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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 March 31, 2011

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 May 9, 2011 was approximately 5,090,004.









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Table of Contents



|                               |  |                                                                                       |  |      |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|                               |  |                                                                                       |  | Page |   
|                               | 
|PART I - FINANCIAL INFORMATION |  |                                                                                       |  |     
|Item 1.                        |  | Financial Statements                                                                  |  |      | 3  | 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations |  |      | 13 | 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |      | 18 | 
|Item 4.                        |  | Controls and Procedures                                                               |  |      | 18 | 
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                       |  |     
|Item 1.                        |  | Legal Proceedings                                                                     |  |      | 19 | 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  |      | 19 | 
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  |      | 19 | 
|Item 4.                        |  | (Removed and Reserved)                                                                |  |      | 19 | 
|Item 5.                        |  | Other Information                                                                     |  |      | 19 | 
|Item 6.                        |  | Exhibits                                                                              |  |      | 19 | 



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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DARA BIOSCIENCES, INC. AND SUBSIDIARIES

(a Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                        |  | March 31,2011 |             |   | December 31,2010 |  
|Assets                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                         |  |               |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                               |  | $             | 4,593,836   |   |                  | $ | 5,478,414   |  
|Prepaid expenses and other assets, current portion                                                                                                                                      |  |               | 451,988     |   |                  |   | 352,076     |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                    |  |               | 5,045,824   |   |                  |   | 5,830,490   |  
|                                                                                                                                                                                        |  |              
|Furniture, fixtures and equipment, net                                                                                                                                                  |  |               | 57,529      |   |                  |   | 63,357      |  
|Restricted cash                                                                                                                                                                         |  |               | 51,401      |   |                  |   | 51,401      |  
|Prepaid expenses and other assets, net of current portion                                                                                                                               |  |               | 129,998     |   |                  |   | 147,331     |  
|Prepaid license fee, net                                                                                                                                                                |  |               | 190,000     |   |                  |   | 220,000     |  
|Investments                                                                                                                                                                             |  |               | 130,468     |   |                  |   | 130,468     |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|Total assets                                                                                                                                                                            |  | $             | 5,605,220   |   |                  | $ | 6,443,047   |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                        |  |              
|Liabilities and stockholders equity                                                                                                                                                    |  |               |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                    |  |               |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                        |  | $             | 214,391     |   |                  | $ | 349,741     |  
|Accrued liabilities                                                                                                                                                                     |  |               | 405,143     |   |                  |   | 551,842     |  
|Capital lease obligation, current portion                                                                                                                                               |  |               | 13,696      |   |                  |   | 13,217      |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                               |  |               | 633,230     |   |                  |   | 914,800     |  
|                                                                                                                                                                                        |  |              
|Deferred lease obligation                                                                                                                                                               |  |               | 12,077      |   |                  |   | 12,054      |  
|Other liability                                                                                                                                                                         |  |               | 283,722     |   |                  |   | 279,722     |  
|Capital lease obligation, net of current portion                                                                                                                                        |  |               | 27,799      |   |                  |   | 31,412      |  
|Patent obligation                                                                                                                                                                       |  |               | 7,895       |   |                  |   | 7,895       |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                                       |  |               | 964,723     |   |                  |   | 1,245,883   |  
|                                                                                                                                                                                        |  |              
|Stockholders equity:                                                                                                                                                                   |  |               |             |   |                  |   |             |  
|Preferred stock, Series A, $0.01 par value, 1,000,000 shares authorized,2,775 shares issued and outstanding at March 31,
2011,3,675 shares issued and outstanding at December 31, 2010. |  |               | 28          |   |                  |   | 37          |  
|Common stock, $0.01 par value, 75,000,000 shares authorized,4,822,004 shares issued and outstanding at March 31,
2011,4,126,004 shares issued and outstanding as of December 31, 2010.  |  |               | 48,220      |   |                  |   | 41,260      |  
|Additional paid-in capital                                                                                                                                                              |  |               | 39,365,985  |   |                  |   | 38,610,457  |  
|Deficit accumulated during the development stage                                                                                                                                        |  |               | (34,794,609 | ) |                  |   | (33,545,960 | )
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                        |  |              
|Total stockholders equity before noncontrolling interest                                                                                                                               |  |               | 4,619,624   |   |                  |   | 5,105,794   |  
|Noncontrolling interest                                                                                                                                                                 |  |               | 20,873      |   |                  |   | 91,370      |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                              |  |               | 4,640,497   |   |                  |   | 5,197,164   |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                        |  |              
|Total liabilities and stockholders equity                                                                                                                                              |  | $             | 5,605,220   |   |                  | $ | 6,443,047   |  
|                                                                                                                                                                                        |  |               |             |   |                  |   |             |  

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)



|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|-------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                     |  | Three months ended March 31, |            |   | Period from June 22,2002 (inception)through March 31,2011 |  
|                                                                     |  | 2011                         |            |   | 2010                                                      |   |            |   | 
|Operating expenses:                                                  |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Research and development                                             |  | $                            | 396,392    |   |                                                           | $ | 359,569    |   |  | $ | 22,997,444  |  
|General and administrative                                           |  |                              | 922,651    |   |                                                           |   | 788,622    |   |  |   | 23,520,324  |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Total operating expenses                                             |  |                              | 1,319,043  |   |                                                           |   | 1,148,191  |   |  |   | 46,517,768  |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Loss from operations                                                 |  |                              | (1,319,043 | ) |                                                           |   | (1,148,191 | ) |  |   | (46,517,768 | )
|                                                                     |  |                              |           
|Other income (expense):                                              |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Gain on distribution of nonmonetary asset                            |  |                              |           |   |                                                           |   |           |   |  |   | 4,760,953   |  
|Gain on sale of marketable securities                                |  |                              |           |   |                                                           |   |           |   |  |   | 6,780,147   |  
|Other (expense) income                                               |  |                              |           |   |                                                           |   | (160       | ) |  |   | 606,972     |  
|Interest income, net                                                 |  |                              | (103       | ) |                                                           |   | 1,985      |   |  |   | 747,780     |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Other income (expense)                                               |  |                              | (103       | ) |                                                           |   | 1,825      |   |  |   | 12,895,852  |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|                                                                     |  |                              |           
|Loss before undistributed loss in equity method investments          |  |                              | (1,319,146 | ) |                                                           |   | (1,146,366 | ) |  |   | (33,621,916 | )
|Undistributed loss in equity method investments                      |  |                              |           |   |                                                           |   |           |   |  |   | (2,374,422  | )
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Consolidated net loss                                                |  |                              | (1,319,146 | ) |                                                           |   | (1,146,366 | ) |  |   | (35,996,338 | )
|                                                                     |  |                              |           
|Net loss attributable to noncontrolling interest                     |  |                              | 70,497     |   |                                                           |   | 50,300     |   |  |   | 1,421,076   |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|                                                                     |  |                              |           
|Net loss attributable to controlling interest                        |  | $                            | (1,248,649 | ) |                                                           | $ | (1,096,066 | ) |  | $ | (34,575,262 | )
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|                                                                     |  |                              |           
|Basic and diluted net loss per common share                          |  | $                            | (0.26      | ) |                                                           | $ | (0.38      | ) |  |   |             |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  
|Shares used in computing basic and diluted net loss per common share |  |                              | 4,721,948  |   |                                                           |   | 2,895,753  |   |  |   |             |  
|                                                                     |  |                              |            |   |                                                           |   |            |   |  |   |             |  

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)



|                                                                            |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------------------------------- | - | ---------- | ---- |  | - | ----------- | -
|                                                                            |  | Three months ended
March 31, |            |   | Period FromJune 22,
2002(inception) throughMarch 31, |  
|                                                                            |  | 2011                         |            |   | 2010                                                 |   |            | 2011 | 
|Operating activities                                                        |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Consolidated net loss                                                       |  | $                            | (1,319,146 | ) |                                                      | $ | (1,146,366 | )    |  | $ | (35,996,338 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Depreciation and amortization                                               |  |                              | 35,828     |   |                                                      |   | 35,760     |      |  |   | 596,958     |  
|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                                                    |  |                              | 199,979    |   |                                                      |   | 228,482    |      |  |   | 5,342,516   |  
|Expense of warrants issued with convertible notes                           |  |                              |           |   |                                                      |   |           |      |  |   | 4,860       |  
|Expense of warrants issued to placement agent                               |  |                              |           |   |                                                      |   |           |      |  |   | 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        |      |  |   | 36,065      |  
|Sale of investment as payment for interest expense                          |  |                              |           |   |                                                      |   |           |      |  |   | 36,712      |  
|Distribution of investment for compensation                                 |  |                              |           |   |                                                      |   |           |      |  |   | 100,000     |  
|Gain on distribution of nonmonetary asset                                   |  |                              |           |   |                                                      |   |           |      |  |   | (4,760,953  | )
|Gain on sale of marketable securities                                       |  |                              |           |   |                                                      |   |           |      |  |   | (6,780,147  | )
|Deferred lease obligation                                                   |  |                              | 23         |   |                                                      |   | 1,019      |      |  |   | 12,078      |  
|Changes in operating assets and liabilities:                                |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Prepaid license fee and other prepaid expenses                              |  |                              | (67,579    | ) |                                                      |   | (121,744   | )    |  |   | (686,349    | )
|Accounts payable                                                            |  |                              | (150,350   | ) |                                                      |   | (25,129    | )    |  |   | (130,609    | )
|Accrued liabilities                                                         |  |                              | (227,307   | ) |                                                      |   | (95,016    | )    |  |   | (402,163    | )
|Other liability                                                             |  |                              | 4,000      |   |                                                      |   | 3,000      |      |  |   | 46,174      |  
|                                                                            |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Net cash used in operating activities                                       |  |                              | (1,524,552 | ) |                                                      |   | (1,119,834 | )    |  |   | (38,283,716 | )
|                                                                            |  |                              |           
|Investing activities                                                        |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Purchases of furniture, fixtures, and equipment                             |  |                              |           |   |                                                      |   | (3,600     | )    |  |   | (199,912    | )
|Proceeds from sale of furniture, fixtures, and equipment                    |  |                              |           |   |                                                      |   | 350        |      |  |   | 5,716       |  
|Issuance of notes receivable                                                |  |                              |           |   |                                                      |   |           |      |  |   | (1,400,000  | )
|Proceeds from sale of marketable securities                                 |  |                              |           |   |                                                      |   |           |      |  |   | 1,951,211   |  
|Payments on notes receivable                                                |  |                              |           |   |                                                      |   |           |      |  |   | 711,045     |  
|Cash provided in the merger                                                 |  |                              |           |   |                                                      |   |           |      |  |   | 771,671     |  
|Purchase of investments in affiliates                                       |  |                              |           |   |                                                      |   |           |      |  |   | (2,471,400  | )
|Proceeds from sale of investments                                           |  |                              |           |   |                                                      |   |           |      |  |   | 4,405,692   |  
|                                                                            |  |                              |            |   |                                                      |   |            |      |  |   |             |  
|Net cash (used in) provided by investing activities                         |  |                              |           |   |                                                      |   | (3,250     | )    |  |   | 3,774,023   |  

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 (Continued)

(Unaudited)



|                                                                           |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|-------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---------------------------------------------------- | - | --------- | ---- |  | - | ---------- | -
|                                                                           |  | Three months endedMarch 31, |           |   | Period From June 22,
2002(inception)throughMarch 31, |  
|                                                                           |  | 2011                        |           |   | 2010                                                 |   |           | 2011 | 
|Financing activities                                                       |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|Proceeds from issuance of notes payable                                    |  |                             |          |   |                                                      |   |          |      |  |   | 605,000    |  
|Principal payments on notes payable                                        |  |                             |          |   |                                                      |   |          |      |  |   | (255,000   | )
|Repayments of capital lease obligation                                     |  |                             | (3,134    | ) |                                                      |   | (1,450    | )    |  |   | (30,571    | )
|Establishment of other financing                                           |  |                             | 98,219    |   |                                                      |   | 103,927   |      |  |   | 238,295    |  
|Repayments on other financing                                              |  |                             | (17,611   | ) |                                                      |   | (18,056   | )    |  |   | (148,732   | )
|Proceeds from exercise of options and warrants                             |  |                             | 562,500   |   |                                                      |   | 100,000   |      |  |   | 1,041,855  |  
|Proceeds from issuance of common stock and warrants, net of issuance costs |  |                             |          |   |                                                      |   | 1,759,545 |      |  |   | 37,704,083 |  
|Establishment of restricted cash                                           |  |                             |          |   |                                                      |   | (115      | )    |  |   | (51,401    | )
|                                                                           |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|Net cash provided by financing activities                                  |  |                             | 639,974   |   |                                                      |   | 1,943,851 |      |  |   | 39,103,529 |  
|                                                                           |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|                                                                           |  |                             |          
|Net (decrease) increase in cash and cash equivalents                       |  |                             | (884,578  | ) |                                                      |   | 820,767   |      |  |   | 4,593,836  |  
|                                                                           |  |                             |          
|Cash and cash equivalents at beginning of period                           |  |                             | 5,478,414 |   |                                                      |   | 3,167,302 |      |  |   |           |  
|                                                                           |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|Cash and cash equivalents at end of period                                 |  | $                           | 4,593,836 |   |                                                      | $ | 3,988,069 |      |  | $ | 4,593,836  |  
|                                                                           |  |                             |           |   |                                                      |   |           |      |  |   |            |  
|                                                                           |  |                             |          
|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 & non-employee directors                        |  |                             | 62,207    |   |                                                      |   | 82,660    |      |  |   | 566,176    |  
|Shares issued to third party for services                                  |  |                             | 98,363    |   |                                                      |   | 22,650    |      |  |   | 556,699    |  
|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 Company has incurred losses since inception through March 31, 2011 of
$34,575,262 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.

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, 2011.

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.

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.



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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. To date, all marketable securities have been classified as available-for-sale, and are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in
stockholders equity.

The Company 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,
Investments  Debt and Equity Securities.

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.

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.



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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 that such 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. 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 the three months ended March 31, 2011 and 2010, no options and 20,314 options, respectively, and 2,001,334 warrants and no warrants, respectively have been excluded from the calculation of diluted earnings per
share because their inclusion would be anti-dilutive.

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 these 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 that 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 adoption of ASU 2009-13 did not 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 adoption of ASC 605-28 did not have a material impact on the Companys financial statements.

3.
Investments

SurgiVision, Inc.

SurgiVision, Inc. (SVI), a privately-held company, is developing real-time devices to be used with Functional MRI Technology. SVI is targeting clinical solutions in areas such as MRI-guided
deep brain stimulation and cardiac ablation to treat atrial fibrillation. In 2010, SVI received 510(k) clearance from the Food and Drug Administration (FDA) to market their ClearPoint system in the United States for general neurological
interventional procedures.

As of March 31, 2011 and December 31, 2010, the 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 SVI common stock at an exercise price of $3.20 per share.



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Cardiovascular Solutions, Inc.

Cardiovascular Solutions, formerly known as Medeikon Corporation, a privately-held company, 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 Cardiovascular Solutions at March 31, 2011.

The
Companys share of Cardiovascular Solutions 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 Cardiovascular Solutions of $1,050,000 for the period from June 22, 2002 (inception) through March 31, 2011. The carrying value at March 31, 2011 and December 31, 2010 of the investment in Cardiovascular Solutions
was $0.

The fair values of cost method investments (when applicable) are not estimated unless there are events or changes identified that may
have a significant adverse effect on the fair value; such estimates of fair value could not be made without incurring excessive costs.

4.
Stockholders Equity

In January 2011, two investors who participated in the December 2010 Series A convertible preferred stock and
warrant investment round exercised 225,000 warrants at $2.50 per warrant. During the quarter ended March 31, 2011, 900 Series A Preferred shares were converted into 360,000 shares of common stock.

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 a total of 234,896 shares of the Companys common stock and 117,456 warrants to purchase shares of common stock. The common stock and warrants were sold in units for $7.52 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 closings of the sale of the units under these securities purchase agreements took place on
February 26, 2010 and March 5, 2010 for proceeds of $1,759,545, net of issuance costs of $6,959. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $7.52. Of these warrants, 114,131
expire on August 26, 2015 and 3,325 expire on September 5, 2015.

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. 107, Share-Based Payment. The simplified method uses an average of the option vesting period and the options original contractual term. The Company uses the implied yield of U. S. Treasury instruments with terms consistent with
the expected life of options as the risk-free interest rate. 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
March 31, 2011. The fair value of options granted to employees and non-employee directors for the three months ended March 31, 2010 was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:



|                                          |  |                                  |      |  
|----------------------------------------- |  | -------------------------------- | ---- | -
|                                          |  | Three months endedMarch 31,
2010 |     
|Expected dividend yield                   |  |                                  |     | %
|Expected volatility                       |  |                                  | 85   | %
|Weighted-average expected life (in years) |  |                                  | 5.7  |  
|Risk free interest rate                   |  |                                  | 2.62 | %
|Forfeiture rate                           |  |                                  | 10   | %



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The Companys consolidated statements of operations for the three months ended March 31, 2011 and
2010, respectively, include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as follows:



|                                                                       |  |                              |        |  |      |   |         | 
|---------------------------------------------------------------------- |  | ---------------------------- | ------ |  | ---- | - | ------- | 
|                                                                       |  | Three months ended March 31, |       
|                                                                       |  | 2011                         |        |  | 2010 |  
|Research and development                                               |  | $                            | 5,574  |  |      | $ | 9,932   | 
|General and administrative                                             |  |                              | 32,854 |  |      |   | 113,393 | 
|                                                                       |  |                              |        |  |      |   |         | 
|Total stock-based compensation to employees and non-employee directors |  | $                            | 38,428 |  |      | $ | 123,325 | 
|                                                                       |  |                              |        |  |      |   |         | 

In January 2011, the Company issued 66,000 shares of restricted stock to five employees which will vest 100% on the one year
anniversary of the grant date. The Companys President and CEO was awarded 50,000 restricted shares and four employees were each awarded 4,000 restricted shares. The Company recognized $49,054 and $6,766 stock-based compensation expense in
general and administrative and research and development, respectively, during the three months ended March 31, 2011. In September 2009, the Company issued 31,250 shares of restricted stock to the same employees which vested September 2010. The
Company recognized $56,466 and $14,116 stock-based compensation expense in general and administrative and research and development, respectively, during the three months ended March 31, 2010.

On January 4, 2010, the Company issued 625 shares of restricted stock to each of two non-employee members of the board which vested 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 vested on January 4, 2011. The Company recognized share-based compensation expense
related to issuance of restricted stock to certain members of the board of directors in general and administrative expense of $6,388 and $12,078 for the three months ended March 31, 2011 and 2010, 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.

The Company recognized $98,363 and $21,400 share-based compensation related to issuance of shares of restricted stock to non-employee (i.e. consultants) in exchange for services during the three months
ended March 31, 2011 and 2010, respectively.

For the three months ended March 31, 2011 and 2010, non-employee (i.e. consultants)
option expense was $732 and $1,097 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 1.75 years was $192,058 at March 31, 2011 and over an estimated weighted-average amortization period of 2.49 years was $315,739 at
March 31, 2010.

A summary of activity under the Companys stock option plans for the three months ended March 31, 2011 is as
follows:



|                              |  |                          |          |   |                            |  |         |                              |  |   |       | 
|----------------------------- |  | ------------------------ | -------- | - | -------------------------- |  | ------- | ---------------------------- |  | - | ----- | 
|                              |  |                          |          |   | Options Outstanding        | 
|                              |  | Shares Availableto grant |          |   | Number ofSharesOutstanding |  |         | WeightedAverageExercisePrice | 
|Balance at December 31, 2010  |  |                          | 357,812  |   |                            |  | 145,098 |                              |  | $ | 14.63 | 
|2008 Stock Plan increase      |  |                          | 723,359  |   |                            |  |        |                              |  |   |      | 
|Shares issued as compensation |  |                          | (111,000 | ) |                            |  | 111,000 |                              |  |   | 3.43  | 
|                              |  |                          |          |   |                            |  |         |                              |  |   |       | 
|Balance at March 31, 2011     |  |                          | 970,171  |   |                            |  | 256,098 |                              |  | $ | 15.42 | 
|                              |  |                          |          |   |                            |  |         |                              |  |   |       | 

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 months ended March 31, 2011 and 2010.



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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 liabilities at March 31, 2011 was $283,722 which was recorded in other liability and if recognized, would affect
the effective tax rate for computing tax expense for the three and twelve month periods then ended, respectively. Consistent with prior periods, the Company accrued interest and penalties, if any, within its interest expense.

8. Subsequent Events

The Company has no
material subsequent events to the Companys Form 10-Q for the quarter ended March 31, 2011 requiring disclosure.



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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, 2010, 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 and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to
our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, our limited operating history which may make it
difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, our ability to successfully develop and outlicense our drug candidates as anticipated, the current
regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners, successful performance under collaborative and other commercial agreements, potential product liability risks that
could exceed our liability coverage, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk
factors identified in the documents we have filed, or will file, with the SEC. 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 result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations
sections of our Annual Report on Form 10-K for the year ended December 31, 2010 and in any subsequently filed Quarterly Reports on Form 10. 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 North Carolina-based biopharmaceutical development company that acquires promising therapeutic molecules and medical technologies 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. 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:



| |  |  | Candidates that fill an important therapeutic need and have the potential to participate in large and growing markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Candidates with a well understood development pathway;
| | - |  | ------------------------------------------------------



| |  |  | Patent portfolio;
| | - |  | -----------------



| |  |  | 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Monetize the resulting product to a strong healthcare partner to complete development and 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 KRN550 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.



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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 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. Our primary source of working capital has
been from the proceeds of investments made in other companies as well as capital raised from the sale of our securities. To date, we have received net proceeds from the sale of marketable securities in the amount of $1,951,211 and $4,405,692 in net
proceeds from sale of investments in affiliates. We have raised $37,704,083 from issuance of preferred and common stock, net of issuance costs, since inception.

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 for the treatment of neuropathic pain for patients with cancer, type II diabetes
(including dyslipidemia), and symptoms of plaque psoriasis. Our cost containment program announced on January 6, 2009, designed to reduce our cash burn rate, necessitated that we focus most 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 II diabetes. Due to this allocation, we reduced our headcount by approximately 60 per cent 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 the first quarter 2012. In the
event that these two candidates are not monetized during 2011, 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
which is presently being developed for the treatment of neuropathic pain in patients with cancer. An active component of KRN5500 has been shown to inhibit nerve cell pain signals. Initial in-vitro studies point to two possible of modes of action,
cholinesterase inhibition and the inhibition of fatty acid amide hydrolase (FAAH). Presently the primary segment of the market being targeted by this compound is chemotherapy-induced neuropathic pain (CINP). On May 12, 2009, we announced
positive results from the completed Phase 2a clinical trial in cancer patients with neuropathic pain to assess the safety and efficacy of KRN5500. KRN5500 met its primary end-point of reduction of pain from baseline and performed statistically
significantly better than placebo (p=0.03).Our subsidiary, DARA Therapeutics, Inc., recently entered into an agreement with the National Cancer Institute, an agency of the U.S. Government, for the further clinical development of KRN5500
focusing on the treatment and prevention of chemotherapy Induced Peripheral Neuropathy. Phase 2b clinical trial(s) are planned to start during the first half of 2011. Recently, we received a federal grant to further the development of KRN5500. We
have initiated discussions regarding the outlicense of KRN5500 and there are currently companies conducting due diligence with respect to this drug candidate. The Company has not yet received any indications of interest specifying proposed terms for
any potential outlicensing transaction and there can be no assurance that the Company will consummate an outlicensing transaction with respect to KRN5500.

We incurred $58,083 in development costs associated with the development of KRN5500 during the three month period ended March 31, 2011, and we have incurred costs of $4,289,507 from inception to
date. We estimate the market potential for KRN5500 for chemotherapy-induced neuropathy to be roughly $2.5 billion at peak sales year.



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DB959

DB959 is a novel dual PPARd/g agonist for the treatment of type 2 diabetes. In March 2009, the FDA cleared our IND
application for DB959. Preclinical studies showed efficacy in animal models for diabetes and dyslipidemia. A recently completed Phase 1a study demonstrated that the drug was well tolerated at all doses. A Phase 1b started during March 2011 with
completion scheduled for June 2011. 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 $178,786 during the three month period ended March 31, 2011, and we have incurred costs of $6,234,267 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.

Based on recently published literature, we are exploring the
PPARs in our library for the treatment of Alzheimers disease, ulcerative colitis, Multiple sclerosis (MS), non-alcoholic liver disease, and other autoimmune diseases.

DB160

DB160 is a dipeptidylpeptidase (DPPIV) inhibitor for the treatment of type 2
diabetes. DDPIV is an enzyme that inactivates a key hormone involved in promoting control of blood sugar levels thus giving diabetics better control of their blood sugar levels. Prior to the implementation of our January 2009 cost reduction plan, we
were developing this drug candidate as a once-daily oral therapy. We have currently suspended the development of DB160, but we will continue to evaluate the competitive environment for DB160 and potential positioning of the compound for other
indications. If our evaluation concludes that further development is warranted, the next step in our development of this candidate would be to file an IND application with the FDA. Our development work with DB160 is pursuant to an exclusive
worldwide license to develop and commercialize the drug candidate from Nuada, LLC.

We incurred $15,498 in direct outside development costs
associated with the development of DB160 during the three month period ended March 31, 2011, and we have incurred costs of $2,347,356 from inception to date. We estimate the market potential for the DPP-IV inhibitor segment of the type 2
diabetes market to be roughly $21 billion in 2034.

On August 4, 2009, we announced a collaboration with America Stem Cell 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, the Company is providing America Stem Cell with DPPIV inhibitors
from our proprietary library 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.



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We incurred $0 in direct outside development costs associated with the development of DB900 series compounds
during the three month period ended March 31, 201, 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 $30.0 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.

We incurred $22,470 in direct outside development costs associated with the development of DB200 series compounds during the three month period ended
March 31, 2011, and we have incurred costs of $403,752 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 $7,338 in direct costs associated with Talabostat during the three month period ended March 31, 2011, and we have
incurred costs of $115,229 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 refundable to us. In such cases, those costs are
expensed when paid.

Accrued Expenses

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



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



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



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



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

Share-Based Compensation

Share-based
compensation is accounted for using the fair value based method prescribed by Financial Accounting Standards Board Accounting Standards Codification 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 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 $100,635 and $205,985 for the three months ended March 31, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for awards to consultants
for services totaling $99,095 and $22,497 for the three months ended March 31, 2011 and 2010, 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 March 31, 2011 Compared to Three Months Ended March 31, 2010

Research and development expenses increased $36,823 from $359,569 for the three months ended March 31, 2010 to $396,392 for the corresponding 2011
period, as a result of the DB959 program beginning Phase 1b.

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 $134,029 from $788,622 for the three months ended March 31, 2010 to $922,651 for the corresponding 2011 period, primarily as a result of an increase in investor relations fees
offset by a decrease in option expense for employees.

Other (expense) income, net reflects non-operating activities associated with
investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other (expense) income, net decreased $1,928 from an income
of $1,825 for the three months ended March 31, 2010 to an expense of $103 for the corresponding 2011 period. The decrease is minimal.

Liquidity and Capital Resources

Overview

From inception through
March 31, 2011, 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 $37,704,083 in net proceeds, and (2) the sale of
securities we held in subsidiary companies and marketable securities, through which we raised $6,356,903.

At March 31, 2011, our
principal sources of liquidity were our cash and cash equivalents which totaled $4,593,836. As of March 31, 2011, we had net working capital of $4,412,594. Our cash resources have been used to acquire licenses, and to fund research and
development activities, capital expenditures, and general and administrative expenses.

Cash Flows

During the three months ended March 31, 2011, cash used in our operating activities was $1,524,552. Cash used in operating activities was primarily
due to the operating loss offset in part by non-cash stock-based compensation of $199,979 and depreciation and amortization of $35,828. Prepaid expenses decreased by $67,579 for the three months ended March 31, 2011, primarily as a result of
decreases in prepaid insurance coverage. Accounts payable decreased by $150,350 and accrued liabilities decreased by $227,307.

We had no
investing activities during the three months ended March 31, 2011.



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We generated $562,500 of net cash from the exercise of 60,000 Series A Class A warrants and 165,000
Series A Class B warrants during the three months ended March 31, 2011. We established $98,219 in other financing offset by payments of $17,611 on capital lease and other financing agreements during the three months ended March 31, 2011.

Financial Condition

We
believe we have sufficient working capital to reach our next value milestones or through the first quarter of 2012. 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 such funds will be available on acceptable terms or at all. If we are unable to obtain such needed capital,
we may not be able to:



| |  |  | 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 March 31, 2011.

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 and that material information relating to the Company is accumulated and communicated to
management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. 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 first quarter of 2011, 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.



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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As of May 9, 2011, we had no
outstanding material legal proceedings.

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

On December 1, 2010 we entered into a letter of agreement with Brooke Capital Investment, LLC, 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 25,000 shares of our common stock on January 3, 2011. Also on December 1, 2010 we entered into a letter of
agreement with ProActive Capital Resources Group, LLC, 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 20,000 shares of our
common stock on January 3, 2011.

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, the purchaser was an accredited investor, as defined in Rule 501(a) of the Securities Act.
|- |  | -----------------------------------------------------------------------------------------------------------------------



| |  | The purchaser has had access to information regarding DARA and is knowledgeable about us and our business affairs.
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | All shares issued 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

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 May 9,
2011.



|                  |  |                        |  |                                      
|----------------- |  | ---------------------- |  | -------------------------------------
|                  |  | DARA BIOSCIENCES, INC.
|                  |  |                       
|Date: May 9, 2011 |  | By:                    |  | /s/ Richard A. Franco                
|                  |  |                        |  | Richard A. Franco                    
|                  |  |                        |  | President and Chief Executive Officer
|                  |  |                       
|Date: May 9, 2011 |  | 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 May 9, 2011               |  |                             
|           |  |                                                                                                                                          
|31.2       |  | Certification of Ann A. Rosar pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2011                                |  |                             
|           |  |                                                                                                                                          
|32         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 9, 2011 |  |                             



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