |  
|Issuance of notes receivable                                                |  |                                |           |   |                                                         |   |           |      |  |   | (1,400,000  | )
|Proceeds from sale of marketable securities                                 |  |                                |           |   |                                                         |   | 178,124    |      |  |   | 1,951,211   |  
|Payments on notes receivable                                                |  |                                |           |   |                                                         |   |           |      |  |   | 711,045     |  
|Cash provided in merger with Point Therapeutics, Inc.                       |  |                                |           |   |                                                         |   |           |      |  |   | 771,671     |  
|Purchase of investments in affiliates                                       |  |                                |           |   |                                                         |   |           |      |  |   | (2,471,400  | )
|Proceeds from sale of investments                                           |  |                                |           |   |                                                         |   | 500,000    |      |  |   | 4,405,692   |  
|                                                                            |  |                                |            |   |                                                         |   |            |      |  |   |             |  
|Net cash (used in) provided by investing activities                         |  |                                | (3,801     | ) |                                                         |   | 676,427    |      |  |   | 3,776,725   |  

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



5



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DARA BIOSCIENCES,
INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)



|                                                                           |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ------------------------------------------------------- | - | --------- | ---- |  | - | ---------- | -
|                                                                           |  | Nine months endedSeptember 30, |            |   | Period FromJune 22,
2002(inception)throughSeptember 30, |  
|                                                                           |  | 2010                           |            |   | 2009                                                    |   |           | 2010 | 
|Financing activities                                                       |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|Proceeds from issuance of notes payable                                    |  |                                |           |   |                                                         |   | 500,000   |      |  |   | 605,000    |  
|Principal payments on notes payable                                        |  |                                |           |   |                                                         |   |          |      |  |   | (255,000   | )
|Repayments of capital lease obligation                                     |  |                                | (6,787     | ) |                                                         |   | (9,420    | )    |  |   | (24,407    | )
|Proceeds from other financing                                              |  |                                | 121,517    |   |                                                         |   |          |      |  |   | 140,076    |  
|Repayments on other financing                                              |  |                                | (102,856   | ) |                                                         |   |          |      |  |   | (112,912   | )
|Proceeds from exercise of options and warrants                             |  |                                | 100,000    |   |                                                         |   | 110,750   |      |  |   | 479,355    |  
|Proceeds from issuance of common stock and warrants, net of issuance costs |  |                                | 1,539,090  |   |                                                         |   | 4,679,828 |      |  |   | 31,934,523 |  
|Proceeds in change of restricted cash                                      |  |                                | 27,356     |   |                                                         |   |          |      |  |   | (51,401    | )
|                                                                           |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|Net cash provided by financing activities                                  |  |                                | 1,678,320  |   |                                                         |   | 5,281,158 |      |  |   | 32,715,234 |  
|                                                                           |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|                                                                           |  |                                |           
|Net (decrease) increase in cash and cash equivalents                       |  |                                | (2,292,725 | ) |                                                         |   | 3,077,305 |      |  |   | 874,577    |  
|                                                                           |  |                                |           
|Cash and cash equivalents at beginning of period                           |  |                                | 3,167,302  |   |                                                         |   | 959,898   |      |  |   |           |  
|                                                                           |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|Cash and cash equivalents at end of period                                 |  | $                              | 874,577    |   |                                                         | $ | 4,037,203 |      |  | $ | 874,577    |  
|                                                                           |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|                                                                           |  |                                |           
|Supplemental disclosure of non-cash financing activity                     |  |                                |            |   |                                                         |   |           |      |  |   |            |  
|Equipment purchased through financing                                      |  | $                              |           |   |                                                         | $ |          |      |  | $ | 91,676     |  
|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   | )
|Forgiveness of stock subscription receivable                               |  |                                |           |   |                                                         |   |          |      |  |   | 242,500    |  
|Shares issued to employees and non-employee directors                      |  |                                | 245,709    |   |                                                         |   | 27,186    |      |  |   | 491,806    |  
|Shares issued to third party for services                                  |  |                                | 42,409     |   |                                                         |   | 5,000     |      |  |   | 406,337    |  
|Exchange of investment for cancellation of accrued interest                |  |                                |           |   |                                                         |   |          |      |  |   | 36,712     |  
|Exchange of investment for cancellation of note payable                    |  |                                |           |   |                                                         |   |          |      |  |   | 500,000    |  
|Conversion of note into equity of subsidiary                               |  |                                |           |   |                                                         |   |          |      |  |   | 1,441,948  |  

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



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DARA BIOSCIENCES,
INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Company

DARA BioSciences, Inc. (the
Company or DARA), headquartered in Raleigh, North Carolina, was incorporated on June 22, 2002. The Company is a development stage biopharmaceutical company that acquires therapeutic drug candidates for development
and subsequent licensing or sale to biotechnology and pharmaceutical companies. The focus is primarily small molecules.

At the present time
the Company has two drug candidates with cleared IND (Investigational New Drug) Applications from the United States FDA which are advancing through clinical development. KRN5500 successfully completed a Phase 2a study and DB959 successfully
completed a Phase 1 study.

The activities of the Company have primarily consisted of establishing offices, recruiting personnel, acquiring
promising therapeutic candidates for development, conducting research and development, performing business and financial planning and raising capital. Accordingly, the Company is considered to be a biopharmaceutical company. The Company has incurred
losses since inception through September 30, 2010 of $32,501,828 and expects to continue to incur losses and require additional financial resources to achieve monetization of its product candidates.

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.

On May 12, 2010, the Company effected a reverse stock split of the
Companys common stock. Pursuant to this reverse stock split, each 16 shares of the Companys common stock issued and outstanding immediately prior to the reverse stock split was converted into one share of the Companys common stock.
The main purpose of the reverse stock split was to enable the Company to regain compliance with the minimum $1.00 per share bid price requirement for continued listing of the Companys common stock on The NASDAQ Capital Market. All share or per
share information included in these unaudited Notes to Consolidated Financial Statements and the audited and unaudited Consolidated Financial Statements have been retroactively restated to effect the reverse stock split.

Unaudited Interim Financial Statements

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 (consisting of
normal recurring accruals) necessary to present fairly the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for the periods presented in accordance with GAAP. Operating results for the
interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The
consolidated financial statements include the accounts of DARA BioSciences, Inc. and its majority-owned subsidiaries: DARA Pharmaceuticals, Inc., (which is wholly owned by the Company), DARA Therapeutics, Inc. (which holds the Companys assets
related to its KRN5500 program and is owned 75% by the Company) and Point Therapeutics Massachusetts, 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.



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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual amounts could differ from those estimates.

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

The Company accounts for its investment in marketable securities in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 320, Investments  Debt and Equity Securities. See Note 3 for further information. This statement requires certain securities to be classified into three categories:

Held-to-Maturity  Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.

Trading Securities  Debt and equity securities that are bought and held primarily for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included in earnings.

Available-for-Sale  Debt and equity securities not
classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders equity.

In accordance with FASB ASC 320, the Company reassesses the appropriateness of the classification of its investments as of the end of each reporting
period. .

The Company utilizes FASB ASC 820, Fair Value Measurements and Disclosures, to value its financial assets and liabilities.
FASB ASC 820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. FASB ASC 820
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.

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 Companys other investments include investments in privately-held companies. Pursuant to FASB ASC 323, Investments  Equity Method and Joint Ventures, 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 at least annually, or whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. 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 FASB ASC 320.

Furniture, Fixtures and Equipment

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



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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 Valuation and Expense

Share-based compensation is accounted for using the fair value method prescribed by FASB ASC 718, Stock Compensation. For stock and stock-based
awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award on the date of grant. 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. See Note 5 for
further information.

Income Taxes

The Company uses the liability method in accounting for income taxes as required by FASB ASC 740,Income Taxes. Under this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carry forwards 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 those assets will be realized.

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.

Net Loss Per
Common Share

The Company calculates its basic loss per share in accordance with FASB ASC 260, 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 per share is computed by dividing the 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 for the three and nine month periods ended September 30, 2010 and 2009 calculation of diluted net loss per share as their effect is anti-dilutive. For the period ended September 30, 2010, 145,098 options and 1,027,226 warrants
have been excluded, because their inclusion would be anti-dilutive. Also for the period ended September 30, 2009, 89,472 options and 892,104 warrants have been excluded, because their inclusion would be anti-dilutive.



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|                                                                                      |  |                                  |            |   |      |   |            |  
|------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                      |  | Three Months ended September 30, |           
|                                                                                      |  | 2010                             |            |   | 2009 |  
|Net loss attributable to controlling interest                                         |  | $                                | (1,703,703 | ) |      | $ | (825,176   | )
|                                                                                      |  |                                  |            |   |      |   |            |  
|                                                                                      |  |                                 
|Basic and diluted net loss per common share attributable to controlling interest:     |  |                                  |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                  | 3,062,318  |   |      |   | 2,182,046  |  
|                                                                                      |  |                                  |            |   |      |   |            |  
|Basic and diluted net loss per common share attributable to controlling interest      |  | $                                | (0.56      | ) |      | $ | (0.38      | )
|                                                                                      |  |                                  |            |   |      |   |            |  
|                                                                                      | 
|                                                                                      |  | Nine Months ended September 30,  |           
|                                                                                      |  | 2010                             |            |   | 2009 |  
|Net loss attributable to controlling interest                                         |  | $                                | (4,827,623 | ) |      | $ | (2,721,857 | )
|                                                                                      |  |                                  |            |   |      |   |            |  
|                                                                                      |  |                                 
|Basic and diluted net loss per common share attributable to controlling interest:     |  |                                  |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                  | 3,006,670  |   |      |   | 1,992,864  |  
|                                                                                      |  |                                  |            |   |      |   |            |  
|Basic and diluted net loss per common share attributable to controlling interest      |  | $                                | (1.61      | ) |      | $ | (1.37      | )
|                                                                                      |  |                                  |            |   |      |   |            |  

Recently Issued Accounting Pronouncements

The ASC includes guidance in ASC 605-25, Revenue Recognition  Multiple-Element Arrangements, related to the allocation of arrangement consideration to multiple elements for purposes of
revenue recognition when delivery of separate units of account occurs in different reporting periods. This guidance recently was modified by the final consensus reached on Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Recognition
for a Single Unit of Accounting, which was codified by Accounting Standards Update (ASU) 2009-13. This change increases the likelihood that deliverables within an arrangement will be treated as separate units of accounting, ultimately leading to
less revenue deferral for many arrangements. The change also modifies the manner in which transaction consideration is allocated to separately identified deliverables. This guidance is effective prospectively for fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Company does not believe ASU 2009-13 will have a material impact on the Companys financial statements.

At the March 2010 meeting, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revenue Recognition (EITF 08-9). The Accounting Standards Update resulting from EITF 08-9 amends ASC
605-28, Revenue Recognition Milestone Method. The Task Force concluded that the milestone method is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, the consensus
states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The milestone method is not
required and is not the only acceptable method of revenue recognition for milestone payments. This guidance is effective prospectively for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not
believe ASC 605-28 will have a material impact on the Companys financial statements.

3. Investments

MiMedx (NASDAQ: MDXG.OB)

The Company
held 400,002 shares of equity securities in MiMedx Group, Inc. (OTBB:MDXG), formerly Spine Medica, Inc. MiMedx became a publicly traded company on February 8, 2008. The Company had carried the investment at cost of $400 and classified it as a
long-term investment in fiscal years prior to that date.

The Company was restricted from selling the shares until February 9, 2009 and
the Company sold 243,565 shares of MiMedx during the three months ended June 30, 2009 realizing a gain on the sale of marketable securities of $96,410. Between February 9, 2009 and June 30, 2009, the Company sold all of its 400,002
shares of MiMedx realizing a gain on the sale of marketable securities of $177,724. Since June 30, 2009, the Company no longer holds an investment in MiMedx.

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).



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SurgiVision, Inc.

SurgiVision, Inc. (SVI) 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. On December 23, 2009, SVI filed a registration statement on Form S-1 in anticipation of an initial public offering (IPO). The following
discussion reflects the effect of a 1-for-4 reverse stock split implemented by SVI on July 13, 2010. The Companys initial investment of $2,000,000 for 2,273,743 shares was in 2004. In 2006, the Company distributed a dividend of 1,541,578
and 44,672 shares of SVI common stock to all investors and vested stock option holders, respectively.

In January 2009, the Company entered
into a stock purchase and loan agreement and related agreements (the Purchase and Loan Agreement) with SVI in which the Company received $1,000,000 of total proceeds. The Company sold 125,000 of its 687,493 shares of SVI at $4.00 per
share. In addition the Company entered into a loan agreement secured by 125,000 shares of the Companys SVI stock. The Company recorded a gain of $459,500 on the sale.

Also in January 2009, the board of directors distributed 6,250 SVI shares to each of three independent members of the board valued at $4.00 per share. The Company distributed an additional 6,250 SVI
shares valued at $4.00 per share as severance to its former Chief Financial Officer. The Company recorded compensation expense of $100,000 and a gain of $91,910 on distribution of nonmonetary asset.

On December 31, 2009, the Company entered into a Stock Purchase Agreement with SVI pursuant to which the Company sold 134,178 shares of SVI common
stock to SVI. The purchase price for the shares was paid through cancellation of outstanding principal of $500,000 and accrued interest of $36,712 on the January 2009 secured promissory note issued by the Company to SVI. As of September 30,
2010, the remaining investment of 403,315 shares was carried at cost of $130,468. In addition, the Company is the holder of a warrant to acquire 101,250 shares of common stock in SVI that has an exercise price of $3.20 per share.

Medeikon Corporation

Medeikon
Corporation (Medeikon) is developing technology focusing on the diagnostics of vulnerable plaque using an optical detection system. The Companys investment represents approximately 25.4% of the outstanding shares of Medeikon at
September 30, 2010.

The Companys share of Medeikons loss for the year ended December 31, 2006 exceeded its basis. The
loss of a minority interest is limited to the extent of equity capital. Application of the equity method resulted in an equity method loss in Medeikon of $1,050,000 for the period from June 22, 2002 (inception) through September 30, 2010.
The carrying value at September 30, 2010 and December 31, 2009 of the investment in Medeikon was $0.

4. Stockholders
Equity

On May 12, 2010, the Company effected a reverse stock split of the Companys common stock. Pursuant to this reverse stock
split, each 16 shares of the Companys common stock issued and outstanding immediately prior to the reverse stock split was converted into one share of the Companys common stock. The financial information within this document has been
adjusted accordingly.

On February 26, 2010 and March 5, 2010, the Company entered into two Securities Purchase Agreements with
certain accredited investors in connection with the private issuance and sale to such investors of 228,248 units and 6,648 units, respectively. Proceeds to the Company were $1,759,545, net of issuance costs of $6,959. Each unit consists of
(1) one share of common stock and (2) one-half of a warrant to purchase one share of common stock. The units were issued and sold to investors for $7.52 per unit. The warrants have an exercise price of $7.52 and are exercisable beginning
six months after the date of issuance with an expiration date of five years after the initial exercise date.

On September 10, 2009, the
Company entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 411,184 shares of the Companys common stock and 308,389 warrants to purchase shares of
common stock. The common stock and warrants were issued and sold in units for $6.08 per unit, with each unit consisting of one share of common stock and three-fourths of a warrant to purchase one share of common stock for each unit purchased. Under
the securities purchase agreement, the units were sold at a closing that was completed on September 14, 2009 for gross proceeds of $2,500,000 and net proceeds after placement agent fees were approximately $2,300,000. In connection with the
September 18, 2009 transaction described above, the number of shares covered by these warrants increased by ten percent to 339,227 as the result of the operation of applicable anti-dilution provisions. Each warrant entitles the holder to
purchase shares of common stock for an exercise price per share equal to $8.96. The warrants are exercisable beginning March 15, 2010 and expire September 14, 2012.

On September 16, 2009, DARA entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 137,500 shares of the
Companys common stock and 68,750 warrants to purchase shares of common stock. In the offering, the common stock and warrants were sold in units for $8.84 per unit, with each unit consisting of one share of common stock and one-half of a
warrant to purchase one share of common stock for each unit purchased. The closing of the sale of units under the Purchase Agreement took place on September 18, 2009 for gross proceeds of $1,215,500 and net proceeds after placement agent fees
were approximately $1,118,000. Each warrant entitles



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the holder to purchase shares of common stock for an exercise price per share equal to $7.84. The warrants are immediately exercisable and expire September 18, 2014.

On June 15, 2009, the Company entered into a Securities Purchase Agreement with certain accredited investors in connection with the private issuance
and sale to such investors of 214,617 units. Gross proceeds to the Company from this sale were $1,397,000, and net proceeds after placement agent fees were approximately $1,298,000.

5. Share-Based Compensation

Effective with the adoption of FASB ASC 718,
Compensation-Stock Compensation, 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. 110, 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. FASB ASC 718 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.

There were no options granted to employees and non-employee directors during the three months ended September 30, 2010 and 2009.

The Companys consolidated statements of operations for the three and nine month periods ended September 30, 2010 and 2009, respectively,
include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as follows:



|                                                                       |  |                                 |        |  |                                |   |         |      |  |   |         |  |  |   |         | 
|---------------------------------------------------------------------- |  | ------------------------------- | ------ |  | ------------------------------ | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                       |  | Three months endedSeptember 30, |        |  | Nine months endedSeptember 30, |  
|                                                                       |  | 2010                            |        |  | 2009                           |   |         | 2010 |  |   | 2009    | 
|Research and development                                               |  | $                               | 11,521 |  |                                | $ | 21,069  |      |  | $ | 39,235  |  |  | $ | 88,618  | 
|General and administrative                                             |  |                                 | 35,707 |  |                                |   | 81,872  |      |  |   | 190,920 |  |  |   | 182,744 | 
|                                                                       |  |                                 |        |  |                                |   |         |      |  |   |         |  |  |   |         | 
|Total stock-based compensation to employees and non-employee directors |  | $                               | 47,228 |  |                                | $ | 102,941 |      |  | $ | 230,155 |  |  | $ | 271,362 | 
|                                                                       |  |                                 |        |  |                                |   |         |      |  |   |         |  |  |   |         | 

The Company issued 31,250 restricted shares to five employees during 2009. The Companys President and CEO was awarded
18,750 restricted shares and four employees were each awarded 3,125 restricted shares. The shares vested 100% on the anniversary of the grant, September 24, 2010. The Company recognized $53,956 and $13,489 stock-based compensation expense in
general and administrative and research and development, respectively, during the three month period ended September 30, 2010. The Company recognized $167,515 and $41,878 stock-based compensation expense in general and administrative and
research and development, respectively, during the nine month period ended September 30, 2010. The Company recognized $3,764 and $941 stock-based compensation expense in general and administrative and research and development, respectively for
the three and nine months period ended September 30, 2009. There was no restricted share expense for employees prior to this period.

On
January 4, 2010, the Company issued 625 shares of restricted stock each to two non-employee members of the board which vest one year from the date of issue, January 4, 2011. On February 9, 2010 the Company issued 208 shares of
restricted stock to a non-employee member of the board which vests on January 4, 2011. The Company recognized share-based compensation expense related to the issuance of restricted stock to certain members of the board of directors in general
and administrative expense of $12,134 and $36,316 for the three and nine month periods ended September 30, 2010, respectively. The Company recognized share-based compensation expense related to the issuance of restricted stock to certain
members of the board of directors in general and administrative expense of $10,220 and $22,481 for the three and nine month period ended September 30, 2009, respectively.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505 Equity, using a fair-value approach. The equity instruments, consisting of shares of
restricted stock, stock options and warrants granted to lenders and consultants, are valued using the Black-Scholes valuation model. Measurements of share-based compensation is subject to periodic adjustments as the underlying equity instruments
vest and are recognized as an expense over the term of the related financing or the period over which services are received.



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On July 30, 2010 the Company
issued 3,125 shares, on April 30, 2010 the Company issued 3,125 shares and on January 4, 2010 the Company issued 6,250 shares to a third party in exchange for services. During the three and nine month period ended September 30, 2010,
the Company recognized share-based compensation related to issuance of restricted stock to non-employees in exchange for services of $3,198 and $38,639, respectively. During the three and nine month period ended September 30, 2009 the Company
recognized share-based compensation related to issuance of restricted stock to non-employees in exchange for services of $5,000.

For the
three and nine month periods ended September 30, 2010, non-employee option expense was $0 for research and development and $1,573 and $3,770 for general and administrative, respectively. For the three and nine month periods ended
September 30, 2009, non-employee option expense was $0 and $19,703 for research and development and $1,478 and $4,864 for general and administrative, respectively.

In January 2010, the Companys President and CEO exercised 25,000 stock options at $4.00 per share.

Unrecognized share-based compensation expense, including time-based options and, performance-based options expected to be recognized over an estimated weighted-average amortization period of 2.21 years
was $262,767 at September 30, 2010.

A summary of activity under the Companys stock option plans for the three and nine months
ended September 30, 2010 is as follows:



|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|----------------------------- |  | ------------------------ | ------- | - | -------------------------- |  | ------- | ----------------------------- |  | - | ----- | 
|                              |  |                          |         |   | Options Outstanding        | 
|                              |  | Shares Availableto grant |         |   | Number ofSharesOutstanding |  |         | WeightedAverageExercise Price | 
|Balance at December 31, 2009  |  |                          | 168,048 |   |                            |  | 89,473  |                               |  | $ | 18.40 | 
|2008 Stock Plan increase      |  |                          | 284,347 |   |                            |  |        |                               |  |   |      | 
|Options granted               |  |                          | (68,125 | ) |                            |  | 68,125  |                               |  |   | 7.35  | 
|Options exercised             |  |                          |        |   |                            |  | (25,000 | )                             |  |   | 4.00  | 
|Shares issued as compensation |  |                          | (7,708  | ) |                            |  |        |                               |  |   |      | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|Balance at March 31, 2010     |  |                          | 376,562 |   |                            |  | 132,598 |                               |  |   | 15.42 | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|Options granted               |  |                          | (12,500 | ) |                            |  | 12,500  |                               |  |   | 6.25  | 
|Shares issued as compensation |  |                          | (3,125  | ) |                            |  |        |                               |  |   |      | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|Balance at June 30, 2010      |  |                          | 360,937 |   |                            |  | 145,098 |                               |  |   | 14.63 | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|Shares issued as compensation |  |                          | (3,125  | ) |                            |  |        |                               |  |   |      | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 
|Balance at September 30, 2010 |  |                          | 357,812 |   |                            |  | 145,098 |                               |  | $ | 14.63 | 
|                              |  |                          |         |   |                            |  |         |                               |  |   |       | 

6. Commitments and Contingencies

From time to time, the Company is exposed to various claims, threats, and legal actions in the ordinary course of business. Management was aware of no such material matters as of the date of these
financial statements.

7. Income Taxes

The Company did not record any current tax expense in the three and nine month periods ended September 30, 2010 and 2009.

The Company maintains a full valuation allowance against its net deferred tax assets and will continue to do so until an appropriate level of profitability is sustained that would enable the Company to
conclude that it is more likely than not that a portion of these net deferred assets would be realized.

The total balance of unrecognized tax
liabilities at September 30, 2010 was $277,022 which was recorded in other liability and if recognized, would affect the effective tax rate for computing tax expense for the three and nine month periods then ended, respectively. The Company
accrues estimated interest and penalties related to unrecognized tax liabilities within its interest expense.

8. Employee Benefit Plan

As part of the Companys cost reduction program, effective April 1, 2009, the Company amended its contribution to the employee
benefit plan to remove the Safe Harbor Cash or Deferred Arrangement provisions. The plan provides for voluntary employee contributions and a discretionary matching employer contribution equal to amounts that do not exceed the maximum amounts allowed
by the Internal Revenue Service. The defined contribution plan match prior to the effective date



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of the amendment was $6,524. The Company does not anticipate matching employee contributions for the remainder of the year.

9. Subsequent Events

The Company has evaluated subsequent events through November 12,
2010, which represents the date the Companys Form 10-Q for the quarter ended September 30, 2010 was filed with the Securities and Exchange Commission.

On October 25, 2010, DARA entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 612,667 units, with each
unit consisting of one of the Companys common shares and 0.50 warrants to purchase one share of common stock for gross proceeds of approximately $1.4 million. In the offering which closed on October 26, 2010, the common stock and warrants
were sold in units for $2.25 per unit. The warrants, which entitle the holders to purchase a total of 306,334 shares of common stock, will be exercisable beginning six months after the date of issuance and will expire on the fifth anniversary
following the date they first become exercisable at an exercise price of $2.79 per share.

On October 29, 2010 the Company received
Internal Revenue Service grant approvals under the Patient Protection and Affordable Care Act of 2010 for KRN5500 and DB959 in the combined amount of $488,958 for the calendar year 2009.



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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 and the audited financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2009, which has been filed with the Securities and Exchange Commission (the SEC).

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, 2009 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 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.

Overview

We are a Raleigh, North
Carolina biopharmaceutical company that acquires promising therapeutic drug candidates from third parties and advances their clinical development for later sale or license to pharmaceutical and biotechnology companies or other entities that have the
potential to complete development, gain approval and commercialize the product. At the present time the company is engaged in discussions with a number of pharmaceutical companies to out license KRN5500. We focus our therapeutic development efforts
on small molecules from late preclinical development through Phase 2 clinical trials. 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 healthcare partner to commercialize.
| | - |  | --------------------------------------------------------------------------------

We do not intend to fully develop, obtain clearance from the U.S. Food and Drug Administration (FDA) or market the drug candidates we are
developing.

While in the past we had a broader pipeline of drug development programs, we are currently focusing all of our resources on our
two most advanced drug development programs which are KRN5500 for the treatment of neuropathic pain in cancer patients and DB959 for the treatment of metabolic diseases including type 2 diabetes.

We hire experts with strong pharmaceutical 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 biotechnology or 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 in-license or
otherwise acquire 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.). The first operational stage of development of our drug candidates is in-licensing, which we typically do at the pre-clinical stage of development. The next stage of development is to obtain FDA



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approval of an IND application and test the drug candidates in Phase 1 and Phase 2 clinical trials. Finally, we seek to license the drug candidate or find a strategic 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 $1,951,211 in the sale of marketable securities and $4,405,692 in proceeds from sale of an
investment. 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 in the near-term. 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.

Status of our Drug Candidates

We currently have a portfolio of drug candidates at various stages of development for the treatment of neuropathic pain for patients with cancer, type 2 diabetes (including dyslipidemia), enhancement of
homing and engraftment of stem cell transplantation and psoriasis. Our portfolio also includes CPT-1 inhibitors intended for topical application for patients with psoriasis, a library of DPPIV inhibitors and a diverse library of approximately 1800
PPAR agonists of various molecular modalities. PPAR receptors are found throughout the human body and recent publications report that PPAR agonists may be useful in the treatment of Alzheimers disease, cystic fibrosis, liver disease, and a
variety of autoimmune diseases. Because our diverse PPAR library has the potential to address the unmet medical needs of these diseases, we plan to explore several of these indications.

Our cost containment program announced on January 6, 2009, designed to reduce our cash burn rate, necessitated that we focus the majority of our working capital on advancing our two lead programs:
the continued development of KRN5500 for the treatment of neuropathic pain for patients with cancer and DB959 for the treatment of type 2 diabetes. Due to this allocation, we reduced our headcount by approximately 60 percent and inventoried three
programs, DB160, DB900 and DB200, for future development. Based on our present working capital and sharpened focus, we have sufficient working capital to advance KRN5500 and DB959 development through 2010. In the event that either of these two
candidates is not monetized during 2010, additional funding will be required to continue development. A brief discussion of the status of each of our drug candidates follows.

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. One primary segment of the market being targeted by KRN5500 is Chemotherapy-induced Peripheral Neuropathy (CIPN). On May 12, 2009, we announced positive results from the
recently completed Phase 2a clinical trial in cancer patients with neuropathic pain to assess its safety and efficacy. KRN5500 provided clinical proof of concept and statistical significance (p=0.03) in meeting its primary endpoint of pain reduction
from baseline. KRN5500 was superior to placebo with a median reduction of 24% in patient rated pain scores, compared to median of zero (0) for placebo. In addition, KRN5500 demonstrated a median of 29% for best weekly improvement in pain scores
compared to zero (0) for placebo (p=0.02) A Phase 2b clinical trial is planned to start during the first half of 2011.

On April 26,
2010, DARA Therapeutics, Inc., a subsidiary of ours, entered into an agreement with the Division of Cancer Prevention, National Cancer Institute (DCP), which is an agency of the U.S. Government with a mission to improve cancer care, for
the clinical development of KRN5500. Chronic neuropathic pain, due to cancer treatments or increased vulnerability to other etiologies, is a frequent complication in cancer; etiologies for the neuropathic pain in the KRN5500 Phase 2a study included
CIPN in 84% of the patients. Under the agreement with DCP, we will, at our sole cost and expense, supply DCP with KRN5500 to perform clinical trials that are intended to further test the effectiveness of KRN5500 as a treatment and/or prevention for
Chemotherapy-induced Peripheral Neuropathy. DCP will be responsible for all costs and expenses associated with DCPs activities in carrying out the clinical trials.

We incurred $377,032 and $662,449 in development costs associated with the development of KRN5500 during the three and nine month periods ended September 30, 2010, and we have incurred costs of
$4,069,558 from inception to date. We estimate the market potential for chemotherapy-induced neuropathy to be roughly $8 to $9 billion in the U.S. alone.

DB959

The second drug candidate, DB959, is a highly selective, non-thiazolidinedione
(TZD), first-in-class dual PPAR (peroxisome proliferator activated receptor) delta/gamma agonist in development for type 2 diabetes. A phase 1 clinical trial for DB959 is



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underway and the Company plans to announce results in the second half of 2010. 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 and less weight gain.

Our
development work on DB959 is being conducted under an exclusive worldwide license to develop and commercialize the drug candidate from Bayer Pharmaceuticals Corp. This license, which was acquired in October 2007, gives us rights to over 2,000
compounds with agonist activities toward multiple PPAR sub-types. On October 24, 2008, in accordance with the terms of this license, we provided Bayer with written notice of our intent to pursue a sublicense of our rights under the agreement to
a third party for purposes of enabling such third party to commercialize Licensed Products (as such term is defined in the agreement). Under the terms of the license agreement, unless Bayer exercises certain rights of first refusal
provided to it under the agreement and we reach agreement with Bayer concerning commercialization of Licensed Products, we will be permitted to enter into an agreement with a third party concerning commercialization of Licensed Products.

We incurred costs of $732,467 and $1,660,878 during the three and nine month periods ended September 30, 2010, and we have incurred costs of
$5,868,524 from inception to date. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $21 billion in 2034.

DB160

DB160 is a dipeptidylpeptidase (DPPIV) inhibitor. Prior to January 2009 we were
developing this drug candidate as a once-daily oral therapy for the treatment of type 2 diabetes. In connection with the implementation of our January 2009 cost reduction plan we suspended this development program. Our development work with DB160 is
pursuant to an exclusive worldwide license to develop and commercialize the drug candidate from Nuada, LLC.

We incurred nominal expense of
$11,195 and $28,208 during the three and nine month periods ended September 30, 2010, and we have incurred costs of $2,322,671 from inception to date.

On August 4, 2009, we announced collaboration with America Stem Cell, Inc. to expand on observations from recent preclinical studies showing that DPPIV inhibitors improve the efficiency of
hematopoietic stem cell (HSC) transplants.On October 12, 2009, we entered into an Addendum and First Amendment to Material Transfer Agreement with America Stem Cell, Inc. pursuant to which the Material Transfer Agreement between the
Company and America Stem Cell was amended. Under the Material Transfer Agreement, we are providing America Stem Cell with DB160 as well as another one of our DPPIV inhibitors, DB295, which America Stem Cell is using to further its research and
development program related to HSC transplants.

Under the Material Transfer Agreement as amended, America Stem Cell is required to pay us a
total of $250,000, in four equal installments over approximately three years, contingent upon America Stem Cells receipt of a specified amount of grant funding for its HSC research and development program.

DB900

DB900 is a series of compounds
which are PPARg/a/d agonists for the treatment of type 2 diabetes. These compounds activate genes involved in the
metabolism of sugars and fats thereby improving the bodys ability to regulate blood sugar. 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. This program is currently not being resourced. Development will not be re-initiated until sufficient additional funding is secured. Should we decide to resume the development of DB900, a
clinical candidate will be selected from a number of strong lead compounds. Our development work with DB900 is pursuant to an exclusive worldwide license to develop and commercialize the drug candidate from Bayer Pharmaceuticals Corp.

We incurred $0 in direct outside development costs associated with the development of DB900 series compounds during the three and nine month periods
ended September 30, 2010, and we have incurred costs of $129,272 from inception to date. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $30 billion in 2014.

DB200

DB200 refers to a series of
compounds that 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.
Should development of DB200 resume, a clinical candidate will be selected from a number of strong lead compounds. This program is currently not being resourced. Development will not be re-initiated until sufficient additional funding is secured.
Should we decide to resume the development of DB200, the next step in the process would be to file an IND application with the FDA. There are no third party licenses associated with this program.



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We incurred $240 and $2,063 in direct
outside development costs associated with the development of DB200 series compounds during the three and nine month periods ended September 30, 2010, and we have incurred costs of $381,282 from inception to date. We estimate the market
potential for the topical agent segment of the psoriasis market to be roughly $3.9 billion in 2011.

Talabostat

We have no current plans to develop Talabostat as a therapy for lung cancer, the original indication for which it was studied at Point Therapeutics in
humans. However, as we continue to receive requests for Talabostat material for other investigations, we recognize value in maintaining the patent estate, as potential future uses for this drug may be identified as a result of these other
investigations. Therefore, we continue to keep these filings current by paying the various patent-related fees which become due.

We
incurred $7,489 and $32,649 in direct costs associated with Talabostat during the three and nine month periods ended September 30, 2010, and we have incurred costs of $103,974 from inception to date.

Critical Accounting Policies and Significant Judgments and Estimates

Our managements discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. 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 clinical trial expenses, stock-based
compensation and asset impairment and significant judgments and estimates. We base our estimates on historical experience and on various other factors that are believed 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;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation. 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



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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 for employees and non-employee directors resulted in compensation expense of $126,807 and $117,867 for the three months ended September 30, 2010 and 2009,
respectively, and $475,865 and $298,549 for the nine month periods ended September 30, 2010 and 2009, respectively. The Company recognized stock-based compensation expense for awards to consultants for services totaling $4,771 and $1,478 for
the three months ended September 30, 2010 and 2009, respectively, and $42,409 and $24,567 for the nine month periods ended September 30, 2010 and 2009, respectively.

Carrying Value of Property and Equipment and the Value of Certain Liabilities

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 September 30, 2010 Compared to
Three Months Ended September 30, 2009

Research and Development expenses increased $893,156 from $295,945 for the three months ended
September 30, 2009 to $1,189,101 for the corresponding 2010 period, primarily as a result of costs associated with the phase 1 study for DB959 whose results we plan to announce in the fourth quarter as well as the completion of the improved
formulation, validation and manufacture of KRN5500. Clinical studies planned with the National Cancer Institute (NCI) will utilize this new formulation.

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 $47,882 from $562,950 for the three months ended
September 30, 2009 to $610,832 for the corresponding 2010 period, primarily as a result of additional compensation expense and expenses associated with our capital raise activities.

Other (expense) income, net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies. Other (expense) income, net decreased
$11,486 from an expense of $14,398 for the three months ended September 30, 2009 to an expense of $2,912 for the corresponding 2010 period. The decrease is due to accrued interest on our loan from SurgiVision of 8% per month in 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Research and Development expenses increased $1,365,176 from $1,449,404 for the nine months ended September 30, 2009 to $2,814,580 for the
corresponding 2010 period, primarily as a result of the initiation of a phase 1 study for DB959 whose results we plan to announce in the fourth quarter as well as the completion of the improved formulation, validation and manufacture of KRN5500.
Clinical studies planned with the National Cancer Institute (NCI) will utilize this new formulation.

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 $135,051 from $2,099,873 for the nine months ended September 30, 2009 to $2,234,924 for the corresponding 2010 period, primarily as
a result of additional compensation expense and expenses associated with our capital raise activities.

Other (expense) income, net reflects
non-operating activities associated with investments and dispositions on investments made in collaborations with other companies. Other (expense) income, net decreased $689,613 from an income of $688,670 for the nine months ended September 30,
2009 to an expense of $943 for the corresponding 2010 period. The decrease is primarily due to the gain on investments of $551,410 from the distribution of SurgiVision stock, as well as the gain on the Companys sale of its marketable
securities of $177,724 in 2009, offset by $30,000 in accrued interest for the SurgiVision loan in 2009.

Liquidity and Capital Resources

Overview

From
inception through September 30, 2010, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $31,934,523 in net proceeds,



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including $1,759,545 in net proceeds from the Companys private placement in February and March 2010 discussed below and (2) the sale of securities we acquired through investments made
in other companies, through which we raised $6,856,903.

On February 26, 2010 and March 5, 2010, we entered into two Securities
Purchase Agreements with certain accredited investors in connection with the private issuance and sale to such investors of 228,243 units and 6,648 units, respectively. Our gross proceeds were $1,766,504. Each unit consisted of (1) one share of
common stock and (2) one-half of a warrant to purchase one share of common stock. The units were issued and sold to investors for $7.52 per unit. The warrants have an exercise price of $7.52 and are exercisable beginning six months after the
date of issuance with an expiration date of five years after the initial exercise date.

At September 30, 2010, our principal sources of
liquidity were our cash and cash equivalents which totaled $874,577. As of September 30, 2010, we had net working capital deficit of $71,405. Our cash resources have been used to acquire licenses, fund research and development activities,
capital expenditures, and general and administrative expenses.

On October 25, 2010, we entered into a Securities Purchase Agreement with
certain accredited investors in connection with a registered direct offering of 612,667 units, with each unit consisting of one of the Companys common shares and 0.50 warrants to purchase one share of common stock for gross proceeds of
approximately $1.4 million. In the offering which closed on October 26, 2010, the common stock and warrants were sold in units for $2.25 per unit. The warrants, which entitle the holders to purchase a total of 306,334 shares of common stock,
will be exercisable beginning six months after the date of issuance and will expire on the fifth anniversary following the date they first become exercisable at an exercise price of $2.79 per share.

On October 29, 2010 the Company received Internal Revenue Service grant approvals under the Patient Protection and Affordable Care Act of 2010 for
KRN5500 and DB959 in the combined amount of $488,958 for the calendar year 2009.

Cash Flows

During the nine month period ended September 30, 2010, cash used in our operating activities was $3,967,244. Cash used in operating activities was
primarily due to the operating loss offset in part by non-cash stock-based compensation of $518,274 and depreciation and amortization of $108,842. Prepaid expenses increased by $127,926 for the nine month period ended September 30, 2010,
primarily representing prepaid director and officer insurance coverage. Accounts payable increased by $389,267 and accrued liabilities increased by $185,122.

Our investing activities used $3,801 cash for the purchase of computers offset by the sale of equipment previously disposed.

We generated $1,539,090 of cash from the private placement of common stock and warrants, net of issuance costs, and $100,000 from the exercise of options by the Companys President and CEO. We
established $121,517 in other financing offset by payments of $109,643 on capital lease and other financing agreements during the nine month period ended September 30, 2010.

Financial Condition

We believe we have sufficient working capital to pursue our current
limited operations into the first quarter of 2011. 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 equity securities or the sale of certain of our investments. However, we have no binding
commitments for any transactions at this time and there can be no assurance that we will consummate this transaction or any other transaction. If we are unable to obtain such needed capital, we may not be able to:



| |  |  | continue the development of our two active drug development programs;
| | - |  | ---------------------------------------------------------------------



| |  |  | resume development of any of our currently inactive drug development programs;
| | - |  | ------------------------------------------------------------------------------



| |  |  | successfully out-license or otherwise monetize any of our programs; or
| | - |  | ----------------------------------------------------------------------



| |  |  | continue operations.
| | - |  | --------------------

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2010.



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NASDAQ Capital Market Listing

Our common stock is currently traded on the NASDAQ Capital Market. The NASDAQ Capital Market imposes, among other requirements,
listing maintenance standards including minimum equity requirements. On August 18, 2010, we received a notification letter from the Listing Qualifications Staff of The NASDAQ Stock Market LLC notifying the Company that, based on its Form 10-Q
for the period ended June 30, 2010, the Company no longer maintained the minimum $2,500,000 stockholders equity required for continued listing on The NASDAQ Capital Market under Marketplace Rule 5550(b)(1). The letter stated that unless
the Company requests an appeal before a NASDAQ Listing Qualifications Panel (the Panel), the Companys securities will be delisted from The NASDAQ Capital Market on August 27, 2010. We appealed the determination and on November
10, 2010, the Panel granted our request to remain listed on The NASDAQ Capital Market, subject to the following conditions: (1) on or before December 31, 2010, we must notify the Panel that we have regained compliance with the Minimum
Stockholders Equity Rule, and (2) on or before February 14, 2011, we must file a Form 8-K with the Securities and Exchange Commission evidencing our compliance with the Minimum Stockholders Equity Rule as of
December 31, 2010, as well as provide the Panel with pro forma projections showing continued compliance with the Minimum Stockholders Equity Rule through 2011. The proceeds from our October 2010 registered direct transaction are
not expected to cause us to regain compliance with the Minimum Stockholders Equity Rule and there are no assurances that we will meet the Panels conditions to remain listed, and if we do not, our common stock will be delisted from The
NASDAQ Capital Market.

If our common stock were delisted from NASDAQ, among other things, it could lead to a number of negative implications,
including reduced liquidity in our common stock, the loss of federal preemption of state securities laws, fewer business development opportunities and greater difficulty in obtaining financing.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the
Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Accounting 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 Executive Officer and Chief Accounting Officer have concluded that these disclosure controls and
procedures were 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 Executive Officer and Chief Accounting Officer concluded that
our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Changes in Internal Control Over
Financial Reporting

During the third quarter of 2010, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
- OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Other than the factor set forth below, there have been no material changes to the risk factors included in Part I, Item 1A, of our
Annual Report on Form 10-K for the year ended December 31, 2009.

If our stockholders equity continues to remain below the
minimum $2,500,000 required by applicable listing rules, our common stock may be delisted from the NASDAQ Capital Market.

Our common
stock is currently traded on the NASDAQ Capital Market. The NASDAQ Capital Market imposes, among other requirements, listing maintenance standards including minimum stockholders equity and public float requirements. In



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particular, NASDAQ rules require us to maintain a minimum stockholders equity of $2,500,000. On August 18, 2010, we received a notification letter from the Listing Qualifications Staff
of The NASDAQ Stock Market LLC notifying us that, based on our Form 10-Q for the period ended June 30, 2010, we no longer maintained the minimum $2,500,000 stockholders equity required for continued listing on The NASDAQ Capital Market
under Marketplace Rule 5550(b)(1) (the Minimum Stockholders Equity Rule). The letter stated that unless we request an appeal before a NASDAQ Listing Qualifications Panel (the Panel), our securities will be delisted from
The NASDAQ Capital Market on August 27, 2010. We appealed the determination and on November 10, 2010, the Panel granted our request to remain listed on The NASDAQ Capital Market, subject to the following conditions: (1) on or before
December 31, 2010, we must notify the Panel that we have regained compliance with the Minimum Stockholders Equity Rule, and (2) on or before February 14, 2011, we must file a Form 8-K with the Securities and Exchange
Commission evidencing our compliance with the Minimum Stockholders Equity Rule as of December 31, 2010, as well as provide the Panel with pro forma projections showing continued compliance with the Minimum Stockholders Equity
Rule through 2011. The proceeds from our October 2010 registered direct transaction are not expected to cause us to regain compliance with the Minimum Stockholders Equity Rule and there are no assurances that we will meet the Panels
conditions to remain listed, and if we do not, our common stock will be delisted from The NASDAQ Capital Market.

If our common stock were
delisted from NASDAQ, among other things, it could lead to a number of negative implications, including reduced liquidity in our common stock, the loss of federal preemption of state securities laws, fewer business development opportunities and
greater difficulty in obtaining financing.

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

On August 1, 2009 we entered into a letter of agreement with Cameron Associates, Inc., an investor relations firm, pursuant
to which we agreed as partial consideration for services to be rendered to us under the agreement to issue to such firm a total of 12,500 shares of our common stock. These shares were issued as follows:



| |  | 6,250 shares on January 4, 2010;
|- |  | --------------------------------



| |  | 3,125 shares on April 30, 2010; and
|- |  | -----------------------------------



| |  | 3,125 shares on July 31, 2010.
|- |  | ------------------------------

These shares were issued upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(2) thereof for transactions not involving a public offering. Use
of this exemption is based on the following facts:



| |  | Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the time of the purchase, Cameron Associates, Inc. was an accredited investor, as defined in Rule 501(a) of the Securities Act.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | Cameron Associates, Inc. has had access to information regarding DARA and is knowledgeable about us and our business affairs.
|- |  | -----------------------------------------------------------------------------------------------------------------------------



| |  | All shares issued to Cameron Associates, Inc. were issued with a restrictive legend and may only be disposed of pursuant to an effective registration
or exemption from registration in compliance with federal and state securities laws.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved).

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, on November 12, 2010.



|                        |  |  |  |                        |  |                                      
|----------------------- |  |  |  | ---------------------- |  | -------------------------------------
|                        |  |  |  | DARA BIOSCIENCES, INC.
|                        |  |  | 
|Date: November 12, 2010 |  |  |  | By:                    |  | /s/ Richard A. Franco                
|                        |  |  |  |                        |  | Richard A. Franco                    
|                        |  |  |  |                        |  | President and Chief Executive Officer
|                        |  |  | 
|Date: November 12, 2010 |  |  |  | By:                    |  | /s/ Ann A. Rosar                     
|                        |  |  |  |                        |  | Ann A. Rosar                         
|                        |  |  |  |                        |  | Chief Accounting Officer             



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EXHIBIT INDEX



|           |  |                                                                                                                                                 |  |                             
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------
|ExhibitNo. |  | Description                                                                                                                                     |  | Incorporated by Reference to
|           |  |                                                                                                                                                
|31.1       |  | Certification of Richard A. Franco, Sr., R.Ph. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010               |  |                             
|           |  |                                                                                                                                                
|31.2       |  | Certification of Ann A. Rosar pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010                                |  |                             
|           |  |                                                                                                                                                
|32         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010 |  |                             



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