This management's discussion and analysis of financial condition and results of operations is intended to provide information to help you better understand and evaluate our financial condition and results of operations. We recommend that you read this section in conjunction with our unaudited condensed financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report and our financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2011 ("Form 10-K").

This quarterly report on Form 10-Q, including the following discussion and analysis of financial condition and results of operations, contains forward-looking statements that you should read in conjunction with the financial statements and notes to financial statements that we have included elsewhere in this report. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Words such as "believe", "anticipate," "expect," "intend," "plan," "will," "may," "should," "estimate," "predict," "potential," "continue," or the negative of such terms or other similar expressions, identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements, and you should not place undue reliance on these statements. Factors that might cause such a difference include whether MelaFind®achieves market acceptance, as well as those discussed below under the heading "Risk Factors" in our Form 10-K and elsewhere in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements as a result of developments occurring after the period covered by this report or otherwise.

Overview

We are a medical device company focused on the commercialization of our flagship product, MelaFind ®, and the further design and development of MelaFind® and our technology. MelaFind®is a non-invasive, point-of-care (in the doctor's office) instrument to aid in the detection of melanoma. MelaFind® features a hand-held component that emits light of multiple wavelengths to capture digital data from clinically atypical pigmented skin lesions. The data are then analyzed utilizing sophisticated classification algorithms, 'trained' on our proprietary database of melanomas and benign lesions, to provide information to assist in the management of the patient's disease, including information useful in the decision of whether to biopsy the lesion.

We commenced operations in December 1989 as a New York corporation, re-incorporated as a Delaware corporation in September 1997, and changed our name from Electro-Optical Sciences, Inc. to MELA Sciences, Inc. on April 30, 2010. Since our inception, we have generated significant losses. As of June 30, 2012, we had an accumulated deficit of approximately $130.8 million. We expect to continue to spend significant amounts on the commercialization and further development of MelaFind®and the development of our technology.

The Company received the Food and Drug Administration's ("FDA") approval of the Pre-Market Approval ("PMA") application for Melafind® in November 2011 and in September 2011 the Company received Conformite Europeenne ("CE") Mark approval for MelaFind®.

In the first quarter of 2012, the Company supported MelaFind ® pre-launch studies conducted by selected dermatologists in the U.S. and Germany. Enhancements to the MelaFind ® system were effected based on information gathered in these pre-launch studies. The Company initiated a controlled launch of MelaFind® in selected U.S. and German markets in March 2012. Prior to March of 2012 the Company had not generated any revenues from MelaFind®.

During the second quarter of 2012, the Company continued the MelaFind® controlled launch with additional installations of MelaFind® systems in both the U.S. and Germany. Additions were made to the direct sales force and field technical support capabilities of the Company commensurate with these additional installations and an increasing demand for MelaFind®. Also during the quarter, the production levels of our contract manufacturers were ramped up to address the increasing demand for MelaFind® systems. In the U.S., MelaFind® systems were placed principally in the Northeast with additional installations in certain Southeastern, Southwestern and Middle-Atlantic states.

The Company anticipates that it will continue to incur net losses for the foreseeable future in the commercialization of the Melafind® device, the conduct of a Post Approval Study ("PAS") evaluating the sensitivity of physicians in diagnosing melanomas and high-grade lesions and the false positive rate after using MelaFind®, the further development of Melafind® and the Company's technology and the expansion of its corporate infrastructure.

Liquidity and Capital Resources

In May 2009, the Company entered into a committed equity financing facility ("CEFF") with Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase from time to time at the Company's sole discretion, up to the lesser of $45 million or 3,327,000 shares of the Company's common stock, prior to May 25, 2012. In connection with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to Kingsbridge to purchase up to 200,000 shares of the Company's common stock at an exercise price of $11.35 per share.

The Company did not sell any stock to Kingsbridge Capital Limited under the CEFF in the three or six months ended June 30, 2012 and June 30, 2011, respectively. The CEFF terminated in May 2012 with 1,095,315 shares of common stock remaining unsold. Legal, accounting, and other costs associated with this agreement approximating $62 have been charged to operations in the quarter ended June 30, 2012 as the CEFF expired. The 200,000 warrants held by Kingsbridge remain outstanding and, if not exercised, will expire in May 2014.

In May 2010, the Company filed a Form S-3 shelf registration statement for an indeterminate number of shares of common stock, warrants to purchase shares of common stock and units consisting of a combination thereof having an aggregate initial offering price not to exceed $75 million. The registration statement was declared effective by the SEC on June 1, 2010. On June 30, 2010, the Company entered into an underwriting agreement, relating to the public offering of 2,200,000 shares of the Company's common stock, at a price to the public of $7.50 per share less underwriting discounts and commissions. The common stock was offered and sold pursuant to the Company's Prospectus dated June 1, 2010 and the Company's Prospectus Supplement filed with the SEC on June 30, 2010, in connection with a takedown from the Company's effective shelf registration statement.

On December 15, 2011, the Company entered into an underwriting agreement, relating to the public offering of 5,000,000 shares of the Company's common stock, at a price to the public of $3.25 per share less underwriting discounts and commissions. The common stock was offered and sold pursuant to the Company's Prospectus dated June 1, 2010 and the Company's Prospectus Supplement filed with the SEC on December 16, 2011, in connection with a takedown from the Company's effective shelf registration statement. The gross proceeds to the Company from the sale of the common stock totaled approximately $16.3 million. After deducting the underwriters' discounts and commissions and other offering expenses payable by the Company, net proceeds were approximately $15 million. This offering closed on December 21, 2011. Approximately $42.2 million remained available under the Company's 2010 shelf registration at December 31, 2011.

On June 15, 2012 the Company entered into a sales agreement with Cowen and Company, LLC to sell shares of its common stock with aggregate gross proceeds of up to $20,000,000, from time to time, through an ATM Program. The common stock was offered and will be sold pursuant to the Company's Prospectus dated June 1, 2010 and the Company's Prospectus Supplement filed with the SEC on June 15, 2012, in connection with a takedown from the Company's effective shelf registration statement, leaving $22.2 million available under the shelf registration. There were no shares of Company common stock sold through this ATM Program as of June 30, 2012. During July 2012, there were 187,102 shares of Company common stock sold through the ATM for gross proceeds of approximately $0.7 million.

Most of our expenditures prior to commercialization in March 2012 had been for research and development activities and general and administrative expenses. Research and development expenses represented costs incurred for product development, clinical trials, activities related to regulatory filings, and manufacturing development efforts. Subsequent to the commercial launch of MelaFind®, certain costs previously classified as research and development expenses are now classified as cost of sales or general and administrative expenses.

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

To date, we have not borrowed (other than by issuing convertible notes, all of which have been converted into equity) or financed our operations through equipment leases, financing loans or other debt instruments.

As of June 30, 2012, the Company's total of cash and cash equivalents was approximately $17.2 million. The Company will require additional funds to achieve significant commercialization of MelaFind®. However, there can be no assurances that the Company will be able to obtain additional financing in the future. Additional funds may not become available on acceptable terms, and there can be no assurance that any additional funding that the Company does obtain will be sufficient to meet the Company's needs in the long term. In the event that the Company is unable to raise additional funds, the Company has the ability and intent to reduce certain discretionary expenditures.

Our cash and cash equivalents at June 30, 2012 are liquid investments in money market accounts and deposits with commercial banks, which are held in amounts that substantially exceed FDIC limits.

Cash Flows from Operating Activities (in thousands)

Net cash used in operations was $9,230 for the six months ended June 30, 2012. For the corresponding period in 2011, net cash used in operations was $9,547. In both periods, cash used in operations was attributable to net losses after an adjustment for non-cash charges related to depreciation/amortization, share-based compensation, deferred rent, deferred revenue, the acquisition of MelaFind® related inventory and other changes in operating assets and liabilities.

Cash Flows from Investing Activities

For the six months ended June 30, 2012, there was $1,391 net cash used in our investing activities, principally for the purchase of MelaFind® systems and components. For the corresponding period in 2011, $31 net cash was used in our investing activities, principally for the purchase of fixed assets.

Cash Flows from Financing Activities

For the six months ended June 30, 2012, there was $166 used in our financing activities representing the net of expenses related to our ATM Program, additional costs from our December 2011 public offering offset, in part, by the proceeds from the exercise of stock options. For the six months ended June 30, 2011, no net cash was provided by or used in our financing activities.

Operating Capital and Capital Expenditure Requirements

We face certain risks and uncertainties, which are present in many emerging medical device companies. At June 30, 2012, we had an accumulated deficit of approximately $130.8 million. We anticipate that we will continue to incur net losses for the foreseeable future as we proceed with the MelaFind® commercialization process, the conduct of a Post Approval Study ("PAS") evaluating the sensitivity of physicians in diagnosing melanomas and high-grade lesions and the false positive rate after using MelaFind®, the further development of Melafind® and the Company's technology and the expansion of its corporate infrastructure. However, we will need substantial funds to broaden the commercial expansion of Melafind®. The timing and amount of any additional funding the Company may require to broaden the commercial expansion of Melafind® will be affected by the commercial success of the product. The funding could be in the form of either additional equity or debt financing. We believe that our current cash and cash equivalents, anticipated revenue and the utilization of the Company's ATM Program will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, if our existing cash is insufficient to satisfy our liquidity requirements, or if we develop additional products, we may seek to sell additional equity or debt securities or obtain a credit facility, which will be even more difficult due to the lack of available capital as a result of the recent global economic crisis. If additional funds are raised through the issuance of debt securities, these securities would have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of, delay or eliminate some or all of planned product research development and commercialization activities, which could harm our business.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices such as MelaFind® and operating our Company, we are unable to estimate the exact amounts of capital outlays and operating expenditures. Our future funding requirements will depend on many factors, including, but not limited to:

• the cost of commercialization activities, including product marketing and building a domestic direct sales force;

• the amount of direct payments we are able to obtain from physicians utilizing MelaFind®;

• the costs of maintaining regulatory approval;

• reimbursement amounts for the use of MelaFind® that we are able to obtain from Medicare and third party payers;

• the success of our research and development efforts in product creation and enhancement, and meeting competitive services and technologies;

• the schedule, costs, and results of our clinical trials;

• the costs of maintaining or potentially building our inventory and other manufacturing expenses;

• the costs involved in defending any patent infringement actions or other litigation claims brought against us by third parties; and

• the costs of filing, prosecuting, defending and enforcing any patent claims or other rights.

Contractual Obligations (in thousands)

The following table summarizes our outstanding contractual obligations as of
June 30, 2012, and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:



                                          Less than
                              Total        1 year         1-3 years       4-5 years
          Operating leases   $ 2,111     $       447     $       947     $       717

Our long-term obligations represent a non-cancelable operating lease for our laboratory, assembly, and office space which expires in December of 2016. The lease is for approximately 21,700 square feet of space including 1,700 square feet which became effective May 1, 2012. This amendment increased the annual rental by $22.

Results of Operations (in thousands)

In the six months ended June 30, 2012, the Company evolved from being exclusively an R&D company prior to the MelaFind® launch to a commercial company with the controlled installation of MelaFind® systems in the U.S. and Germany. Additions were made to the direct sales force and field technical support capabilities of the Company commensurate with these additional installations and increasing demand for MelaFind®. Also during the quarter, the production levels of our contract manufacturers were accelerated to address the increasing demand for MelaFind® systems. For the first two months of 2012 the Company continued to record all transactions as an R&D company, as it had in 2011. Subsequent to the commercial launch of MelaFind®, certain costs previously classified as research and development expenses are now classified as cost of sales or general administrative expenses. Sales and marketing efforts have been increased in the first six months of 2012 leading up to and subsequent to the commercial launch of MelaFind®.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Sales

Invoicing for the quarter totaled $147, with revenue of $76 and deferred revenue of $71 recorded in the three months ended June 30, 2012 as the Company continued its controlled commercial launch of the MelaFind® product which commenced during March 2012. Prior to the commercial launch of MelaFind ®, the Company had not recorded any product revenue or deferred revenue since the discontinuance of our Difoti product in 2005. In general, the Company signs a user agreement with its customers that includes an installation fee for the placement of the MelaFind® system and for the sale of its electronic patient record cards and consumables which are needed to operate the system. The Company is addressing unique aspects of the European marketplace through variations of the user agreement. Deferred revenue reflects the timed recognition of the installation fee revenue over the term of the user agreement, which is generally 2 years.

Cost of Sales

Costs of $372 were recorded as associated with the realization of MelaFind® revenue and deferred revenue during the three months ended June 30, 2012. These costs were made up of direct costs associated with the placement of the MelaFind® system in the doctor's office, the cost of consumables delivered at installation, the cost of the electronic record cards, and depreciation costs of the MelaFind® system placed with the customer which remains the property of the Company. Certain manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind® along with technical support and quality costs are also recorded to cost of goods sold.

Research and Development Expense

Research and development ("R&D") expenses experienced an overall decrease of $947 or 36% in the three months ended June 30, 2012 below the comparable period a year earlier. This decrease was principally due to the decrease in R&D labor and materials at Askion in Germany of $265 and the re-classification to general and administrative ("G&A") expense of approximately $263 of regulatory expenses and $336 of clinical expenses, and the re-classification of approximately $75 of quality expenses to cost of sales.

General and Administrative Expense

General and administrative ("G&A") expenses experienced an overall increase of $1,321 or 60% for the three months ended June 30, 2012 above the comparable period a year earlier. Within G&A, marketing costs represented $624 of the increase as compensation related costs increased by $259 with the expansion of our field and in-house sales force, expenses for consulting in Germany increased by $167, conference expenses increased by $82 and travel expenses increased by $103.

Other year-to-year increases in general and administrative costs for the three months ended June 30, 2012 include the re-classification to G&A of approximately $ 336 in clinical and $263 of regulatory expenses which would have been classified as R&D if incurred prior to launch, while non-marketing travel expense increased by $124.

Interest Income

Interest income for the three months ended June 30, 2012 decreased to $9 from $14 in the comparable period of 2011. Interest income decreased as a result of the deterioration of interest rates and smaller cash balances during the period in 2012.

Other Income

Other income for the three months ended June 30, 2012 and 2011, respectively, was principally the $5 royalty minimum we earn each quarter from Kavo on the sale/licensing of our discontinued DEFOTI product.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Sales

Invoicing in the first two quarters totaled $175, with revenue of $87 and deferred revenue of $88 recorded in the six months ended June 30, 2012 as the Company commenced its controlled commercial launch of the MelaFind ® product during March 2012. Prior to the launch of MelaFind®, the Company had not recorded any product revenue or deferred revenue since the discontinuance of our Difoti product in 2005. In general, the Company signs a user agreement with its customers that includes an installation fee for the placement of the MelaFind® system and for the sale of its electronic patient record cards and consumables which are needed to operate the system. The Company is addressing unique aspects of the European marketplace through variations of the user agreement. Deferred revenue reflects the timed recognition of the installation fee revenue over the term of the user agreement, which is generally 2 years.

Cost of Sales

Costs of $502 were recorded as associated with the realization of MelaFind® revenue and deferred revenue during the six months ended June 30, 2012. These costs were made up of direct costs associated with the placement of the MelaFind® system in the doctor's office, the cost of consumables sold, the cost of the system access cards, and depreciation costs of the MelaFind® system placed with the customer which remains the property of the Company. Certain manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind® along with technical support and quality costs are also recorded to cost of goods sold.

Research and Development Expense

Research and development ("R&D") expenses experienced an overall decrease of $1,089 or 21% in the six months ended June 30, 2012 below the comparable period a year earlier. This decrease was principally due to the decrease in R&D labor and materials at Askion in Germany of $719, the re-classification to general and administrative expenses of approximately $486 of regulatory expenses and $482 of clinical expenses, and of approximately $118 of quality expenses to cost of sales. These decreases were offset by an increase of $311 in software development costs and an increase of $384 in expenses related to clinical studies initiated in Germany prior to commercial launch.

General and Administrative Expense

General and administrative expenses experienced an overall increase of $2,145 or 47% for the six months ended June 30, 2012 above the comparable period a year earlier. Within G&A, marketing costs represented $902 of the increase as compensation related costs increased by $398 with the expansion of our sales force, expenses for consulting in Germany increased by $247, conference expenses increased by $121 and travel expenses increased by $154.

Other year-to-year increases in general and administrative costs for the six months ended June 30, 2012 include the re-classification to G&A of approximately $ 482 in clinical and $486 of regulatory expense which would have been classified as R&D if incurred prior to launch, while non-marketing travel expense increased by $136.

Interest Income

Interest income for the six months ended June 30, 2012 decreased to $22 from $34 in the comparable period of 2011. Interest income decreased as a result of the deterioration of interest rates and smaller cash balances during the period in 2012.

Other Income

Other income for the six months ended June 30, 2012 and 2011, respectively, was the $10 royalty minimum we earned from Kavo on the sale/licensing of our discontinued DIFOTI product.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP"). 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 judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable 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 that the following accounting policies and significant judgments and estimates relating to revenue recognition, stock-based compensation charges, and accrued expenses are most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

The Company considers revenue to be earned when all of the following criteria are met: persuasive evidence a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. The Company's agreements with dermatologists regarding the MelaFind® system combines the elements noted above with a future service obligation. While the Company is required to place the MelaFind® system with dermatologists for their exclusive use, ownership of the MelaFind® system remains with the Company.

In the U.S., the Company generates revenue primarily from the sale of single-use electronic patient record cards. These cards activate the MelaFind® system, capture data and store the data for each patient visit. Additionally, the Company typically charges an initial installation fee for each MelaFind® system . . .