##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



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



| | For the quarterly period ended
| | ------------------------------



| | September 30, 2009
| | ------------------

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 Address if Changed Since Last Report)





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

Common Stock, Par Value $.01 Per Share

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

(Title of Class)





Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    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  ̈                       |  | Smaller reporting company þ
|(Do not check if a smaller reporting company) |  |                            

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

The number of shares outstanding of the Registrants common stock as of November 12, 2009 was approximately 44,633,474.





---

##### Table of Contents

Table of Contents



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|PART I - FINANCIAL INFORMATION                                                               
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  | 3   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 23  
|Item 4. Controls and Procedures                                                               |  | 23  
|                                                                                             
|PART II - OTHER INFORMATION                                                                  
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 25  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 25  
|Item 3. Defaults Upon Senior Securities                                                       |  | 25  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 25  
|Item 5. Other Information                                                                     |  | 25  
|Item 6. Exhibits                                                                              |  | 25  



---

##### Table of Contents

PART IFINANCIAL INFORMATION

Item 1. Financial Statements

DARA BioSciences, Inc.

(A Development Stage Company)

Consolidated Balance Sheet

(Unaudited)



|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                    |  | September 30,2009 |             |   | December 31,2008 |  
|Assets                                                                                                                                                                              |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                           |  | $                 | 4,037,203   |   |                  | $ | 959,898     |  
|Marketable securities                                                                                                                                                               |  |                   |            |   |                  |   | 1,656,408   |  
|Prepaid expenses, current portion                                                                                                                                                   |  |                   | 191,550     |   |                  |   | 113,694     |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                |  |                   | 4,228,753   |   |                  |   | 2,730,000   |  
|                                                                                                                                                                                    |  |                  
|Furniture, fixtures and equipment, net                                                                                                                                              |  |                   | 83,486      |   |                  |   | 112,253     |  
|Restricted cash                                                                                                                                                                     |  |                   | 78,757      |   |                  |   | 78,105      |  
|Prepaid expenses, net of current portion                                                                                                                                            |  |                   | 242,663     |   |                  |   | 285,996     |  
|Prepaid license fee, net                                                                                                                                                            |  |                   | 370,000     |   |                  |   | 460,000     |  
|Investments                                                                                                                                                                         |  |                   | 173,889     |   |                  |   | 222,479     |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                                                                        |  | $                 | 5,177,548   |   |                  | $ | 3,888,833   |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Liabilities and stockholders equity                                                                                                                                                |  |                   |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                |  |                   |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                    |  | $                 | 1,058,753   |   |                  | $ | 866,081     |  
|Accrued liabilities                                                                                                                                                                 |  |                   | 228,106     |   |                  |   | 328,117     |  
|Accrued interest on note payable -SVI                                                                                                                                               |  |                   | 26,667      |   |                  |   |            |  
|Note payable -SVI                                                                                                                                                                   |  |                   | 500,000     |   |                  |   |            |  
|Other financing agreements                                                                                                                                                          |  |                   | 13,458      |   |                  |   |            |  
|Capital lease obligation, current portion                                                                                                                                           |  |                   | 15,472      |   |                  |   | 12,951      |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                           |  |                   | 1,842,456   |   |                  |   | 1,207,149   |  
|Deferred lease obligation                                                                                                                                                           |  |                   | 9,949       |   |                  |   | 5,933       |  
|Other liability                                                                                                                                                                     |  |                   | 264,723     |   |                  |   | 253,174     |  
|Capital lease obligation, net of current portion                                                                                                                                    |  |                   | 37,032      |   |                  |   | 48,973      |  
|Patent obligation                                                                                                                                                                   |  |                   | 20,261      |   |                  |   | 20,261      |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                                   |  |                   | 2,174,421   |   |                  |   | 1,535,490   |  
|Stockholders equity:                                                                                                                                                               |  |                   |             |   |                  |   |             |  
|Common stock, $0.01 par value; 75,000,000 shares authorized, 43,233,437 issued and outstanding as of September 30, 2009.
30,113,829 issued and outstanding as of December 31, 2008. |  |                   | 432,334     |   |                  |   | 301,138     |  
|Additional paid in capital                                                                                                                                                          |  |                   | 29,332,138  |   |                  |   | 24,296,934  |  
|Accumulated other comprehensive income                                                                                                                                              |  |                   |            |   |                  |   | 1,656,008   |  
|Deficit accumulated during the development stage                                                                                                                                    |  |                   | (27,271,794 | ) |                  |   | (24,549,937 | )
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                          |  |                   | 2,492,678   |   |                  |   | 1,704,143   |  
|Non-controlling interest                                                                                                                                                            |  |                   | 510,449     |   |                  |   | 649,200     |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                          |  |                   | 3,003,127   |   |                  |   | 2,353,343   |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                          |  | $                 | 5,177,548   |   |                  | $ | 3,888,833   |  
|                                                                                                                                                                                    |  |                   |             |   |                  |   |             |  

See accompanying notes.



3



---

##### Table of Contents

DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED
STATEMENTS OF OPERATIONS

(Unaudited)

|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | --------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                     |  | Three months ended September 30, |            |   | Nine months ended September 30, |   |            | Period FromJune
22,2002(inception)September30, 2009 | 
|                                                                     |  | 2009                             |            |   | 2008                            |   |            | 2009                                                |  |   | 2008       |   | 
|Operating expenses:                                                  |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Research and development                                             |  | $                                | 295,945    |   |                                 | $ | 2,704,727  |                                                     |  | $ | 1,449,404  |   |  | $ | 6,197,208  |   |  | $ | 18,820,475  |  
|General and administrative                                           |  |                                  | 562,950    |   |                                 |   | 1,271,564  |                                                     |  |   | 2,099,873  |   |  |   | 3,537,865  |   |  |   | 18,707,397  |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Total operating expenses                                             |  |                                  | 858,895    |   |                                 |   | 3,976,291  |                                                     |  |   | 3,549,277  |   |  |   | 9,735,073  |   |  |   | 37,527,872  |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Loss from operations                                                 |  |                                  | (858,895   | ) |                                 |   | (3,976,291 | )                                                   |  |   | (3,549,277 | ) |  |   | (9,735,073 | ) |  |   | (37,527,872 | )
|                                                                     |  |                                  |            |   |                                
|Other (expense) income:                                              |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Gain on distribution of nonmonetary asset                            |  |                                  |           |   |                                 |   |           |                                                     |  |   | 551,410    |   |  |   |           |   |  |   | 5,220,453   |  
|Other income (expense), net                                          |  |                                  |           |   |                                 |   |           |                                                     |  |   |           |   |  |   |           |   |  |   | 135,899     |  
|Interest (expense) income                                            |  |                                  | (14,723    | ) |                                 |   | 3,925      |                                                     |  |   | (38,579    | ) |  |   | 131,723    |   |  |   | 752,506     |  
|Gain (loss) on disposal of assets                                    |  |                                  | 325        |   |                                 |   | 2,468      |                                                     |  |   | (1,885     | ) |  |   | (16,496    | ) |  |   | (17,866     | )
|Gain on sale of marketable securities                                |  |                                  |           |   |                                 |   |           |                                                     |  |   | 177,724    |   |  |   |           |   |  |   | 5,827,356   |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Other (expense) income                                               |  |                                  | (14,398    | ) |                                 |   | 6,393      |                                                     |  |   | 688,670    |   |  |   | 115,227    |   |  |   | 11,918,348  |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Loss before undistributed loss in equity method investments          |  |                                  | (873,293   | ) |                                 |   | (3,969,898 | )                                                   |  |   | (2,860,607 | ) |  |   | (9,619,846 | ) |  |   | (25,609,524 | )
|Undistributed loss in equity method investments                      |  |                                  |           |   |                                 |   |           |                                                     |  |   |           |   |  |   |           |   |  |   | (2,374,422  | )
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Consolidated net loss                                                |  |                                  | (873,293   | ) |                                 |   | (3,969,898 | )                                                   |  |   | (2,860,607 | ) |  |   | (9,619,846 | ) |  |   | (27,983,946 | )
|Net loss attributable to non-controlling interest                    |  |                                  | 48,117     |   |                                 |   | 58,789     |                                                     |  |   | 138,750    |   |  |   | 208,365    |   |  |   | 931,499     |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Net loss attributable to controlling interest                        |  | $                                | (825,176   | ) |                                 | $ | (3,911,109 | )                                                   |  | $ | (2,721,857 | ) |  | $ | (9,411,481 | ) |  | $ | (27,052,447 | )
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Basic and diluted net loss per common share                          |  | $                                | (0.02      | ) |                                 | $ | (0.14      | )                                                   |  | $ | (0.09      | ) |  | $ | (0.41      | ) |  |   |             |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  
|Shares used in computing basic and diluted net loss per common share |  |                                  | 34,912,742 |   |                                 |   | 27,619,876 |                                                     |  |   | 31,885,836 |   |  |   | 23,206,008 |   |  |   |             |  
|                                                                     |  |                                  |            |   |                                 |   |            |                                                     |  |   |            |   |  |   |            |   |  |   |             |  

See accompanying notes.



4



---

##### Table of Contents

DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED
STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                            |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                            |  | Nine months endedSeptember 30, |            |   | Period FromJune 22, 2002(inception)throughSeptember 30,2009 |  
|                                                                            |  |                               
|                                                                            |  |                               
|                                                                            |  |                               
|                                                                            |  | 2009                           |            |   | 2008                                                        |   |           
|Operating activities                                                        |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Consolidated net loss                                                       |  | $                              | (2,860,607 | ) |                                                             | $ | (9,619,846 | ) |  | $ | (27,983,947 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Depreciation and amortization                                               |  |                                | 118,578    |   |                                                             |   | 113,126    |   |  |   | 377,239     |  
|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                                                    |  |                                | 324,783    |   |                                                             |   | 1,215,185  |   |  |   | 4,337,326   |  
|Expense of warrants issued with convertible notes                           |  |                                |           |   |                                                             |   |           |   |  |   | 4,860       |  
|Expense of warrants issued to placement agent                               |  |                                | 47,706     |   |                                                             |   |           |   |  |   | 230,920     |  
|Loss on disposal of furniture, fixtures and equipment                       |  |                                | 1,885      |   |                                                             |   | 16,496     |   |  |   | 35,905      |  
|Distribution of investment for compensation                                 |  |                                | 100,000    |   |                                                             |   |           |   |  |   | 100,000     |  
|Gain on distribution of nonmonetary asset                                   |  |                                | (551,410   | ) |                                                             |   |           |   |  |   | (5,220,453  | )
|Gain on sale of marketable securities                                       |  |                                | (177,724   | ) |                                                             |   |           |   |  |   | (5,827,356  | )
|Deferred lease obligation                                                   |  |                                | 4,016      |   |                                                             |   | (963       | ) |  |   | 9,949       |  
|Changes in operating assets and liabilities:                                |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Prepaid expenses and other assets                                           |  |                                | (31,842    | ) |                                                             |   | 117,050    |   |  |   | (540,770    | )
|Accounts payable                                                            |  |                                | 192,672    |   |                                                             |   | 591,522    |   |  |   | 728,753     |  
|Accrued liabilities                                                         |  |                                | (59,886    | ) |                                                             |   | (549,400   | ) |  |   | (465,470    | )
|Other liability                                                             |  |                                | 11,549     |   |                                                             |   |           |   |  |   | 45,375      |  
|                                                                            |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Net cash used in operating activities                                       |  |                                | (2,880,280 | ) |                                                             |   | (8,116,830 | ) |  |   | (30,108,799 | )
|Investing activities                                                        |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Purchases of furniture, fixtures, and equipment                             |  |                                | (2,747     | ) |                                                             |   | (17,410    | ) |  |   | (191,810    | )
|Proceeds from sale of furniture, fixtures, and equipment                    |  |                                | 1,050      |   |                                                             |   | 2,844      |   |  |   | 5,366       |  
|Payments on capital lease                                                   |  |                                | (9,420     | ) |                                                             |   | (2,241     | ) |  |   | (5,703      | )
|Issuance of notes receivable                                                |  |                                |           |   |                                                             |   |           |   |  |   | (1,400,000  | )
|Proceeds from sale of marketable securities                                 |  |                                | 178,124    |   |                                                             |   |           |   |  |   | 1,951,211   |  
|Payments on notes receivable                                                |  |                                |           |   |                                                             |   |           |   |  |   | 711,045     |  
|Cash provided in the merger                                                 |  |                                |           |   |                                                             |   | 771,671    |   |  |   | 771,671     |  
|Purchase of investments in affiliates                                       |  |                                |           |   |                                                             |   |           |   |  |   | (2,471,400  | )
|Proceeds from sale of investments                                           |  |                                | 500,000    |   |                                                             |   |           |   |  |   | 4,405,692   |  
|                                                                            |  |                                |            |   |                                                             |   |            |   |  |   |             |  
|Net cash provided by investing activities                                   |  |                                | 667,007    |   |                                                             |   | 754,864    |   |  |   | 3,776,072   |  



5



---

##### Table of Contents

DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)



|                                                                           |  |                                |           |      |                                                             |            |   |  |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------ | --------- | ---- | ----------------------------------------------------------- | ---------- | - |  | - | ---------- | -
|                                                                           |  | Nine months endedSeptember 30, |           |      | Period FromJune 22, 2002(inception)throughSeptember 30,2009 |           
|                                                                           |  |                               
|                                                                           |  |                               
|                                                                           |  |                               
|                                                                           |  | 2009                           |           | 2008 |                                                             |           
|Financing activities                                                       |  |                                |           |      |                                                             |            |   |  |   |            |  
|Proceeds from issuance of notes payable                                    |  |                                | 500,000   |      |                                                             |           |   |  |   | 605,000    |  
|Principal payments on notes payable                                        |  |                                |          |      |                                                             |           |   |  |   | (255,000   | )
|Proceeds from exercise of options and warrants                             |  |                                | 110,750   |      |                                                             |           |   |  |   | 190,801    |  
|Proceeds from issuance of common stock and warrants, net of issuance costs |  |                                | 4,679,828 |      |                                                             | 188,554    |   |  |   | 29,907,234 |  
|Establishment of restricted cash reserve                                   |  |                                |          |      |                                                             |           |   |  |   | (78,105    | )
|                                                                           |  |                                |           |      |                                                             |            |   |  |   |            |  
|Net cash provided by financing activities                                  |  |                                | 5,290,578 |      |                                                             | 188,554    |   |  |   | 30,369,930 |  
|                                                                           |  |                                |           |      |                                                             |            |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                       |  |                                | 3,077,305 |      |                                                             | (7,173,412 | ) |  |   | 4,037,203  |  
|Cash and cash equivalents at beginning of period                           |  |                                | 959,898   |      |                                                             | 8,263,006  |   |  |   |           |  
|                                                                           |  |                                |           |      |                                                             |            |   |  |   |            |  
|Cash and cash equivalents at end of period                                 |  | $                              | 4,037,203 |      | $                                                           | 1,089,594  |   |  | $ | 4,037,203  |  
|                                                                           |  |                                |           |      |                                                             |            |   |  |   |            |  
|Supplemental disclosure of non-cash financing activity                     |  |                                |           |      |                                                             |            |   |  |   |            |  
|Equipment purchased through financing                                      |  | $                              |          |      | $                                                           | 52,543     |   |  | $ | 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   | )
|Unrealized gain on available-for-sale securities                           |  |                                |          |      |                                                             | 1,628,008  |   |  |   |           |  
|Forgiveness of stock subscription receivable                               |  |                                |          |      |                                                             |           |   |  |   | 242,500    |  
|Shares issued to directors for services                                    |  |                                | 22,481    |      |                                                             | 99,731     |   |  |   | 159,021    |  
|Shares issued to employees                                                 |  |                                | 4,705     |      |                                                             |           |   |  |   | 4,705      |  
|Shares issued to third party for services                                  |  |                                | 5,000     |      |                                                             | 19,527     |   |  |   | 327,261    |  
|Conversion of note into equity of subsidiary                               |  |                                |          |      |                                                             |           |   |  |   | 1,441,948  |  



6



---

##### Table of Contents

DARA BIOSCIENCES, INC.

(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 activities of the Company have primarily consisted of establishing offices, recruiting personnel, conducting research and development,
performing business and financial planning and raising capital. Accordingly, the Company is considered to be a biopharmaceutical development company. The Company has incurred losses since inception through September 30, 2009 of $27,052,447 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.

Going Concern

The Company
has incurred significant net losses and has had negative cash flows from operations during each period from inception through September 30, 2009 and has a deficit accumulated during the development stage of $27,271,794 at September 30,
2009. Management expects operating losses and negative cash flows to continue during 2009 and into the near-term future.

At
September 30, 2009, management believes that currently available cash and cash equivalents and marketable securities together with existing financing agreements would provide sufficient funds to enable the Company to meet its obligations
through the beginning of 2011. To date, the Company has principally raised capital through public and private placements of its equity securities and the sale of equities of other companies that were owned by the Company. Management plans to
continue to finance the Companys operations with a combination of equity issuances and debt arrangements, as well as pursuing collaborative revenue generating arrangements with healthcare companies and or Government agencies. If adequate funds
are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs or obtain funds through collaborative arrangements with others that may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself.

Since January 2009, the Company has been diligently implementing a plan to raise working capital and reduce expenses. To this end DARA has reduced staff by 60% and burn rate by approximately 70%. The Chief Executive Officer is compensated
at $1.00 per year and all salary increases and 401k contributions have been suspended. In addition, all independent director monetary compensation has been also suspended. The Company is now focusing on the two lead drug candidates and has suspended
work on three. The Company has raised approximately $5,000,000 during the nine month period ended September 30, 2009.

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, 2009.



7



---

##### Table of Contents

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 Signum Pharmaceuticals, Inc. of which the Company owns 87.5%. 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.

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.

Investments in marketable securities with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities
represent the investment of cash that is available for current operations.

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 (deficit).

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.



8



---

##### Table of Contents

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 8 for further information.

Income Taxes

The Company uses the liability method in accounting for income taxes as required by FASB ASC 740,Income Taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards
and for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not 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 and marketable securities. The Company maintains deposits in federally insured financial institutions
in excess of federally insured limits.



9



---

##### Table of Contents

Comprehensive Income (Loss)

FASB ASC 220, Comprehensive Income, requires components of other comprehensive income, including gains and losses on available-for-sale investments, are included as part of
total comprehensive income. The Company displays comprehensive income (loss) and its components as part of the statement of stockholders equity (deficit) in its annual financial statements.

Comprehensive income (loss) consists of net loss and unrealized gains and losses on available-for-sale investments. As of September 30,
2009, the Company had sold all of its available-for-sale investments recognizing a gain on available-for-sale investments of $0 and $177,724 for the three and nine month periods ended September 30, 2009, respectively. Comprehensive loss was
$825,176 and $2,721,857 for the three and nine month periods ended September 30, 2009, respectively. Comprehensive loss was $3,887,109 and $7,783,473 for the three and nine month periods ended September 30, 2008, respectively.

Net Loss Per Common Share

The Company calculates its basic loss per share in accordance with FASB ASC 260, Earnings Per Share, by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common shares outstanding
for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted loss per share is computed by dividing the loss applicable to common stockholders by the
weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period determined using the treasury-stock method.
For purposes of this calculation, options and warrants to purchase common stock are considered to be common stock equivalents but have been excluded for the three and nine month periods ended September 30, 2009 and 2008 calculation of diluted
net loss per share as their effect is anti-dilutive. For the period ended September 30, 2009, 14,273,658 warrants and 1,431,550 options have been excluded, because their inclusion would be anti-dilutive. Also for the period ended
September 30, 2008, 700,597 warrants and 2,228,213 options have been excluded because their inclusion would be anti-dilutive.



|                                                                                      |  |                                 |            |   |      |   |            |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                      |  | Three months endedSeptember 30, |           
|                                                                                      |  | 2009                            |            |   | 2008 |  
|Net loss attributable to controlling interest                                         |  | $                               | (825,176   | ) |      | $ | (3,911,109 | )
|                                                                                      |  |                                 |            |   |      |   |            |  
|Basic and diluted net loss per common share:                                          |  |                                 |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                 | 34,912,742 |   |      |   | 27,619,876 |  
|                                                                                      |  |                                 |            |   |      |   |            |  
|Basic and diluted net loss per common share                                           |  | $                               | (0.02      | ) |      | $ | (0.14      | )
|                                                                                      |  |                                 |            |   |      |   |            |  
|                                                                                      | 
|                                                                                      |  | Nine months endedSeptember
30,  |           
|                                                                                      |  | 2009                            |            |   | 2008 |  
|Net loss attributable to controlling interest                                         |  | $                               | (2,721,857 | ) |      | $ | (9,411,481 | )
|                                                                                      |  |                                 |            |   |      |   |            |  
|Basic and diluted net loss per common share:                                          |  |                                 |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                 | 31,885,836 |   |      |   | 23,206,008 |  
|                                                                                      |  |                                 |            |   |      |   |            |  
|Basic and diluted net loss per common share                                           |  | $                               | (0.09      | ) |      | $ | (0.41      | )
|                                                                                      |  |                                 |            |   |      |   |            |  

Recently Issued Accounting Pronouncements

In June, 2009, FASB issued and the Company adopted FASB ASC 105, Generally Accepted Accounting Principles. FASB ASC 105 approved the
FASB ASC as the source of authoritative nongovernmental GAAP. All existing accounting standards have been superseded and all other accounting literature not included in the FASB ASC will be considered nonauthoritative. Accordingly, all references to
accounting standards have been conformed to the new ASC hierarchy.

In May 2009, the FASB issued FASB ASC 855,
Subsequent Events. FASB ASC 855 establishes principles and requirements for subsequent events, in particular: (i) the period after the balance sheet date during which management of a reporting entity



10



---

##### Table of Contents

shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity shall recognize events
or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. See Note 13 for further
information.

In December 2007, the FASB issued FASB ASC 810, Consolidation. FASB ASC 810 requires that
non-controlling interests (previously referred to as minority interests) be clearly identified and presented as a component of equity, separate from the parents equity. FASB ASC 810 also requires that the amount of consolidated
net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for as equity
transactions; and that when a subsidiary is deconsolidated, any retained non-controlling equity investment in that subsidiary and the gain or loss on the deconsolidation of that subsidiary be measured at fair value. FASB ASC 810 is to
be applied prospectively, except for the presentation and disclosure requirements (which are to be applied retrospectively for all periods presented) and is effective for fiscal years beginning after December 15, 2008. Effective January 1,
2009, the Company adopted FASB ASC 810. The effect was an increase in total equity of $510,449 as of September 30, 2009 and $649,200 for December 31, 2008. There was no material effect to the Companys consolidated results of
operations.

FASB ASC 810 also requires retrospective application of its disclosure and presentation requirements for all
periods presented. Accordingly, non-controlling interests at December 31, 2008 which were previously reported as minority interest in subsidiary, have been reclassified as a separate component of equity. Furthermore, net earnings previously
reported as minority interest in subsidiary for the three and nine month periods ended September 30, 2008 and for the period from June 22, 2002 (inception) through September 30, 2009 have been presented as attributable to
non-controlling interest.

In November 2007, the EITF ratified a consensus on FASB ASC 808, Collaborative Arrangements,
which requires participants in a collaboration to make separate disclosures regarding the nature and purpose of an arrangement, their rights and obligations under the arrangement, the accounting policy for the arrangement and the income statement
classification and amounts arising from the arrangement between participants for each period an income statement is presented. FASB ASC 808 is effective beginning January 1, 2009. The Companys adoption of FASB ASC 808 did not have a
material effect on the Companys consolidated results of operations and financial position.

Certain 2008 amounts have
been reclassified to conform to the 2009 presentation. The reclassifications had no impact on previously reported results of operations, financial position, or cash flows.

3. Investments

MiMedx (NASDAQ: MDXG.OB)

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

The Company was restricted from selling the shares until February 9, 2009 upon which date the Company became able to
sell shares to improve its cash position. Utilizing ASC 820, the valuation of MiMedx was based upon Level 3 inputs which included applying a lack-of-marketability discount to the quoted market price of MiMedx common stock as of December 31,
2008. This resulted in a fair value of $1,656,408 as of December 31, 2008 which represented an unrealized gain of $1,656,008 for the year.

As of September 30, 2009, following the removal of the restriction allowing the sale of MiMedx shares, the market value declined to $0.75. Between February 9, 2009 and September 30, 2009,
the Company sold all its 400,002 shares of MiMedx realizing a gain on the sale of marketable securities of $177,724. At September 30, 2009, the Company no longer held an investment in MiMedx.

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



11



---

##### Table of Contents

SurgiVision, Inc.

SurgiVision, Inc. (SVI) is developing real-time devices to be used with Functional MRI Technology. The Company is targeting clinical solutions in areas such as MRI-guided deep brain
stimulation and cardiac ablation to treat atrial fibrillation. The Companys initial investment of $2,000,000 for 9,094,970 shares was in 2004. In 2006, the Company distributed a dividend of 6,166,312 and 178,688 shares of SVI common stock to
all investors and vested stock option holders, respectively. The remaining investment of 2,749,970 shares was carried at cost of $222,479 at December 31, 2008.

In January 2009, the Company entered into a stock purchase and loan agreement and related agreements (the Purchase and Loan Agreement) with SVI in which the Company received $1,000,000 of
total proceeds. The Company sold 500,000 of its 2,749,970 shares of SVI at $1.00 per share. In addition the Company entered into a loan agreement secured by 500,000 shares of the Companys SVI stock (See Note 4). The Company recorded a gain of
$459,500 on distribution of nonmonetary asset.

Also in January 2009, the board of directors distributed 25,000 SVI shares
each, to three independent members of the board valued at $1.00 per share. The Company distributed an additional 25,000 SVI shares valued at $1.00 per share as severance to its former Chief Financial Officer. The Company recorded compensation
expense of $100,000 and a gain of $91,910 on distribution of nonmonetary asset.

As of September 30, 2009, the remaining
investment of 2,149,970 shares was carried at cost of $173,889.

Medeikon, Corporation

Medeikon Corporation (Medeikon) is developing technology focusing on the diagnostics of vulnerable plaque using an optical detection system.
The Companys investment represents approximately 25.4% of the outstanding shares of Medeikon at September 30, 2009.

The Companys share of Medeikons loss for the year ended December 31, 2006 exceeded its basis. The loss of a minority interest is limited to the extent of equity capital. Application of the equity method resulted in an
equity method loss in Medeikon of $1,050,000 for the period from June 22, 2002 (inception) through September 30, 2009. The carrying value at September 30, 2009 and December 31, 2008 of the investment in Medeikon 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. Note Payable

On January 30, 2009, the Company entered into the Purchase and Loan Agreement with SVI
pursuant to which the Company received $1,000,000 of total proceeds. The Company sold 500,000 of its 2,749,970 shares of SVI at $1.00 per share. The Company also entered into a loan agreement for $500,000 at 8% interest per annum due July 30,
2010. As collateral security for this loan, DARA pledged to SVI 500,000 additional SVI shares owned by the Company (See Note 3).

5. Merger

On February 12, 2008, DARA and Point Therapeutics, Inc. (Point) merged. The Directors of Point and DARA,
respectively, believed that by combining Point and DARA, the combined company would generate improved long-term operating and financial results and establish a stronger competitive position in the industry by gaining access to greater resources,
diversification and increased access to capital. In merging with Point, the DARA board also considered the potential for increased liquidity for its stockholders expected as the result of the Merger.

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

The Merger was accounted for as a reverse acquisition under the purchase method of accounting for business
combinations in accordance with GAAP. Under this method of accounting, Point is treated as the acquired company for financial reporting purposes. On February 12, 2008, Point had approximately $762,000 in cash. Under the terms of the Merger
Agreement, as of the closing of the Merger, the former holders of DARA equity securities acquired 96.4% of the capital stock of the Company (on a fully diluted basis). Immediately following the Merger, the Board of Directors of the Company consisted
of six



12



---

##### Table of Contents

directors, all of whom were former directors of DARA. In addition, the senior management team of DARA manages the operations of the Company, with the exception of the Chairman of the Board of
Directors and Chief Executive Officer who resigned from the Company as of March 21, 2008. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the Merger was treated as the equivalent of the Company issuing stock for the net assets of Point. The net assets of Point were stated at fair value, which approximates historical cost, with no goodwill or other intangible
assets recorded. The Companys deficit accumulated in the development stage was carried forward after the Merger. Following is the allocation of the purchase price to the net assets of Point based on fair values:



|                                  |  |   |           |  
|--------------------------------- |  | - | --------- | -
|Cash                              |  | $ | 772,000   |  
|                                  | 
|Other current assets              |  |   | 480,000   |  
|                                  | 
|Fixed assets, net of depreciation |  |   | 56,000    |  
|                                  | 
|Accrued liabilities               |  |   | (837,000  | )
|                                  | 
|Merger transaction cost expensed  |  |   | 1,272,000 |  
|                                  |  |   |           |  
|                                  | 
|Total purchase price              |  | $ | 1,743,000 |  
|                                  |  |   |           |  

The Merger had no effect on loss per share.

6. Securities Purchase Agreement

On June 15, 2009, the Company entered into a Securities Purchase Agreement with certain accredited investors in connection with the private issuance and sale to such investors of 3,433,884 units. Gross proceeds to the Company from this
sale were $1,397,000, and net proceeds after placement agent fees were approximately $1,298,000. Each unit consisted of (1) one share of common stock and (2) one warrant to purchase one share of common stock. The units were issued and sold
to investors at a price per unit equal to the average of the closing sales price on the NASDAQ Capital Market for one share of common stock for the period of twenty (20) trading days ending on the last trading day prior to the date the investor
executed the securities purchase agreement and deposited the purchase price. With this pricing mechanism, different investors paid different prices in the Private Placement depending on when they signed the Purchase Agreement and submitted their
funds. Purchase prices ranged from $0.39 to $0.55 per unit. Each warrant has an exercise price equal to $0.46, which was the consolidated closing bid price on the trading day prior to the closing date. The warrants are exercisable beginning twelve
months after the date of issuance with an expiration date of five years after the date of issuance. In addition to the warrants issued to investors, the placement agents received a total of 151,848 warrants.

The Company sold the units to certain accredited investors without registration under the Securities Act of 1933, as amended (the
Act), or state securities laws, in reliance on the exemptions provided by Section 4(2) of the Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws. Since the units have not
been registered, they may not be offered or sold by investors absent registration or an applicable exemption from registration requirements, such as the exemption afforded by Rule 144 under the Act. Subject to the volume limit, manner of sale and
other requirements of Rule 144, investors who are not affiliates of the Company would be able to re-sell the shares of the Companys common stock acquired in the Private Placement following a six month holding period.

On September 10, 2009, the Company entered into a Securities Purchase Agreement with certain accredited investors in connection with a
registered direct offering by the Company of 6,578,947 shares of the Companys common stock and 4,934,210 warrants to purchase shares of common stock. The common stock and warrants were issued and sold in units for $0.38 per unit, with each
unit consisting of one share of common stock and three-fourths of a warrant to purchase one share of common stock for each unit purchased. Under the securities purchase agreement, the units were sold at a closing that was completed on
September 14, 2009 for gross proceeds of $2,500,000 and net proceeds after placement agent fees were approximately $2,300,000. In connection with the September 18, 2009 transaction described above, the number of shares covered by these
warrants increased by ten percent to 5,427,630 as the result of the operation of applicable anti-dilution provisions. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $0.56. The warrants
are exercisable beginning March 15, 2010 and expire September 14, 2012.

On September 16, 2009, DARA entered
into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 2,200,000 shares of the Companys common stock and 1,100,000 warrants to purchase shares of common stock.
In the offering, the common stock and warrants were sold in units for $0.5525 per unit, with each unit consisting of one share of common stock and one-half of a warrant to purchase one share of common stock for each unit purchased. The closing of
the sale of units under the Purchase Agreement took place on September 18, 2009 for gross proceeds of $1,215,500 and net proceeds after placement agent fees were approximately $1,118,000. Each warrant entitles the holder to purchase shares of



13



---

##### Table of Contents

common stock for an exercise price per share equal to $0.49. The warrants are immediately exercisable and expire September 18, 2014.

7. Stockholders Equity

Pursuant to the Merger, each share of DARA common stock and preferred stock issued and outstanding immediately prior to the effective time of the merger ceased to be outstanding and was converted into the right to receive 1.031406 shares of
post-merger Company common stock, plus cash in lieu of any fractional shares. Additionally, outstanding options and warrants to purchase shares of DARA common stock became options and warrants to purchase shares of post-merger Company common stock
adjusted as follows: the number of shares acquirable upon exercise was multiplied by 1.031406 and the exercise price per share was divided by 1.031406. As a result of the transaction, the former DARA stockholders received 96.4% of the Companys
outstanding shares of common stock on a fully-diluted basis and Merger Sub merged with and into DARA, with DARA surviving as a wholly-owned subsidiary of the Company.

8. 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.

The fair value of options granted to employees and non-employee directors was estimated using a Black-Scholes option-pricing model and the following weighted-average assumptions:



|                                          |  |                                 |   |  |      |  
|----------------------------------------- |  | ------------------------------- | - |  | ---- | -
|                                          |  | Three months endedSeptember 30, |  
|                                          |  | 2009                            |   |  | 2008 |  
|Expected dividend yield                   |  |                                |   |  |     |  
|Expected volatility                       |  | 82                              | % |  | 79   | %
|Weighted-average expected life (in years) |  | 5.3                             |   |  | 5.8  |  
|Risk free interest rate                   |  | 2.02                            | % |  | 3.02 | %
|Forfeiture rate                           |  | 10                              | % |  | 10   | %

The Companys consolidated statements of operations for the three and nine month
periods ended September 30, 2009 and 2008, respectively, include the following share-based compensation expense related to issuances of stock options to employees and non-employee directors as follows:



|                                                                                            |  |                                 |         |                                |   |         |  |      |         |  |   |          
|------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | ---------
|                                                                                            |  | Three months endedSeptember 30, |         | Nine months endedSeptember 30,
|                                                                                            |  | 2009                            |         | 2008                           |   | 2009    |  | 2008
|Research and development                                                                    |  | $                               | 21,069  |                                | $ | 309,706 |  | $    | 88,618  |  | $ | 481,851  
|General and administrative                                                                  |  |                                 | 81,872  |                                |   | 356,522 |  |      | 182,744 |  |   | 613,229  
|                                                                                            |  |                                 |         |                                |   |         |  |      |         |  |   |          
|Total share-based compensation related to employee and non-employee directors stock options |  | $                               | 102,941 |                                | $ | 666,228 |  | $    | 271,362 |  | $ | 1,095,080
|                                                                                            |  |                                 |         |                                |   |         |  |      |         |  |   |          

The Company issued 500,000 restricted shares to five employees in the three month
period ending September 30, 2009. The Chief Executive Officer/President was awarded 300,000 restricted shares and four employees each were awarded 50,000 restricted shares. The shares will vest 100% on the anniversary of the grant,
September 24, 2010. The Company recognized $3,764 and $941 stock-based compensation expense in general and administrative and research and development, respectively. There was no restricted share expense for employees prior to this period.

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 $10,220 and $22,481 for the three and nine month periods ended September 30, 2009, respectively. The Company recognized $28,157 and $99,731 for the three and nine month periods ended
September 30, 2008, respectively.



14



---

##### Table of Contents

The Company satisfied a $5,000 obligation with a non-cash issuance of shares. The Company
recognized $1,667 of share based expense for the three and nine month periods ended September 30, 2009.

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.

For the three month and nine month periods ended
September 30, 2009, non-employee (i.e. consultants) option expense was $0 and $19,703 for research and development and $1,478 and $4,864 for general and administrative, respectively. For the three month and nine month periods ended
September 30, 2008 non-employee option expense was $0 for both research and development and general and administrative.

In September 2009, the Chief Executive Officer/President exercised 400,000 stock options at $0.25 per share. Also during September 2009, the Chief Accounting Officer exercised 25,000 stock options at $0.43 per share.

Unrecognized share-based compensation expense, including time-based options, performance-based options and restricted stock awards expected
to be recognized over an estimated weighted-average amortization period of 0.57 years was approximately $162,000 at September 30, 2009 and over an estimated weighted-average amortization period of 2.2 years was approximately $1,309,000 at
September 30, 2008.

A summary of activity under the Companys stock option plans for the three month and nine month
periods ended September 30, 2009 is as follows:



|                                         |  |                          |   |  |                     |   |  |                               |     
|---------------------------------------- |  | ------------------------ | - |  | ------------------- | - |  | ----------------------------- | ----
|                                         |  |                          |   |  | Options Outstanding
|                                         |  | Shares Availableto grant |   |  | Number of Shares    |   |  | WeightedAverageExercise Price
|Balance at December 31, 2008             |  | 4,041,408                |   |  | 2,228,213           |   |  | $                             | 2.15
|                                         |  |                          |   |  |                     |   |  |                               |     
|Restricted shares issued to directors    |  | (11,251                  | ) |  |                    |   |  |                               |    
|Shares issued                            |  | (1,000,000               | ) |  | 1,000,000           |   |  |                               | 0.25
|Shares cancelled and forfeited 2003 Plan |  |                         |   |  | (398,121            | ) |  |                               | 2.31
|                                         |  |                          |   |  |                     |   |  |                               |     
|Balance at March 31, 2009                |  | 3,030,157                |   |  | 2,830,092           |   |  |                               | 1.44
|Shares (issued ) forfeited to directors  |  | 29,167                   |   |  |                    |   |  |                               |     
|Options granted                          |  | (150,000                 | ) |  | 150,000             |   |  |                               | 0.43
|Shares cancelled and forfeited           |  | 41,677                   |   |  | (322,870            | ) |  |                               | 2.31
|                                         |  |                          |   |  |                     |   |  |                               |     
|Balance at June 30, 2009                 |  | 2,951,001                |   |  | 2,657,222           |   |  |                               | 1.28
|Shares issued                            |  | (512,195                 | ) |  |                    |   |  |                               |    
|Options exercised                        |  |                         |   |  | (425,000            | ) |  |                               | 0.26
|Shares cancelled and forfeited           |  | 250,000                  |   |  | (800,672            | ) |  |                               | 2.06
|                                         |  |                          |   |  |                     |   |  |                               |     
|Balance at September 30, 2009            |  | 2,688,806                |   |  | 1,431,550           |   |  | $                             | 1.15
|                                         |  |                          |   |  |                     |   |  |                               |     

9. Commitments and Contingencies

On March 10, 2009, the United States Food and Drug Administration (FDA) cleared the Companys Investigational New Drug Application (IND) for DB959,
allowing DARA to commence Phase 1 studies in humans. DB959 is a unique, first-in-class dual peroxisome proliferator activated receptor (PPAR) delta/gamma agonist and is intended for use in the treatment of Type 2 Diabetes Mellitus
(T2D) including addressing the abnormalities in cholesterol and triglycerides in these patients. DARA plans to study DB959 as both monotherapy and in combination with other standard glucose lowering agents such as metformin,
dipeptidyl-peptidase IV (DPP-IV) inhibitors, sulphonylureas (SU), and metformin/SU combinations. DARA is in the process of evaluating strategies for raising additional capital and/or forming strategic partnerships to fund
further clinical development. Under the terms of its third party license agreement, this IND approval triggers a $500,000 milestone payment to be paid within 90 days.



15



---

##### Table of Contents

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.

10. Income
Taxes

The Company did not record any current tax expense in the three and nine month periods ended September 30, 2009
and 2008.

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 Company adopted the provisions of ASC 740 Income Taxes as of January 1, 2007. The Company had approximately $264,723 and
$253,174 of unrecognized tax liabilities at September 30, 2009 and December 31, 2008, respectively, which if recognized, would affect the effective tax rate for computing tax expense for the six and twelve month periods then ended,
respectively. Consistent with prior periods, the Company accrued interest and penalties, if any, within its interest expense.

11. Employee
Benefit Plan

As part of the Companys cost reduction program, effective April 1, 2009, the Company amended its
contribution to the employee benefit plan to remove the Safe Harbor Cash or Deferred Arrangement provisions. The plan provides for voluntary employee contributions and a discretionary matching employer contribution equal to amounts that do not
exceed the maximum amounts allowed by the Internal Revenue Service. The defined contribution plan match prior to the effective date of the amendment was $6,524. The Company does not anticipate matching employee contributions for the remainder of the
year.

12. Subsequent Events

The Company has evaluated subsequent events through November 13, 2009, which represents the date the Companys Form 10-Q for the quarter ended September 30, 2009 was filed with the
Securities and Exchange Commission.

On October 13, 2009, DARA entered into a Securities Purchase Agreement with certain
accredited investors in connection with a registered direct offering by the Company of 1,400,037 shares of the Companys common stock and 700,018 warrants to purchase shares of common stock. In the offering, the common stock and warrants were
sold in units for $0.5357 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. Under the securities purchase agreement, the units were sold at a
closing that was completed on October 14, 2009 for gross proceeds of $750,000. Each warrant entitles the holder to purchase shares of common stock for an exercise price per share equal to $0.4732. The warrants are immediately exercisable and
expire October 14, 2014.

On October 9, 2009, DARA entered into an Addendum and First Amendment to Material Transfer
Agreement (the Amendment) with America Stem Cell, Inc. pursuant to which the Material Transfer Agreement between the Company and America Stem Cell dated March 24, 2008 (the Agreement) was amended. Under the
Agreement, the Company is providing America Stem Cell with dipeptidylpeptidase (DPP-IV) inhibitors from its proprietary library which America Stem Cell is using to further its research and development program related to hematopoietic stem cell (HSC)
transplants (the Program). Under the Agreement as amended by the Amendment, America Stem Cell is required to pay the Company a total of $250,000, in four equal installments over approximately three years, contingent upon America Stem
Cells receipt of at least $3 million in grant funding for the Program.



16



---

##### Table of Contents

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

The following discussion and analysis should be read in conjunction with our Consolidated Financial
Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report
includes forward-looking statements based on our current managements expectations. There can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future program dispositions and operating results, competitive pressures and the other potential risks and
uncertainties discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

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



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



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



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

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

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

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

We have not generated any revenue from operations to date. We have liquidated or distributed to our stockholders some of our investments made in other companies. To date, we have
received net proceeds from the sale of those assets in the amount of $1,951,211 in sale of marketable securities and $4,405,692 in proceeds from sale of an investment. These proceeds together with capital raised from the sale of our securities have
been our primary source of working capital.

We expect to continue to incur operating losses in the near-term. Our results may
vary depending on many factors, including pre-clinical and clinical test results, the performance of our strategic outsource partners and the progress of licensing activities with pharmaceutical partners.



17



---

##### Table of Contents

Status of our Drug Candidates

We currently have a portfolio of five programs with drug candidates for the treatment of neuropathic pain, type 2 diabetes and psoriasis. In connection with a cost reduction plan we
announced on January 6, 2009 necessitated by our inability to raise sufficient funds to maintain all of our programs, we have focused our resources entirely towards the development of our two most advanced programs, KRN5500 and DB959. Due to
this allocation of resources, development of our other three programs, DB160, DB900 and DB200 has been delayed. Based on our present working capital, we believe that we have sufficient working capital to maintain our KRN5500 and DB959 development
programs on a limited basis into the second quarter of 2010 and that we will require additional funding to meet our working capital needs to progress those programs to a liquidity event through a collaboration, sale or out-license. A brief
discussion of the status of each of our drug candidates follows.

KRN5500

KRN5500 is a drug candidate with development for the treatment of neuropathic pain in cancer patients. An active component of KRN5500 has been shown to inhibit nerve cell pain
signals. The primary segment of this market being targeted is chemotherapy-induced neuropathic pain (CINP). On May 12, 2009, the Company announced positive results from the recently completed Phase 2a clinical trial in cancer patients with
neuropathic pain to assess its safety and efficacy. A second larger Phase 2 trial is planned for initiation in the fourth quarter 2009 assuming sufficient additional funding is secured or through a collaboration or out-license.

We incurred approximately $144,000 and $422,000 in development costs associated with the development of KRN5500 during the three and nine
month periods ended September 30, 2009, respectively, and we have incurred costs of approximately $3,391,000 from inception to September 30, 2009. We estimate the market potential for chemotherapy-induced neuropathy to be roughly $1.6
billion in 2014.

DB959

DB959 is a PPARd/g agonist for the treatment of type 2 diabetes. In March 2009, the FDA cleared our IND
application for DB959, allowing us to commence Phase 1 studies in humans. 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 is being conducted under an exclusive worldwide license to develop
and commercialize the drug candidate from Bayer Pharmaceuticals Corp (Bayer). This license, which was entered into in October 2007, gives the Company rights to over 2,000 compounds with agonist activities toward multiple PPAR sub-types.
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 license 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 approximately $77,000 and $733,000 in development costs associated with the development of DB959 during the three and nine month periods ended September 30, 2009,
respectively, and we have incurred costs of approximately $4,099,000 from inception to September 30, 2009. We estimate the market potential for the PPAR agonist segment of type 2 Diabetes market to be roughly $5.4 billion in 2010.

Based on recently published literature, the Company is exploring the PPARs in its library for the treatment of Alzheimers disease,
Multiple sclerosis (MS), liver disease, and autoimmune disease.

DB160

DB160 is a DPP-IV inhibitor for the treatment of type 2 diabetes. DPP-IV is an enzyme that inactivates a key hormone involved in promoting control of blood sugar levels thus giving
diabetics better control of their blood sugar levels. Prior to the implementation of the cost reduction plan, the Company was developing this drug candidate as a once-daily oral therapy. We are currently negotiating with America Stem Cell to provide
America Stem Cell with dipeptidylpeptidase (DPP-IV) inhibitors from the Companys proprietary library for America Stem Cell to use to further its research and development



18



---

##### Table of Contents

program related to hematopoietic stem cell (HSC) transplants. 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 to 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 approximately $4,000 and $13,000 in direct outside
development costs associated with the development of DB160 for the three and nine month periods ended September 30, 2009, respectively, and we have incurred costs of approximately $2.3 million from inception to date. We estimate the market
potential for the DPP-IV inhibitor segment of the type 2 diabetes market to be roughly $5.1 billion in 2016.

DB900

DB900 is a series of compounds which are PPARg/a/d agonists for the treatment of type 2 diabetes. This compound activates genes involved in the metabolism of sugars and fats thereby improving the bodys
ability to regulate blood sugar. 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. Our development work with DB900 is pursuant to an exclusive worldwide license to develop and commercialize the drug
candidate from Bayer Pharmaceuticals Corp.

We incurred approximately $0 and $14,000 in direct outside development costs
associated with the development of DB900 series compounds for the three and nine month periods ended September 30, 2009, respectively, and we have incurred costs of approximately $129,000 from inception to date.

DB200

DB200 refers to a
series of compounds we have which are inhibitors of CPT-1 for the topical treatment of psoriasis. This drug candidate has the potential to inhibit inflammation and the proliferation of skin cells thus resulting in decreased reddening and less
flaking of the skin. 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 is to file an IND application to the FDA. There are no third party licenses associated with this program.

We incurred approximately $0 and less than $1,000 in direct development costs associated with the development of DB200 series compounds for
the three and nine month periods ended September 30, 2009, respectively, and we have incurred costs of approximately $377,000 from inception to date. We estimate the market potential for the topical agent segment of the psoriasis market to be
roughly $3.6 billion in 2014.

Critical Accounting Policies and Significant Judgments and Estimates

This Managements Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial
statements, which have been prepared in accordance with 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 research and development expenses, accrued expenses and share-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

We expense research and
development expenses when incurred. The costs 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



19



---

##### Table of Contents

development work ceases to progress for whatever reason, are not repayable to us. In such cases, those costs are expensed when paid.

Accrued Expenses

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



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



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



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



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

Share-Based Compensation

Share-based compensation is accounted for using the fair value based method
prescribed by FASB ASC 718 . 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 $117,867 and $666,228 for the three month periods ended September 30, 2009 and 2008,
respectively, and $298,548 and $1,095,080 for the nine month periods ended September 30, 2009 and 2008, respectively. The Company recognized stock-based compensation expense for awards to non-employees totaling $1,478 and $24,567 for the three
and nine months ended September 30, 2009, respectively. The Company did not have any non-employee option expense for the three and nine months ended September 30, 2008.

Significant Judgments and Estimates

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

Results of Operations

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Research and development expenses decreased approximately $2,409,000, from approximately $2,705,000 for the three months ended
September 30, 2008 to approximately $296,000 for the corresponding 2009 period, primarily as a result of the implementation of a cost reduction plan to conserve our remaining cash balance and to the delay in the development of three of the
Companys drug programs.

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 decreased approximately $709,000, from approximately $1,272,000 for the three months ended September 30, 2008 to approximately $563,000 for the corresponding 2009 period, as a result of the
implementation of a cost reduction plan to conserve our remaining cash balance.

Other (expense) income, net reflects
non-operating activities associated with investments and dispositions on investments made in collaborations with other companies. Other (expense) income, net decreased approximately $20,000 from an income



20



---

##### Table of Contents

of approximately $6,000 for the three months ended September 30, 2008 to an expense of approximately $14,000 for the corresponding 2009 period. The increase in expense is primarily due the
expense accrual for the SVI loan.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Research and development expenses decreased approximately $4,748,000, from approximately $6,197,000 for the nine months ended
September 30, 2008 to approximately $1,449,000 for the corresponding 2009 period, primarily as a result of the implementation of a cost reduction plan to conserve our remaining cash balance and to the delay in the development of three of the
Companys drug programs.

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 decreased approximately $1,438,000, from approximately $3,538,000 for the nine months ended September 30, 2008 to approximately $2,100,000 for the corresponding 2009 period, primarily as a result of
the substantial expenses we incurred in the first quarter of 2008 in connection with the Merger and becoming a public company and the implementation of a cost reduction plan to conserve our remaining cash balance.

Other (expense) income, net reflects non-operating activities associated with investments and dispositions on investments made in
collaborations with other companies. Other (expense) income, net increased approximately $574,000 from income of approximately $115,000 for the nine months ended September 30, 2008 to income of approximately $689,000 for the corresponding 2009
period. The increase is primarily due to the gain on investments of approximately $551,000 from the distribution of SurgiVision stock, as well as the gain on the Companys sale of its marketable securities of approximately $178,000, offset by
disposition of equipment and interest expense.

Liquidity and Capital Resources

Overview

From inception
through September 30, 2009, 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 approximately $29,907,000 in net proceeds,
including approximately $3,418,000 in net proceeds from the Companys two registered direct offerings in September 2009 and $1,298,000 in net proceeds from the Companys private placement in June 2009 pursuant to the Purchase Agreement
(see following discussion), (2) the sale of securities we acquired through investments made in other companies, through which we raised approximately $6,260,000, and (3) a $500,000 loan we received from SurgiVision, Inc.

At September 30, 2009, our principal sources of liquidity were our cash and cash equivalents which totaled approximately $4,037,000. As
of September 30, 2009, we had net working capital of approximately $2,386,000. Our cash resources have been used to acquire licenses, fund research and development activities, capital expenditures, and general and administrative expenses. Over
the next several years, we expect to incur substantial additional research and development costs, including costs related to preclinical and clinical trials, increased administrative expenses to support our research and development operations and
increased capital expenditures, and various equipment needs and facility improvements.

On September 16, 2009, we entered
into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 2,200,000 shares of the Companys common stock and 1,100,000 warrants to purchase shares of common stock.
Our gross proceeds from this sale were approximately $1,216,000, and net proceeds after placement agent fees were approximately $1,118,000.

On September 10, 2009, we entered into a Securities Purchase Agreement with certain accredited investors in connection with a registered direct offering by the Company of 6,578,947 shares of the
Companys common stock and 4,934,210 warrants to purchase shares of common stock. Our gross proceeds from this sale were approximately $2,500,000, and net proceeds after placement agent fees were approximately $2,300,000. In connection with the
entry into the Securities Purchase Agreement on September 16, 2009 as described above, the number of shares covered by these warrants increased by ten percent to 5,427,630 as the result of the operation of applicable anti-dilution provisions.

On June 15, 2009, we entered into a Securities Purchase Agreement with certain accredited investors in connection with
the private issuance and sale to such investors of 3,433,884 units. Each unit consisted of (1) one share of common stock and (2)



21



---

##### Table of Contents

one warrant to purchase one share of common stock. Our gross proceeds from this sale were $1,397,000, and net proceeds after placement agent fees were approximately $1,298,000.

Cash Flows

During the nine
month period ended September 30, 2009, cash used in our operating activities was approximately $2,880,000. This decrease in cash from operations was primarily due to the operating loss offset in part by non-cash stock-based compensation of
approximately $325,000 and depreciation and amortization of approximately $119,000. Prepaid expenses decreased by approximately $32,000 for the nine month period ended September 30, 2009, primarily representing prepaid director and officer
insurance coverage. Accounts payable increased by approximately $193,000 and accrued liabilities decreased by approximately $60,000 during the nine month period ended September 30, 2009, primarily due to the $100,000 milestone payment to Bayer
and corresponding $400,000 in accounts payable for the cleared IND application for DB959.

Our investing activities provided
net cash of approximately $667,000 for the nine month period ended September 30, 2009, primarily as a result of proceeds of approximately $178,000 from sale of marketable securities and proceeds of $500,000 from the sale of an investment,
offset by payments on capital lease and purchase of equipment.

We generated approximately $5,000,000 of cash from the
issuance of common stock and warrants during the nine month period ended September 30, 2009. We generated approximately $111,000 from the exercise of options during the nine month period ended September 30, 2009. The Company entered into a
loan agreement for $500,000 at 8% interest per annum due July 30, 2010.

Financial Condition

We believe we have sufficient working capital to pursue our current limited operations into the second quarter of 2010. 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. We have no commitments to obtain any additional funds and there can be no assurance such
funds will be available on acceptable terms or at all. If we are unable to obtain such needed capital, we may not be able to:



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



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



| |  |  | respond to customers and competition; or
| | - |  | ----------------------------------------



| |  |  | remain in operation.
| | - |  | --------------------

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2009
that have or are reasonably likely to have a current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that
is material to investors.

NASDAQ Delisting Notice

On April 6, 2009, we received a letter from the NASDAQ Stock Market (NASDAQ) notifying us that, based on our Form 10-K for the period ended December 31, 2008, we no longer maintained
the minimum $2,500,000 stockholders equity



22



---

##### Table of Contents

required for continued listing on The NASDAQ Capital Market under Marketplace Stockholders Equity Rule 4310(c)(3) (the Stockholders Equity Rule). On October 22, 2009,
the Company received notification from NASDAQ indicating that the Company had demonstrated compliance with the Stockholders Equity Rule.

On September 15, 2009, we received a letter from NASDAQ stating that the minimum bid price of the our common stock was below $1.00 per share for 30 consecutive business days and that we were
therefore not in compliance with Marketplace Rule 5550(a)(2) (the Minimum Bid Price Rule). The notification letter states that DARA will be afforded 180 calendar days, or until March 15, 2010, to regain compliance with the Minimum
Bid Price Rule. In accordance with Marketplace Rule 5810(c)(3)(a), we will regain compliance if the closing bid price of the our common stock meets or exceeds $1.00 per share for at least 10 consecutive business days.

If we do not regain compliance with the Minimum Bid Price Rule by March 15, 2010, our common stock may be delisted from NASDAQ.

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

Cautionary Information regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. When used in this Form 10-Q, the words believe, anticipates, intends, plans, estimates, and similar expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-Q are based on managements current expectations. These statements and expectations are based on currently available competitive, financial and economic data along with our operating plans, and are subject to future
events and uncertainties that could cause anticipated events not to occur or actual results to differ materially from historical or anticipated results. Forward-looking statements may address the following subjects: results of operations;
development of drug candidates; operating expenses, including research and development expense; capital resources and access to financing; and results of clinical trials. We caution investors that there can be no assurance that actual results,
outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, the potential risks and uncertainties described in our Annual
Report on Form 10-K for the year ended December 31, 2008 under Part I, Item 1A  Risk Factors.

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
Exchange Act), our management, including our Chief Executive Officer and Chief Accounting Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures
as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer have concluded that these disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by us in reports that we file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in Securities and Exchange
Commission rules and forms. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired



23



---

##### Table of Contents

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.

During the nine month period ended
September 30, 2009, 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.



24



---

##### Table of Contents

PART IIOTHER INFORMATION

Item 1. Legal Proceedings

As of November 
13, 2009, we had no outstanding material legal proceedings.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not
applicable.

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

The Annual Meeting of Stockholders of DARA BioSciences, Inc. (the Corporation) was held August 12, 2009 at the
Corporations offices at 8601 Six Forks Road, Suite 160, Raleigh, North Carolina 27615 at 11:00 a.m. local time. The Board of Directors had fixed June 26, 2009 as the record date for the Annual Meeting and provided appropriate notice
concerning the availability of a list of stockholders of record for inspection by stockholders of the Corporation. More than a majority of the outstanding voting power represented by shares of Common Stock of the Corporation was represented at the
meeting in person or by proxy. The following proposals were submitted and approved by the stockholders at the meeting:



| | 1. | Election of four nominees to the Board of Directors:
| | -- | ----------------------------------------------------



|                         |  |            |  |               
|------------------------ |  | ---------- |  | --------------
|                         |  | Votes For  |  | Votes Withheld
|Richard A. Franco, Sr.   |  | 23,557,559 |  | 137,018       
|Haywood D. Cochrane, Jr. |  | 23,593,465 |  | 101,112       
|David J. Drutz, M.D.     |  | 23,593,739 |  | 100,838       
|Gail F. Lieberman        |  | 23,574,446 |  | 120,131       



| | 2. | Approval of the issuance of shares of the Corporations Common Stock in connection with a private placement transaction (28,201,143 for, 23,883
against, 12,898,576 broker non-votes, 591 abstaining).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Ratification of the selection of Ernst & Young LLP as independent public accountants for fiscal 2009 (23,524,514 for, 29,280 against,
140,783 abstaining).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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



25



---

##### Table of Contents

SIGNATURES

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



|                        |  |  |  |                        |  |                                      
|----------------------- |  |  |  | ---------------------- |  | -------------------------------------
|                        |  |  |  | DARA BIOSCIENCES, INC.
|                        |  |  | 
|Date: November 13, 2009 |  |  |  | By:                    |  | /s/ Richard A. Franco                
|                        |  |  |  |                        |  | Richard A. Franco                    
|                        |  |  |  |                        |  | President and Chief Executive Officer
|                        |  |  | 
|Date: November 13, 2009 |  |  |  | By:                    |  | /s/ Ann A. Rosar                     
|                        |  |  |  |                        |  | Ann A. Rosar                         
|                        |  |  |  |                        |  | Chief Accounting Officer             



26



---

##### Table of Contents

EXHIBIT INDEX

Item 15(c) Exhibits:



|           |  |                                                                                                                                            |  |                                                                                          
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                |  | Incorporated by Reference to                                                             
|4.1        |  | Form of Warrant                                                                                                                            |  | Incorporated by reference to the Companys Report on Form 8-K filed on September 14, 2009
|           |  |                                                                                                                                           
|4.2        |  | Form of Warrant                                                                                                                            |  | Incorporated by reference to the Companys Report on Form 8-K filed on September 21, 2009
|           |  |                                                                                                                                           
|10.1       |  | Form of Securities Purchase Agreement dated September 10, 2009, by and between DARA BioSciences, Inc. and the purchasers signatory thereto |  | Incorporated by reference to the Companys Report on Form 8-K filed on September 14, 2009
|           |  |                                                                                                                                           
|10.2       |  | Placement Agent Agreement, dated August 21, 2009, by and between DARA BioSciences, Inc. and Moody Capital Solutions, Inc.                  |  | Incorporated by reference to the Companys Report on Form 8-K filed on September 14, 2009
|           |  |                                                                                                                                           
|10.3       |  | Form of Securities Purchase Agreement dated September 16, 2009, by and between DARA BioSciences, Inc. and the purchasers signatory thereto |  | Incorporated by reference to the Companys Report on Form 8-K filed on September 21, 2009
|           |  |                                                                                                                                           
|31.1       |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                     |  |                                                                                          
|           |  |                                                                                                                                           
|31.2       |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                     |  |                                                                                          
|           |  |                                                                                                                                           
|32         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                     |  |                                                                                          



27