Summary of DARA BIOSCIENCES, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the Securities and Exchange Commission (the "SEC").

This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q, the words "believe," "anticipates," "intends," "plans," "estimates," and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on management's current expectations and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, the potential stockholder dilution that may result from future capital raising efforts, our limited operating history which may make it difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, any revenue we generate will come from a small group of commercialized products, our ability to successfully develop and outlicense our drug candidates as anticipated, the current regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners and third-party manufacturers, successful performance under collaborative and other commercial agreements, potential product liability risks that could exceed our liability coverage, potential risks related to healthcare fraud and abuse laws, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk factors identified in the documents we have filed, or will file, with the SEC. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the year ended December 31, 2011 and in any subsequently filed Quarterly Reports on Form 10-Q. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC. Except as required by law, we undertake no obligation to update any forward-looking statements.

Overview

We are a North Carolina-based specialty pharmaceutical company focused on the development and commercialization of oncology treatment and supportive care pharmaceutical products. Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, Soltamox® (oral liquid tamoxifen). Soltamox® has been approved by the U.S. Food and Drug Administration ("FDA") for the treatment of breast cancer. We also have an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace. Bionect® has been 510(k) cleared by the FDA for the management of irritation of the skin as well as first and second degree burns. Additionally, we continue to have an internal clinical development program focused on our drug candidate KRN5500 for the treatment of neuropathic pain in cancer patients and are pursuing out-license opportunities for DB959 for the treatment of metabolic diseases including type 2 diabetes.

In our sales and marketing efforts we will employ a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, innovative marketing programs, partnerships with specialty pharmacy providers, working with patient advocacy groups and foundations as well as collaborative arrangements with third party sales organizations.

In our internal development program, we contract with and manage 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 and allows us to control our annual expenses and to optimize our resources.

In order to successfully achieve these goals, having sufficient liquidity is important since we do not currently have a recurring sales or revenue stream to provide such working capital. We have not generated any revenue from operations to date. We have liquidated or distributed to our stockholders some of our investments made in other companies. Our primary source of working capital has been from the proceeds of investments made in other companies as well as capital raised from the sale of our securities. From inception through March 31, 2012, we have received net proceeds from the sale of marketable securities assets in the amount of $1,951,211, $4,405,692 in net proceeds from sale of investments in affiliates and we have raised $39,217,163 from issuance of preferred and common stock, net of issuance costs.

We expect to continue to incur operating losses in the near-term. Our results may vary depending on many factors, including the success of our building a successful sales and marketing organization, our ability to properly anticipate customer needs and obtain timely regulatory approvals, as well as the clinical results of our KRN5500 program and the progress of licensing activities of our other drug compounds with pharmaceutical partners.

Product Commercialization and Development

While in the past we had a broad range of drug development programs, currently our primary focus is on the development and commercialization of the following types of oncology treatment and supportive care pharmaceutical products:

· Soltamox®, an FDA-approved liquid formulation of tamoxifen and other liquid formulation products;

· Gemcitabine and other generic sterile injectable cytotoxic products; and

· Cancer support therapeutics, including Bionect®, an FDA 510(k) cleared product for the management of irritation of the skin as well as first and second degree burns.

Oral liquid formulations of FDA approved products

Oral liquids can effectively provide an attractive alternative to solid dose formulations for those patients with dysphagia, or difficulty swallowing, or who simply prefer to take drug products in liquid form. Dysphagia is a condition that exists in a portion of the population, particularly the elderly. Those suffering from dysphagia often have difficultly or experience pain when using oral tablet or capsule products and can benefit greatly from liquid formulations of drugs. In addition, breast cancer patients receiving chemotherapeutic agents are subject to severe oral mucositis, which makes liquid medical formulations preferable.

Soltamox®

Soltamox® (oral liquid tamoxifen), our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. Soltamox® will be the only liquid formulation of tamoxifen available for sale in the United States. As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox® in the United States. Currently, Soltamox® is marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd. Soltamox® is the subject of a U.S. issued patent which expires in June 2018. We expect to begin actively marketing and selling Soltamox® in the U.S. in the second half of 2012.

Generic sterile injectable cytotoxic products

We are also focusing on the development and commercialization of generic sterile injectable cytotoxic products. Many cytotoxics have recently lost patent protection or are scheduled to shortly lose such patent protection. We plan to partner with sterile injectable product manufacturers who have the expertise and capability to provide a finished product from FDA inspected and approved facilities. Currently, the FDA review and approval process for generic products is taking on average approximately 36 months.

Gemcitabine

In February 2012, we entered into an Exclusive Distribution Agreement with Uman Pharma Inc. pursuant to which we received an exclusive license to import, sell, market and distribute Uman's gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Uman plans to file an Abbreviated New Drug Application for gemcitabine with the FDA in the second half of 2012.

Cancer support therapeutics

We are also focusing on the development and commercialization of cancer support therapeutics.

Bionect®

On March 23, 2012 we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace. Bionect® has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns. Bionect® is currently being promoted and sold by Innocutis in the dermatology market. The Company will be compensated by Innocutis for each unit sold in this market. We expect to begin actively marketing and selling Bionect® in the U.S. in the second quarter of 2012.

Internal Drug Candidates

DARA had two internal drug candidates in clinical development prior to the acquisition of Oncogenerix in January 2012.

· KRN5500, a cancer support product for the treatment of neuropathic pain in cancer patients; and

· DP959, a first-in-class drug candidate for the treatment of type 2 diabetes and dyslipidemia.

KRN5500

KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of neuropathic pain in patients with cancer. The drug has successfully completed a Phase 2a proof of concept study in patients with end-stage cancer and analgesia-resistant neuropathic pain where it showed statistically-significant pain reduction versus placebo (p = 0.03) using standardized pain test scores. There were no major safety concerns. The FDA has designated KRN5500 a Fast Track drug, based on its potential usefulness in treating a serious medical condition and in fulfilling an unmet medical need. We are working with the National Cancer Institute (NCI) to design an additional clinical trial under joint DARA-NCI auspices. Since KRN5500 would complement the portfolio of oncology treatment and supportive care pharmaceuticals we are seeking to build, we are considering further internal Phase 2 development to a potential ex-US partnering point, while retaining the US market opportunity.

We incurred $24,228 in development costs associated with the development of KRN5500 during the three month period ended March 31, 2012, and we have incurred costs of $4,797,443 from inception to date.

DB959

DB959 comes from a family of PPAR alpha/delta/gamma agonists licensed from Bayer Pharmaceuticals Corporation. DB959 is a first-in-class, small molecule, non-TZD PPAR delta/gamma agonist for the treatment of diabetes and hyperlipidemia. The drug activates genes involved in the metabolism of sugars and fats, thereby improving the body's ability to regulate both aspects of diabetes. DB959 has successfully completed Phase 1 trials, in which it demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose. In addition, the drug has a pharmacokinetic profile supporting once-a-day oral dosing. Our review of non-clinical studies in models predictive of human disease indicates that DB959 provides glucose control and increases (good) HDL cholesterol better than rosiglitazone (Avandia) with less weight gain. DB959 is targeted for out-licensing to partners more able to sustain the prolonged time-lines and significant costs involved in diabetes drug development.

We incurred $76,169 in development costs associated with DB959 during the three month period ended March 31, 2012, and we have incurred costs of $7,522,847 from inception to date.

Pre-clinical Drug Candidate Programs Available for Out-license Opportunities

We also have families of patents covering additional PPAR agonists and DPPIV inhibitors, with potential applications in the areas of diabetes, metabolic and inflammatory disease. We are currently evaluating partnering and other opportunities to maximize the potential commercial value of these assets.

DB900 comprises a series of compounds which are PPAR gamma/alpha/delta agonists. We did not incur costs during the three month period ended March 31, 2012 for the development of DB900 series compounds; we have incurred costs of $129,272 from inception to date.

DB160 is a dipeptidylpeptidase (DPPIV) inhibitor for the treatment of type 2 diabetes. We incurred $4,874 of patent costs for the development of DB160 during the three month period ended March 31, 2012, and we have incurred costs of $2,379,711from inception to date.

The DB200 program has been on hold since 2009 due to internal capital constraints. Since 2009, the only expenditure has been to maintain intellectual property support for the series of compounds which served as early leads. We have decided to discontinue further expenditure in the DB200 program, due to its early stage of research and the low likelihood of success. Doing so is consistent with our new focus in oncology and supportive-care products and commercial-stage investments.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses, stock-based compensation and asset impairment and significant judgments and estimates. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

We expense research and development expenses when incurred. The cost of certain research programs, such as patient recruitment and related supporting functions for clinical trials, are based on reports and invoices submitted by the contract research organization ("CRO") assisting us in conducting the clinical trial. These expenses are based on patient enrollment as well as costs consisting primarily of payments made to the CRO, clinical centers, investigators, testing facilities and patients for participating in our clinical trials. Certain research and development costs must be prepaid which, if the research and development work ceases to progress for whatever reason, are not refundable to us. In such cases, those costs are expensed when paid.

Accrued Expenses

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

· fees paid to CROs in connection with preclinical and toxicology studies and clinical trials;

· fees paid to investigative sites in connection with clinical trials;

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

· professional service fees.

Share-Based Compensation

Share-based compensation is accounted for using the fair value based method prescribed by Financial Accounting Standards Board Accounting Standards Codification 718, Compensation-Stock Compensation. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company's common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. Our Company's share-based compensation transactions for employees and non-employee directors resulted in compensation expense of $47,467 and $100,636 for the three months ended March 31, 2012 and 2011, respectively. The Company recognized share-based compensation expense for awards to consultants for services totaling $29,684 and $99,095 for the three months ended March 31, 2012 and 2011, respectively.

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

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

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

The company incurred sales and marketing expense of $75,266 as a result of its merger with Oncogenerix. Prior to the merger the company had no sales and marketing.

Research and development expenses decreased $80,556 from $396,392 for the three months ended March 31, 2011 to $315,836 for the corresponding 2012 period, as a result of the Company's decision to focus on the KRN5500 program and to pursue out-license opportunities for the DB959 program, which resulted in decreasing development costs for DB959.

General and administrative expenses consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions and patent costs. In addition, general and administrative expenses include allocated facility, basic operational and support costs and insurance costs. General and administrative expenses increased $733,563 from $922,651 for the three months ended March 31, 2011 to $1,656,214 for the corresponding 2012 period, primarily as a result of expenses associated with our capital raise activities, additional compensation expense, and non-cash amortization expense of the SoltamoxÒ license.

Other income (expense), net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other (expense) income was minimal for the three months ended March 31, 2012 and 2011.

Liquidity and Capital Resources

Overview

From inception through March 31, 2012, we have financed our operations primarily from the net proceeds of (1) registered direct offerings and private placements of equity securities, through which we raised $39,217,163 in net proceeds, and
(2) the sale of securities we held in subsidiary companies and marketable securities, through which we raised $6,356,903.

At March 31, 2012, our principal sources of liquidity were our cash and cash equivalents which totaled $1,378,373. As of March 31, 2012, we had net working capital of $78,735. Our cash resources have been used to acquire licenses, and to fund research and development activities, capital expenditures, and general and administrative expenses.

Subsequent to March 31, 2012, on April 16, 2012, we completed the closing of a public offering of $10,250,000 of units consisting of shares of Series B-2 convertible preferred stock and warrants to purchase shares of common stock.

Cash Flows

During the three months ended March 31, 2012, cash used in our operating activities was $1,403,679. Cash used in operating activities was primarily due to the operating loss offset in part by non-cash stock-based compensation of $77,151 and depreciation and amortization of $169,228. Prepaid expenses decreased by $262,702 for the three months ended March 31, 2012, as a result of decreases in prepaid insurance coverage and funds held in patent trust fund. Accounts payable increased by $477,707 and accrued liabilities increased by $183,256.

We received $10,631 in cash from the Merger and we purchased a 10% Senior Unsecured Convertible Note from MRI Interventions, Inc. which converted into 29,919 shares of MRI Interventions common stock during the three months ended March 31, 2012.

We generated $1,513,080 of net cash from the registered direct offering of Series B convertible preferred stock and warrants. We established $137,711 in other financing offset by payments of $18,771 on capital lease and other financing agreements during the three months ended March 31, 2012.

Financial Condition

We believe we have sufficient working capital to continue our operations through the first six months of 2013. However, we expect to require additional investment capital to pursue our business plan. Our capital requirements will depend upon numerous factors, including our ability to generate revenue through our sales and marketing efforts as well the level of costs we incur in building our portfolio of products and creating a sales organization and on our research and development programs.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2012.