The following discussion and analysis of our financial condition as of June 30, 2009 and results of operations for the three and six months ended June 30, 2009 and 2008 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which involve risks, uncertainties and assumptions. All statements, other than statements of historical facts, are "forward-looking statements" for purposes of these provisions, including any projections of revenue, expenses or other financial items, cash requirements, financing plans, any statement of the plans and objectives of management for future operations, any statements concerning proposed new clinical trials or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "anticipates," "believe," "continue," "estimates," "expects," "intend," "look forward," "may," "could," "seeks," "plans," "potential," or "will" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report.

In this report, "Sunesis," the "Company," "we," "us," and "our" refer to Sunesis Pharmaceuticals, Inc. and its wholly-owned subsidiary, except where it is made clear that the term means only the parent company.

Overview

We are a biopharmaceutical company focused on the development and commercialization of new oncology therapeutics for the treatment of hematologic and solid tumor cancers. We have built a highly experienced cancer drug development organization committed to advancing our lead product candidate, voreloxin, in multiple indications to improve lives of people with cancer.

From our incorporation in 1998 through 2001, our operations consisted primarily of developing and refining our proprietary methods of discovering drugs in pieces, or fragments. From 2002 through June 2008, we focused on the discovery, in-licensing and development of novel small molecule drugs. In June 2008, we announced a corporate realignment to focus on the development of voreloxin. In conjunction with this strategic restructuring, or the 2008 Restructuring, we expanded our late-stage development team, announced the winding down of our internal discovery research activities, ceased development of an enhanced fragment-based discovery platform, and reduced our workforce by approximately 60%.

We are currently advancing voreloxin through Phase 2 development. Voreloxin is a first-in-class anti-cancer quinolone derivative, or AQD - a class of compounds that has not been used previously for the treatment of cancer. Quinolone derivatives have been shown to mediate anti-tumor activity by targeting mammalian topoisomerase II, an enzyme critical for cell replication, and have demonstrated promising preclinical anti-tumor activity. We are in the process of conducting three clinical trials of voreloxin: a Phase 2 clinical trial (known as the REVEAL-1 trial) in previously untreated elderly patients with acute myeloid leukemia, or AML, a Phase 1b/2 clinical trial combining voreloxin with cytarabine for the treatment of patients with relapsed/refractory AML, and a Phase 2 single agent clinical trial in platinum-resistant ovarian cancer patients. We have worldwide development and commercialization rights to voreloxin. We may enter into partnering arrangements for this product candidate to maximize its commercial potential.

At the American Society of Clinical Oncology (ASCO) 2009 Annual Meeting in June, we presented new data from the three ongoing clinical trials that we believe demonstrates that voreloxin shows promising safety and efficacy in acute myeloid leukemia and in platinum-resistant ovarian cancer. Please see our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2009 for further information regarding the data we presented at ASCO.

We have taken a number of important steps to focus our resources and efforts on the advancement of voreloxin. We have discontinued development of our product candidate, SNS-032, a selective inhibitor of cyclin-dependent kinases, or CDKs, 2, 7 and 9, which we had in-licensed from BMS. In March 2009, the license agreement was terminated and SNS-032 was returned to BMS. In addition, we recently completed enrollment in a Phase 1 trial of SNS-314, a potent and selective pan-Aurora kinase inhibitor discovered internally at Sunesis, in patients with advanced solid tumors. A maximum tolerated dose was not established in that trial, and no responses were observed. We currently have no plans to conduct further development activities on SNS-314 on our own, but we plan to seek a partner to support further development of SNS-314 in the future.

On April 3, 2009, we closed the initial $10.0 million of a Private Placement of up to $43.5 million of the Company's securities. The Private Placement contemplates the sale of up to $15.0 million of units consisting of Series A convertible preferred stock and warrants to purchase common stock, and up to $28.5 million in common stock, in three closings, to accredited investors, including certain members of management. In the initial closing, $10.0 million of units were sold, resulting in net proceeds of $8.8 million. An additional $5.0 million of units may be sold in the second closing, which may occur at our election upon the occurrence of certain defined events or at the election of the holders of a majority of the Series A convertible preferred stock issued in the Private Placement, subject to conditions described in 'Sources of Liquidity' below. An additional $28.5 million of common stock may be sold in a common equity closing, again subject to conditions described in 'Sources of Liquidity' below.

In March 2009, we announced that we sold our interest in all of our lymphocyte function-associated antigen-1, or LFA-1, patents and related know-how to SARcode Corporation, or SARcode, for total cash consideration of $2.0 million, of which $1.8 million was received in March 2009 and $0.2 million was received in April 2009. The entire $2.0 million was recorded as revenue in the second quarter of 2009. In connection with the sale, the license agreement was terminated. SARcode has been the exclusive licensee of those assets since March 2006.

Our fragment-based discovery approach, known as Tethering, formed the basis of several strategic research and development collaborations entered into between 2002 and 2004, including collaborations with Biogen Idec and Merck. In June 2009, we earned a milestone of $1.5 million for Biogen Idec's selection of a Raf kinase inhibitor development candidate for the treatment of cancer, which was recorded as revenue in the second quarter of 2009. The milestone payment was received in July 2009. Biogen Idec is currently conducting IND-enabling preclinical work with the Raf kinase development candidate.

We have incurred significant losses in each year since our inception. As of June 30, 2009, we had an accumulated deficit of $347.4 million. We expect our significant net losses to continue for the foreseeable future, as we continue to conduct development of, and seek regulatory approvals for, voreloxin.

On July 24, 2009, we applied to transfer our listing of common stock from The NASDAQ Global Market to The NASDAQ Capital Market. If our application is not approved, we expect to be subject to delisting proceedings. To list our common stock on The NASDAQ Capital Market we are required to meet certain listing requirements, including a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1.0 million and stockholders' equity of at least $2.5 million. We requested the transfer of our listing of common stock based upon our compliance with the minimum stockholders' equity requirement and all other applicable criteria for continued listing on The NASDAQ Capital Market, but for the $1.00 minimum bid price requirement, which has been suspended by NASDAQ through August 2, 2009. If the application is approved, we will no longer be subject to delisting from NASDAQ as a result of the previously disclosed stockholders' equity deficiency as of December 31, 2008, but we will need to comply with The NASDAQ Capital Markets' continued listing requirements on an ongoing basis.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes during the six months ended June 30, 2009 to our critical accounting policies and significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

Effective January 1, 2009, we adopted EITF Issue No. 07-1, Accounting for Collaborative Arrangements, or EITF 07-1. EITF 07-1 requires participants in a collaborative arrangement (sometimes referred to as a "virtual joint venture") to present the results of activities for which they act as the principal on a gross basis and to report any payments received from (made to) other collaborators based on other applicable GAAP, or, in the absence of other applicable GAAP, based on analogy to authoritative literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 also requires significant disclosures related to collaborative arrangements. The adoption did not have a material impact on our financial condition or consolidated results of operations.

Effective April 1, 2009, we adopted Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of SFAS 165 had no material effect on our financial condition or consolidated results of operations.

Effective April 1, 2009, we adopted Financial Accounting Standards Board, or FASB, Staff Position No. FAS 115-2, or FSP FAS 115-2. FSP FAS 115-2 amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities to make the other-than-temporary

impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity's management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. FSP FAS 115-2 requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of FSP FAS 115-2 had no material effect on our financial condition or consolidated results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162, or SFAS 168. The FASB Accounting Standards Codification, or Codification, will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will no longer be authoritative. SFAS 168 is effective for us for the nine-month period ended September 30, 2009 and is not expected to have a material effect on our financial condition or consolidated results of operations.

Results of Operations

Revenue

We have not generated any revenue from sales of commercial products and do not expect to generate any product revenue or any other significant revenue for the foreseeable future.

Collaboration Revenue. In the past we have generated revenue primarily through payments received in connection with our collaborations, consisting principally of research funding and milestones paid by our collaborators, substantially offsetting our related research and development expenses. However, we are no longer conducting any research activities or receiving research funding in connection with any of our collaborations.

We are entitled to receive milestone payments under our collaborations with Biogen Idec and Merck upon achievement of certain milestones by them. Additionally, we are entitled to receive royalty payments based on future sales of products, if any, resulting from these collaborations, although we do not expect to generate any royalty revenue from these collaborations in the foreseeable future, if at all.

Collaboration revenue was $1.5 million for the three months ended June 30, 2009 as compared to $2.6 million for the same period in 2008. The decrease of $1.1 million was primarily as a result of a decrease in revenue recognized under the collaboration with Biogen Idec due to the termination of the research phase of this collaboration in June 2008. Collaboration revenue was $1.5 million for the six months ended June 30, 2009 as compared to $4.9 million for the same period in 2008. The decrease of $3.4 million was primarily as a result of decreased revenue from the collaborations with Biogen Idec, as described above, and Johnson & Johnson Pharmaceutical Research & Development LLC, or J&JPRD, for which a milestone of $0.5 million was recognized in the first quarter of 2008. The revenues in the three and six months ended June 30, 2009 were primarily comprised of the $1.5 million milestone earned from Biogen Idec's selection of a Raf kinase inhibitor development candidate for the treatment of cancer.

In the first quarter of 2009, we initiated discussions with J&JPRD regarding the termination of our collaboration related to the enzyme, Cathepsin S, entered into in May 2002. On July 17, 2009, J&JPRD provided written notice that it was terminating this collaboration agreement. In accordance with the terms of the collaboration agreement, the termination will be effective on January 13, 2010. As a result, we do not expect to receive any additional revenues from J&JPRD under this collaboration agreement.

We expect that we will have substantially lower collaboration revenue in 2009 and in future years unless, and until, any products that may result from our collaborations advance to a level where significant milestones will be payable to us.

License and Other Revenue. License and other revenue was $2.0 million and $2.2 million for the three and six months ended June 30, 2009, respectively, as compared to zero for the same periods in 2008. In March 2009, we sold to SARcode our interest in all of the patents and related know-how that had been the subject of a license agreement with them for a total cash consideration of $2.0 million. Of this amount, $1.8 million was received in March 2009 and $0.2 million was received in April 2009. All deliverables under the agreement were completed in April 2009, and as a result, the entire $2.0 million was recorded as revenue in the second quarter. In connection with the sale, the license agreement was terminated and we will not receive any future license fees, milestones or royalties under that license. We still hold three secured convertible promissory notes issued under the original license agreement, with a total principal value of $1.0 million, which are due in 2012 and are convertible into the preferred stock of SARcode at our option. We have yet to record these notes as revenue due to uncertainty of their collectibility.

Research and Development Expense

Most of our operating expenses to date have been for research and development activities, and include costs incurred:

• in the discovery and development of novel small molecule therapeutics and the advancement of product candidates towards clinical trials, including the Phase 1 and Phase 2 clinical trial costs for voreloxin and the Phase 1 clinical trial costs for SNS-032 and SNS-314;

• in the development of our proprietary fragment-based Tethering drug discovery approach and other novel fragment-based drug discovery methods;

• in the development of in-house research, preclinical study and development capabilities;

• in connection with in-licensing activities; and

• in the conduct of activities we are required to perform in connection with our strategic collaborations.

We expense all research and development costs as they are incurred.

The table below sets forth our research and development expense by program for the three and six months ended June 30, 2009 and 2008 (in thousands):

                                                Three months ended June 30,         Six months ended June 30,
                                                 2009                2008             2009             2008
Voreloxin                                   $         3,292     $         4,399   $      7,370    $        8,884
SNS-032                                                  96               1,170            145             2,408
SNS-314                                                  61                 653            198             1,456
Discovery programs and new technologies                  -                1,074             -              2,233
Other kinase inhibitors                                  -                  967             -              2,024

Total research and development expense      $         3,449     $         8,263   $      7,713    $       17,005

As a result of our 2008 Restructuring and the resulting wind-down of our research activities, we do not anticipate incurring any significant additional research expenses related to the discovery of additional product candidates, the development or application of our proprietary fragment-based drug discovery methods, or the development of in-house research capabilities. In addition, we are no longer conducting any research activities in connection with any of our collaborations.

However, we have incurred and expect to continue to incur substantial research and development expense to conduct clinical trials of voreloxin. Clinical trials are costly, and as we continue to advance voreloxin through clinical development, we expect our related expenses to remain high. For example, we expect to spend at least $10.0 million over the next 12 months to advance our voreloxin program to completion of the current Phase 1b/2 and Phase 2 clinical trials as well as prepare for subsequent trials for AML. Due to the risks inherent in the clinical trial process and given the early state of development, we are unable to estimate the additional substantial costs we will incur in the voreloxin development program.

In addition, we are currently focused on trials of voreloxin in targeted indications and patient populations. Based on results of translational research, clinical results, regulatory and competitive concerns and our overall financial resources, we anticipate that we will make determinations as to which indications to pursue and patient populations to treat and how much funding to direct to each indication on an ongoing basis. This will affect our research and development expense going forward.

We are currently anticipating that development of voreloxin will be our highest priority. If we engage a development or commercialization partner on our voreloxin program, or if, in the future, we acquire additional product candidates, our research and development expenses could be significantly affected. We cannot predict whether future collaborative or licensing arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Under our Biogen Idec agreement, we have the right to participate in the co-development and co-promotion of product candidates for up to two targets including, at our option, the Raf kinase target, on a worldwide basis (excluding Japan). If we were to exercise our option on one or more product candidates, our research and development expense would increase significantly.

Research and development expense was $3.4 million and $7.7 million for the three and six months ended June 30, 2009 as compared to $8.3 million and $17.0 million for the same periods in 2008. The decrease of $4.9 million between the three month periods was primarily due to reduced research staffing as a result of our 2008 Restructuring, which resulted in a $2.0 million decrease in headcount-related expenses, and decreases in facility costs of $1.2 million, clinical expenses of $0.7 million and other outside services of $0.5 million. The decrease of $9.3 million between the six month periods was again primarily due to reduced staffing due to the 2008 Restructuring, which resulted in a $4.2 million decrease in headcount-related expenses, and decreases in facility costs of $2.2 million, clinical expenses of $1.1 million, lab costs of $0.7 million and other outside services of $0.7 million. We expect that we will continue to incur significant expenses related to the development of voreloxin in 2009 and future years. Overall research and development expenses are expected to be lower in 2009 as compared to 2008 as a result of the reduction in research efforts and related staffing.

General and Administrative Expense

Our general and administrative expense consists primarily of salaries and other related costs for personnel in finance, human resources, legal, management and general administration, as well as non-cash stock-based compensation. Other significant costs include facilities costs and fees paid to outside legal advisors and independent auditors.

General and administrative expense was $2.0 million and $4.3 million for the three and six months ended June 30, 2009 as compared to $3.2 million and $6.5 million for the same periods in 2008. The decrease of $1.2 million between the three month periods was primarily due to reduced administrative headcount as a result of our 2008 and 2009 Restructurings, which resulted in a $1.0 million decrease in headcount-related expenses, and $0.1 million decreases in both facility costs and professional service costs. The decrease of $2.2 million between the six month periods was primarily due to reduced administrative headcount as a result of our 2008 and 2009 Restructurings, which resulted in a $1.6 million decrease in headcount-related expenses, and a $0.4 million decrease in professional service costs. We expect general and administrative expenses to be lower in 2009 as compared to 2008 as a result of the reduction in administrative headcount in connection with our 2008 and 2009 Restructurings (see Note 4).

Restructuring Charges

Restructuring charges were $1,000 and $1.9 million for the three and six months ended June 30, 2009 as compared to $4.9 million and $5.2 million for the same periods in 2008. For the three months ended June 30, 2008, the $4.9 million of charges were comprised of $5.6 million related to the 2008 Restructuring, partially offset by a $0.7 million reversal of charges for the restructuring plan implemented in August 2007, or the 2007 Restructuring, related to facility exit costs. For the six months ended June 30, 2009, we recorded net charges of $1.3 million for lease termination activities related to the 2008 Restructuring and a charge of $0.6 million for employee severance and related benefit costs related to the 2009 Restructuring. The net charge for lease termination activities includes $2.2 million for early lease termination fees paid to the landlord and $0.4 million for third party commission, partially offset by the reversal of $1.4 million in non-cash deferred rent on this facility. For the six months ended June 30, 2008, the $5.2 million of charges were comprised of $5.6 million related to the 2008 Restructuring, partially offset by a $0.4 million reversal of 2007 Restructuring charges related to facility exit costs.

Interest Income

Interest income was $6,000 and $19,000 for the three and six months ended June 30, 2009 as compared to $0.3 million and $0.7 million for the same periods in 2008. The decreases between the periods were primarily due to lower average balances of cash, cash equivalents and marketable securities and lower average interest rates during the 2009 periods.

Interest Expense

Interest expense was zero and $1,000 in the three and six months ended June 30, 2009 as compared to $54,000 and $114,000 for the same periods in 2008. The decreases between the periods resulted from the full payment of the outstanding balance under our equipment financing agreement with General Electric Capital Corporation in November 2008.

Other Income (Expense), Net

Other expense, net was $21.0 million and $21.1 million for the three and six months ended June 30, 2009 as compared to zero for the same periods in 2008. The expense in the 2009 periods was primarily due to non-cash charges of $21.0 million related to the accounting for the Private Placement, comprising of $7.5 million recorded upon the initial closing in April 2009 and $13.5 million upon the revaluation in June 2009 of the options to participate in the second closing and common equity closing.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through the issuance of common and preferred stock; research funding, technology access fees and milestone payments from our collaboration partners; research grants; loans from Biogen Idec and other debt financings.

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