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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended June 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  x    No   ̈



Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).    Yes   ̈    No   ̈

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



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

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

The number of shares outstanding of the Registrants common stock as of August 12, 2009 was approximately 33,517,296.









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Table of Contents



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|        |  | PART I - FINANCIAL INFORMATION                                                        |  |     
|Item 1. |  | Financial Statements                                                                  |  | 3   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 22  
|Item 4. |  | Controls and Procedures                                                               |  | 22  
|        |  |                                                                                      
|        |  | PART II - OTHER INFORMATION                                                           |  |     
|Item 1. |  | Legal Proceedings                                                                     |  | 23  
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 23  
|Item 3. |  | Defaults Upon Senior Securities                                                       |  | 23  
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 23  
|Item 5. |  | Other Information                                                                     |  | 23  
|Item 6. |  | Exhibits                                                                              |  | 23  



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##### Table of Contents

PART I - FINANCIAL INFORMATION



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

DARA BioSciences, Inc.

(a Development Stage Company)

Consolidated Balance Sheet



|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                              |  | June 30,2009(unaudited) |             |   | December 31,2008 |  
|Assets                                                                                                                                                                        |  |                         |             |   |                  |   |             |  
|Current assets:                                                                                                                                                               |  |                         |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                     |  | $                       | 1,374,665   |   |                  | $ | 959,898     |  
|Marketable securities                                                                                                                                                         |  |                         |            |   |                  |   | 1,656,408   |  
|Interest receivable                                                                                                                                                           |  |                         | 52          |   |                  |   |            |  
|Prepaid expenses, current portion                                                                                                                                             |  |                         | 227,604     |   |                  |   | 113,694     |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total current assets                                                                                                                                                          |  |                         | 1,602,321   |   |                  |   | 2,730,000   |  
|                                                                                                                                                                              |  |                        
|Furniture, fixtures and equipment, net                                                                                                                                        |  |                         | 90,183      |   |                  |   | 112,253     |  
|Restricted cash                                                                                                                                                               |  |                         | 78,641      |   |                  |   | 78,105      |  
|Prepaid expenses, net of current portion                                                                                                                                      |  |                         | 251,330     |   |                  |   | 285,996     |  
|Prepaid license fee, net                                                                                                                                                      |  |                         | 400,000     |   |                  |   | 460,000     |  
|Investments                                                                                                                                                                   |  |                         | 173,889     |   |                  |   | 222,479     |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total assets                                                                                                                                                                  |  | $                       | 2,596,364   |   |                  | $ | 3,888,833   |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|                                                                                                                                                                              |  |                        
|Liabilities and stockholders equity                                                                                                                                          |  |                         |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                          |  |                         |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                              |  | $                       | 607,913     |   |                  | $ | 866,081     |  
|Accrued liabilities                                                                                                                                                           |  |                         | 850,060     |   |                  |   | 328,117     |  
|Other financing agreements                                                                                                                                                    |  |                         | 16,250      |   |                  |   |            |  
|Capital lease obligation, current portion                                                                                                                                     |  |                         | 14,581      |   |                  |   | 12,951      |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                     |  |                         | 1,488,804   |   |                  |   | 1,207,149   |  
|                                                                                                                                                                              |  |                        
|Deferred lease obligation                                                                                                                                                     |  |                         | 8,930       |   |                  |   | 5,933       |  
|Accrued interest on note payable - SVI                                                                                                                                        |  |                         | 16,666      |   |                  |   |            |  
|Note payable - SVI                                                                                                                                                            |  |                         | 500,000     |   |                  |   |            |  
|Other liability                                                                                                                                                               |  |                         | 260,774     |   |                  |   | 253,174     |  
|Capital lease obligation, net of current portion                                                                                                                              |  |                         | 41,251      |   |                  |   | 48,973      |  
|Patent obligation                                                                                                                                                             |  |                         | 20,261      |   |                  |   | 20,261      |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                             |  |                         | 2,336,686   |   |                  |   | 1,535,490   |  
|                                                                                                                                                                              |  |                        
|Equity:                                                                                                                                                                       |  |                         |             |   |                  |   |             |  
|Common stock, $.01 par value; 75,000,000 shares authorized, 33,517,296 issued and outstanding as of June 30, 2009. 30,113,829 issued and
outstanding as of December 31, 2008. |  |                         | 335,173     |   |                  |   | 301,138     |  
|Additional paid in capital                                                                                                                                                    |  |                         | 25,812,556  |   |                  |   | 24,296,934  |  
|Accumulated other comprehensive income                                                                                                                                        |  |                         |            |   |                  |   | 1,656,008   |  
|Deficit accumulated during the development stage                                                                                                                              |  |                         | (26,446,618 | ) |                  |   | (24,549,937 | )
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total stockholders (deficit) equity                                                                                                                                          |  |                         | (298,889    | ) |                  |   | 1,704,143   |  
|Noncontrolling interest                                                                                                                                                       |  |                         | 558,567     |   |                  |   | 649,200     |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total equity                                                                                                                                                                  |  |                         | 259,678     |   |                  |   | 2,353,343   |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  
|Total liabilities and equity                                                                                                                                                  |  | $                       | 2,596,364   |   |                  | $ | 3,888,833   |  
|                                                                                                                                                                              |  |                         |             |   |                  |   |             |  

See accompanying notes.



3



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|-------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | --------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                     |  | Three
months ended June 30, |            |   | Six months ended June 30, |   |            | Period from June 22,2002
(inception)through June 30, 2009 | 
|                                                                     |  | 2009                        |            |   | 2008                      |   |            | 2009                                                      |  |   | 2008       |   | 
|Operating expenses:                                                  |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Research and development                                             |  | $                           | 262,901    |   |                           | $ | 2,030,369  |                                                           |  | $ | 1,153,459  |   |  | $ | 3,492,481  |   |  | $ | 18,524,530  |  
|General and administrative                                           |  |                             | 575,457    |   |                           |   | 1,044,769  |                                                           |  |   | 1,536,923  |   |  |   | 2,266,301  |   |  |   | 18,144,447  |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Total operating expenses                                             |  |                             | 838,358    |   |                           |   | 3,075,138  |                                                           |  |   | 2,690,382  |   |  |   | 5,758,782  |   |  |   | 36,668,977  |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Loss from operations                                                 |  |                             | (838,358   | ) |                           |   | (3,075,138 | )                                                         |  |   | (2,690,382 | ) |  |   | (5,758,782 | ) |  |   | (36,668,977 | )
|                                                                     |  |                             |            |   |                          
|Other income (expense):                                              |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Gain on distribution of nonmonetary asset                            |  |                             |           |   |                           |   |           |                                                           |  |   | 551,410    |   |  |   |           |   |  |   | 5,220,453   |  
|Other income (expense), net                                          |  |                             |           |   |                           |   |           |                                                           |  |   |           |   |  |   |           |   |  |   | 135,899     |  
|Interest (expense) income                                            |  |                             | (14,629    | ) |                           |   | (60,304    | )                                                         |  |   | (23,856    | ) |  |   | 127,798    |   |  |   | 767,229     |  
|Gain (loss) on disposal of assets                                    |  |                             | 575        |   |                           |   | (18,964    | )                                                         |  |   | (2,210     | ) |  |   | (18,964    | ) |  |   | (18,191     | )
|Gain on sale of marketable securities                                |  |                             | 96,410     |   |                           |   |           |                                                           |  |   | 177,724    |   |  |   |           |   |  |   | 5,827,356   |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Other income (expense)                                               |  |                             | 82,356     |   |                           |   | (79,268    | )                                                         |  |   | 703,068    |   |  |   | 108,834    |   |  |   | 11,932,746  |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|                                                                     |  |                             |            |   |                          
|Loss before undistributed loss in equity method investments          |  |                             | (756,002   | ) |                           |   | (3,154,406 | )                                                         |  |   | (1,987,314 | ) |  |   | (5,649,948 | ) |  |   | (24,736,231 | )
|Undistributed loss in equity method investments                      |  |                             |           |   |                           |   |           |                                                           |  |   |           |   |  |   |           |   |  |   | (2,374,422  | )
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Consolidated net loss                                                |  |                             | (756,002   | ) |                           |   | (3,154,406 | )                                                         |  |   | (1,987,314 | ) |  |   | (5,649,948 | ) |  |   | (27,110,653 | )
|                                                                     |  |                             |            |   |                          
|Net loss attributable to non-controlling interest                    |  |                             | 45,827     |   |                           |   | 75,144     |                                                           |  |   | 90,633     |   |  |   | 149,576    |   |  |   | 883,382     |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|                                                                     |  |                             |            |   |                          
|Net loss attributable to controlling interest                        |  | $                           | (710,175   | ) |                           | $ | (3,079,262 | )                                                         |  | $ | (1,896,681 | ) |  | $ | (5,500,372 | ) |  | $ | (26,227,271 | )
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|                                                                     |  |                             |            |   |                          
|Basic and diluted net loss per common share                          |  | $                           | (0.02      | ) |                           | $ | (0.11      | )                                                         |  | $ | (0.06      | ) |  | $ | (0.20      | ) |  |   |             |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  
|Shares used in computing basic and diluted net loss per common share |  |                             | 30,579,095 |   |                           |   | 27,331,397 |                                                           |  |   | 30,347,298 |   |  |   | 27,281,120 |   |  |   |             |  
|                                                                     |  |                             |            |   |                           |   |            |                                                           |  |   |            |   |  |   |            |   |  |   |             |  

See accompanying notes.



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                            |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | -------------------------------------------------- | - | ---------- | ---- |  | - | ----------- | -
|                                                                            |  | Six months endedJune 30, |            |   | Period FromJune 22, 2002(inception)throughJune 30, |  
|                                                                            |  | 2009                     |            |   | 2008                                               |   |            | 2009 | 
|Operating activities                                                        |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|Consolidated net loss                                                       |  | $                        | (1,987,314 | ) |                                                    | $ | (5,649,948 | )    |  | $ | (27,110,653 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|Depreciation and amortization                                               |  |                          | 111,741    |   |                                                    |   | 74,440     |      |  |   | 370,401     |  
|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                                                  |  |                          |           |   |                                                    |   | 290        |      |  |   | 406,359     |  
|Shares issued to directors for services                                     |  |                          | 12,262     |   |                                                    |   | 71,574     |      |  |   | 148,802     |  
|Share-based compensation                                                    |  |                          | 191,509    |   |                                                    |   | 428,852    |      |  |   | 4,067,512   |  
|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                       |  |                          | 2,785      |   |                                                    |   | 19,339     |      |  |   | 36,805      |  
|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                                                   |  |                          | 2,997      |   |                                                    |   | (2,940     | )    |  |   | 8,931       |  
|Changes in operating assets and liabilities:                                |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|Interest receivable                                                         |  |                          | (588       | ) |                                                    |   | 44,429     |      |  |   | (588        | )
|Prepaid license fee and other prepaid expenses                              |  |                          | (97,660    | ) |                                                    |   | 8,148      |      |  |   | (616,713    | )
|Accounts payable                                                            |  |                          | (258,168   | ) |                                                    |   | 557,418    |      |  |   | 277,913     |  
|Accrued liabilities                                                         |  |                          | 538,609    |   |                                                    |   | (480,201   | )    |  |   | 161,349     |  
|Other liability                                                             |  |                          | 7,600      |   |                                                    |   |           |      |  |   | 23,226      |  
|                                                                            |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|Net cash used in operating activities                                       |  |                          | (2,057,655 | ) |                                                    |   | (4,928,599 | )    |  |   | (29,286,174 | )
|                                                                            |  |                          |           
|Investing activities                                                        |  |                          |            |   |                                                    |   |            |      |  |   |             |  
|Purchases of furniture, fixtures, and equipment                             |  |                          |           |   |                                                    |   | (16,019    | )    |  |   | (189,063    | )
|Proceeds from sale of furniture, fixtures, and equipment                    |  |                          | 2,210      |   |                                                    |   | 375        |      |  |   | 6,526       |  
|Payments on capital lease                                                   |  |                          | (6,092     | ) |                                                    |   | (1,766     | )    |  |   | (2,375      | )
|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                                   |  |                          | 674,242    |   |                                                    |   | 754,261    |      |  |   | 3,783,307   |  



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DARA BIOSCIENCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)



|                                                                           |  |                          |           |      |                                                    |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- | -------------------------------------------------- | ---------- | ---- |  | - | ---------- | -
|                                                                           |  | Six months endedJune 30, |           |      | Period FromJune 22, 2002(inception)throughJune 30, |           
|                                                                           |  | 2009                     |           | 2008 |                                                    |            | 2009 | 
|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                             |  |                          |          |      |                                                    |           |      |  |   | 80,051     |  
|Proceeds from issuance of common stock and warrants, net of issuance costs |  |                          | 1,298,180 |      |                                                    | 188,554    |      |  |   | 26,525,586 |  
|Establishment of restricted cash                                           |  |                          |          |      |                                                    |           |      |  |   | (78,105    | )
|                                                                           |  |                          |           |      |                                                    |            |      |  |   |            |  
|Net cash provided by financing activities                                  |  |                          | 1,798,180 |      |                                                    | 188,554    |      |  |   | 26,877,532 |  
|                                                                           |  |                          |           |      |                                                    |            |      |  |   |            |  
|                                                                           |  |                          |          
|Net increase (decrease) in cash and cash equivalents                       |  |                          | 414,767   |      |                                                    | (3,985,784 | )    |  |   | 1,374,665  |  
|                                                                           |  |                          |          
|Cash and cash equivalents at beginning of period                           |  |                          | 959,898   |      |                                                    | 8,263,006  |      |  |   |           |  
|                                                                           |  |                          |           |      |                                                    |            |      |  |   |            |  
|Cash and cash equivalents at end of period                                 |  | $                        | 1,374,665 |      | $                                                  | 4,277,222  |      |  | $ | 1,374,665  |  
|                                                                           |  |                          |           |      |                                                    |            |      |  |   |            |  
|                                                                           |  |                          |          
|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                           |  |                          |          |      |                                                    | 1,604,008  |      |  |   | 1,604,008  |  
|Forgiveness of stock subscription receivable                               |  |                          |          |      |                                                    |           |      |  |   | 242,500    |  
|Shares issued to directors for services                                    |  |                          | 12,262    |      |                                                    | 71,574     |      |  |   | 148,802    |  
|Shares issued to third party for services                                  |  |                          |          |      |                                                    |           |      |  |   | 322,261    |  
|Conversion of note into equity of subsidiary                               |  |                          |          |      |                                                    |           |      |  |   | 1,441,948  |  



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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 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 in the development stage. The Company has incurred losses since inception through
June 30, 2009 of $26,227,271 and expects to continue to incur losses and require additional financial resources to achieve commercialization of its products.

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

Going Concern

The Company has incurred significant net losses and
has had negative cash flows from operations during each period from inception through June 30, 2009 and has a deficit accumulated during the development stage of $26,446,618 at June 30, 2009. Management expects operating losses and
negative cash flows to continue during 2009 and into the foreseeable future.

At June 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 into the second quarter of 2010. To date, the Company has principally raised capital
through public and private placements of its equity securities. 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. 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.

The accompanying unaudited consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. However, as presented in the unaudited consolidated financial statements at June 30, 2009, DARA had unrestricted cash of $1,374,665 and
the Company also incurred a net loss attributable to controlling interest of $1,896,681 and negative cash flows from operations of $2,057,655 during the six month period ended June 30, 2009. As a result, there exists substantial doubt about the
Companys ability to continue as a going concern. The unaudited consolidated financial statements as of and for the period ended June 30, 2009 do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Companys ability to continue as a going concern.

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, the Company is now focusing on the two lead drug candidates and has suspended work on three.

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



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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.

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 Therapeutics, Inc. and Signum
Pharmaceuticals, Inc. The Company has control of all subsidiaries, and as such, they are all consolidated in the presentation of the consolidated financial statements. All significant intercompany transactions have been eliminated in the
consolidation.

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 Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities (SFAS 115).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 SFAS 115, 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 SFAS No. 157, Fair
Value Measurements (SFAS 157) to value its financial assets and liabilities.

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



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

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

Level 3 Inputs Instruments with primarily
unobservable value drivers.

In determining fair value, the Company utilizes techniques to optimize the use of observable inputs, when available, and
minimize the use of unobservable inputs to the extent possible. As such, the Company uses valuation models in determining fair value. Based on this valuation technique, the Company utilizes certain assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk and/or risks inherent in the inputs.

The Companys other investments include
investments in privately-held companies. Pursuant to APB 18, The Equity Method of Accounting for Investments in Common Stock, the Company accounts for these investments either at historical cost, or if the Company has significant
influence over the investee, the Company accounts for these investments using the equity method of accounting. The Company reviews all investments for indicators of impairment 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 Financial Accounting Standards Board (FASB) Staff Position 115-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments.

Furniture, Fixtures and Equipment

Furniture, fixtures
and equipment are recorded at cost and depreciated over the estimated useful lives of the assets (three to fifteen 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 SFAS No. 123R, Share-Based Payment (SFAS
123R). For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award 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.

Income Taxes

The Company
uses the liability method in accounting for income taxes as required by SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under this method, deferred tax assets and liabilities are recognized for operating loss and tax
credit 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.



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Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, requires components of other comprehensive income, including gains and losses on available-for-sale investments, to be included as part of total comprehensive income. The Company
displays comprehensive income (loss) and its components as part of the statement of stockholders equity (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 June 30, 2009, the Company had sold all of its available-for-sale investments recognizing a gain on
available-for-sale investments of $96,410 and $177,724 for the three and six month periods ended June 30, 2009, respectively. Comprehensive loss was $1,475,254 and $3,896,364 for the three and six month periods ended June 30, 2008,
respectively.

Net (Loss) Earnings Per Common Share

The Company calculates its basic (loss) earnings per share in accordance with SFAS No. 128, Earnings Per Share,by dividing the earnings or loss applicable to common stockholders by the weighted-average number of common
shares outstanding for the period less the weighted average unvested common shares subject to forfeiture and without consideration for common stock equivalents. Diluted (loss) earnings per share is computed by dividing the earnings or loss
applicable to common stockholders by the weighted-average number of common share equivalents outstanding for the period less the weighted average unvested common shares subject to forfeiture and dilutive common stock equivalents for the period
determined using the treasury-stock method. For purposes of this calculation, options and warrants to purchase common stock are considered to be common stock equivalents but have been excluded for the three and six month periods ended June 30,
2009 and 2008 calculation of diluted net loss per share as their effect is anti-dilutive. 7,855,745 warrants and 2,657,222 options have been excluded for the June 30, 2009 periods and 698,064 warrants and 1,778,375 options have been excluded
for the June 30, 2008 periods respectively, because their inclusion would be anti-dilutive.



|                                                                                             |  |                            |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                             |  | Three months endedJune 30, |           
|                                                                                             |  | 2009                       |            |   | 2008 |  
|Net loss attributable to controlling interest                                                |  | $                          | (710,175   | ) |      | $ | (3,079,262 | )
|                                                                                             |  |                            |            |   |      |   |            |  
|Basic and diluted net loss per common share:                                                 |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss per common share        |  |                            | 30,579,095 |   |      |   | 27,331,397 |  
|                                                                                             |  |                            |            |   |      |   |            |  
|Basic and diluted net loss per common share                                                  |  | $                          | (0.02      | ) |      | $ | (0.11      | )
|                                                                                             |  |                            |            |   |      |   |            |  
|                                                                                             | 
|                                                                                             |  | Six months endedJune 30,   |           
|                                                                                             |  | 2009                       |            |   | 2008 |  
|Net loss attributable to controlling interest                                                |  | $                          | (1,896,681 | ) |      | $ | (5,500,372 | )
|                                                                                             |  |                            |            |   |      |   |            |  
|Basic and diluted net loss per common share:                                                 |  |                            |            |   |      |   |            |  
|Weighted-average shares used in computing basic and diluted net loss income per common share |  |                            | 30,347,298 |   |      |   | 27,281,120 |  
|                                                                                             |  |                            |            |   |      |   |            |  
|Basic and diluted net loss per common share                                                  |  | $                          | (0.06      | ) |      | $ | (0.20      | )
|                                                                                             |  |                            |            |   |      |   |            |  

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS
160). SFAS 160 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. SFAS 160 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. SFAS 160 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 SFAS 160. The effect was an increase in Total equity (deficit) of $558,567 as of June 30, 2009 and $649,200 for December 31, 2008. There was no material effect to the Companys
consolidated results of operations.

FAS 160 also requires retrospective application of its disclosure and presentation requirements for all periods
presented. Accordingly, noncontrolling 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



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minority interest in subsidiary for the three and six month periods ended June 30, 2008 and for the period from June 22, 2002 (inception) through
June 30, 2009 have been presented as attributable to noncontrolling interest.

In November 2007, the EITF ratified a consensus on EITF 07-1,
Accounting for Collaborative Arrangements, or EITF 07-1, 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. EITF 07-1 is effective beginning January 1, 2009.
The Companys adoption of EITF 07-1 did not have a material effect on the Companys consolidated results of operations and financial position.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this statement is not expected to have a material effect on the
Companys financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS 165, which provides guidance
to establish general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim or fiscal periods ending
after June 15, 2009. We adopted this statement effective June 15, 2009.

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 entirely consist 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 SFAS 157, 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.

In the period subsequent to December 31, 2008, the restriction from selling shares of MiMedx was lifted and the market value declined to $0.54 as of June 30,
2009. The Company sold 243,565 shares of MiMedx shares for the three month period ended June 30, 2009 realizing gain on the sale of marketable securities $96,410. Between February 9, 2009 and June 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 June 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).

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.



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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 shares each, to three independent members of the board valued at $1.00 per share. The Company distributed an additional 25,000 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 June 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 June 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 June 30, 2009. The carrying value at June 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 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



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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
(the Purchase Agreement) with certain accredited investors in connection with the private issuance and sale to such investors of 3,433,884 units (the Private Placement). 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 consists 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 $.39 to $.55 per unit. Each warrant has an exercise price equal to $.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 will use the net proceeds from the Private Placement for working capital. The Purchase
Agreement contemplates a total potential offering of up to $5,000,000 of units. If any additional units are sold in the Private Placement, they will be sold at a subsequent closing. There can be no assurance that the Company will sell any additional
units in the Private Placement.

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.

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 SFAS 123R, Share-Based Payments 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



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

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 endedJune 30, |  
|                                          |  | 2009                       |   |  | 2008 |  
|Expected dividend yield                   |  |                           |   |  |     |  
|Expected volatility                       |  | 83                         | % |  | 79   | %
|Weighted-average expected life (in years) |  | 5.8                        |   |  | 5.8  |  
|Risk free interest rate                   |  | 2.3                        | % |  | 1.9  | %
|Forfeiture rate                           |  | 10                         | % |  | 10   | %

The Companys consolidated statements of operations for the three and six month periods ended June 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 endedJune 30, |        | Six months endedJune 30,
|                                                                                            |  | 2009                       |        | 2008                     |   | 2009    |  | 2008
|Research and development                                                                    |  | $                          | 14,771 |                          | $ | 83,402  |  | $    | 67,549  |  | $ | 172,145
|General and administrative                                                                  |  |                            | 33,402 |                          |   | 69,813  |  |      | 100,872 |  |   | 256,707
|                                                                                            |  |                            |        |                          |   |         |  |      |         |  |   |        
|Total share-based compensation related to employee and non-employee directors stock options |  | $                          | 48,173 |                          | $ | 153,215 |  | $    | 168,421 |  | $ | 428,852
|                                                                                            |  |                            |        |                          |   |         |  |      |         |  |   |        

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of Emerging
Issues Task Force (EITF) No.96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, using a fair-value approach. The equity instruments, consisting of
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 six month periods ended June 30, 2009, non-employee (i.e. consultants) option expense was $6,343 and $19,703 for research and development and $2,093 and $3,386 for general and administrative, respectively. For the three month and six
month periods ended June 30, 2008 non-employee option expense was $0 for both research and development and general and administrative.

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 $1,262 and $12,262 for the three and six month periods ended June 30,
2009, respectively. The Company recognized $44,074 for the three and six month periods ended June 30, 2008.

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 1.81 years was approximately $267,347 at June 30, 2009 and over an
estimated weighted-average amortization period of 2.0 years was $1,164,400 at June 30, 2008.

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



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|                                       |  |                         |   |  |                     |   |  |                               |     
|-------------------------------------- |  | ----------------------- | - |  | ------------------- | - |  | ----------------------------- | ----
|                                       |  |                         |   |  | Options Outstanding
|                                       |  | SharesAvailableto Grant |   |  | Number ofShares     |   |  | Weighted-AverageExercisePrice
|Balance at December 31, 2008           |  | 4,041,408               |   |  | 2,228,213           |   |  | $                             | 2.15
|Options granted                        |  | (1,000,000              |   |  | 1,000,000           |   |  |                               | 0.25
|Shares issued to directors             |  | (11,251                 | ) |  |                    |   |  |                               |    
|Shares cancelled and forfeited         |  |                        |   |  | (398,121            |   |  |                               | 2.31
|                                       |  |                         |   |  |                     |   |  |                               |     
|Balance at March 31, 2009              |  | 3,030,157               |   |  | 2,830,092           |   |  | $                             | 1.44
|Options exercised                      |  |                        |   |  |                    |   |  |                               |     
|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

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. This $500,000 in research and development expense is included in accrued liabilities at June 30, 2009.

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 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 six month periods ended June 30, 2009 and 2008, respectively.

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 FASB Interpretation No.48 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 as of January 1, 2007. The Company had approximately $260,774 and $253,174 of unrecognized tax liabilities at June 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.



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12. Other Significant Events

On April 6, 2009, the Company received a notice from the Staff of The NASDAQ Stock Market that the Company no longer satisfies Listing Rule 5550(b), which requires a listed company to maintain a minimum stockholders equity of
$2.5 million, at least $35 million in market value of listed securities, or a minimum $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years for
continued listing on The NASDAQ Capital Market (the Rule). On April 20, 2009, the Company submitted a plan to regain compliance with the Rule and received an extension from the Staff of The NASDAQ Stock Market until July 2009.

The Company received an additional notice of noncompliance on July 21, 2009 from the Staff of The NASDAQ Stock Market notifying the Company that
trading of the Companys common stock would be suspended at the opening of business on July 30, 2009, unless the Company requested a hearing before a NASDAQ Listing Qualifications Panel (the Panel). The Company has requested a
hearing before the Panel. There can be no assurance that the Panel will grant the Companys request for continued listing, and if it does not, the Companys common stock would be delisted from the NASDAQ Stock Market.

13. Subsequent Events

The Company has evaluated subsequent events
through August 14, 2009 which represents the date the Companys Form 10-Q for the quarter ended June 30, 2009 was filed with the Securities and Exchange Commission.



|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 pharmaceutical 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



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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 $1,854,557 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 for the foreseeable future. Our results may
vary depending on many factors, including pre-clinical and clinical test results, the performance of our strategic outsource partners and the progress of licensing activities with pharmaceutical partners.

Status of our Drug Candidates

We currently have a portfolio
of 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 initial 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 $149,000 and $278,000
in development costs associated with the development of KRN5500 during the three and six month periods ended June 30, 2009, and we have incurred costs of approximately $3,247,000 from inception to June 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 $71,600 and $656,600 in development costs associated with the development of DB959 during the three and six month periods ended June 30,
2009, and we have incurred costs of approximately $4,023,000 from



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inception to June 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.

DB160

DB160 is a DPP-IV inhibitor for the treatment
of type 2 diabetes. DDP-IV is an enzyme that inactivates a key hormone involved in promoting control of blood sugar levels thus giving diabetics better control of their blood sugar levels. Prior to the implementation of the cost reduction plan, the
Company was developing this drug candidate as a once-daily oral therapy. We have currently suspended the development of DB160, but we will continue to evaluate the competitive environment for DB160 and potential positioning of the compound for other
indications. If our evaluation concludes that further development is warranted, the next step in our development of this candidate would be to file an IND application 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.

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.

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.

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 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



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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 SFAS No. 123R, Share-Based Payment
(SFAS 123R). For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange
for the Companys common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the
date of issuance. Our Companys share-based compensation transactions for employees and non-employee directors resulted in compensation expense of $49,434 and $197,289 for the three month periods ended June 30, 2009 and 2008, respectively,
and $180,683 and $500,426 for the six month periods ended June 30, 2009 and 2008, respectively. The Company recognized stock-based compensation expense for awards to non-employees totaling $8,436 and $23,089 for the three and six months ended
June 30, 2009, respectively. The Company did not have any non-employee option expense for the three and six months ended June 30, 2008.

Significant Judgments and Estimates

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

Results of Operations

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

Research and development expenses decreased approximately $1,767,000, from approximately
$2,030,000 for the three months ended June 30, 2008 to approximately $263,000 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 $470,000, from approximately $1,045,000 for the three months ended June 30, 2008 to approximately $575,000 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 increased approximately $161,000 from an expense of approximately $79,000 for the three months ended June 30, 2008 to an income of
approximately $82,000 for the corresponding 2009 period. The increase is primarily due to the gain on the sale of marketable securities.

Six Months
Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Research and development expenses decreased approximately $2,339,000, from
approximately $3,492,000 for the six months ended June 30, 2008 to approximately $1,153,000 for the corresponding 2009 period, primarily as a result of the



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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 $729,000, from approximately $2,266,000 for the six months ended June 30, 2008 to approximately $1,537,000 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 $594,000 from income
of approximately $109,000 for the six months ended June 30, 2008 to income of approximately $703,000 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 June 30, 2009, we have financed our operations primarily from the net proceeds of (1) private placements of equity securities, through which we raised approximately $26,525,000 in net
proceeds, including approximately $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 June 30,
2009, our principal sources of liquidity were our cash and cash equivalents which totaled approximately $1,375,000. As of June 30, 2009, we had net working capital of approximately $114,000. 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 June 15, 2009, we entered into a Securities Purchase Agreement (the 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) 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. We will use these net proceeds for working capital. The Purchase Agreement contemplates a total potential offering of up to $5,000,000 of units. If any additional units are sold,
they will be sold at a subsequent closing. There can be no assurance that we will sell any additional units in the Private Placement.

Cash Flows

During the six month period ended June 30, 2009, cash used in our operating activities was approximately $2,058,000. This decrease in cash from
operations was primarily due to the operating loss offset in part by non-cash stock-based compensation of approximately $204,000 and depreciation and amortization of approximately $112,000. Prepaid expenses decreased by approximately $98,000 for the
six month period ended June 30, 2009, primarily representing prepaid director and officer insurance coverage. Accounts payable decreased by approximately $258,000 and accrued liabilities increased by approximately $539,000 during the six month
period ended June 30, 2009, primarily due to the $500,000 milestone payment accrual to Bayer for the cleared IND application for DB959.

Our investing
activities provided net cash of approximately $674,000 for the six month period ended June 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.



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We generated approximately $1,298,000 of cash from the issuance of common stock and warrants during the six month period
ended June 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 securities pursuant to the 2009 Private Placement discussed above or the sale of certain of our investments. We have no commitments to obtain any additional funds (assuming the
Purchase Agreement is not a commitment), 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 June 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
notice from the Staff of The NASDAQ Stock Market that we no longer satisfy Listing Rule 5550(b), which requires a listed company to maintain a minimum stockholders equity of $2.5 million, at least $35 million in market value of listed
securities, or a minimum $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years for continued listing on The NASDAQ Capital Market (the
Rule). On April 20, 2009, we submitted a plan to regain compliance with the Rule and received an extension from the Staff of The NASDAQ Stock Market until July 2009.

We received an additional notice of noncompliance on July 21, 2009 from the Staff of The NASDAQ Stock Market notifying us that trading of our common stock would be suspended at the opening of business on
July 30, 2009, unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the Panel). We have requested a hearing before the Panel. There can be no assurance that the Panel will grant our request for continued
listing, and if it does not, our common stock would be delisted from the NASDAQ Stock Market. Delisting could adversely affect both the market liquidity and the market price of our common stock.

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,



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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 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 six month period ended June 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.



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##### Table of Contents

PART II - OTHER INFORMATION



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

As of August 14, 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
|------- | ---------------------------------------------------

Not
applicable.



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

Not applicable.



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

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



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##### 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: August 14, 2009 |  | By:                    |  | /s/ Richard A. Franco                
|                      |  |                        |  | Richard A. Franco                    
|                      |  |                        |  | President and Chief Executive Officer
|                      |  |                       
|Date: August 14, 2009 |  | By:                    |  | /s/ Ann A. Rosar                     
|                      |  |                        |  | Ann A. Rosar                         
|                      |  |                        |  | Chief Accounting Officer             



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##### Table of Contents

EXHIBIT INDEX

Item 15(c) Exhibits:



|            |  |                                                                                                                        |  |                                                                                     
|----------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                            |  | Incorporated by Reference to                                                        
|4           |  | Form of Warrant                                                                                                        |  | Incorporated by reference to the Companys Report on Form 8-K filed on June 16, 2009
|            |  |                                                                                                                       
|10          |  | Form of Securities Purchase Agreement                                                                                  |  | Incorporated by reference to the Companys Report on Form 8-K filed on June 16, 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 |  |                                                                                     



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