Bionovo 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
	or
o	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 001-33498

BIONOVO, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-5526892
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

5858 Horton Street, Suite 375,

Emeryville, California 94608

(510) 601-2000

(Address of Principal Executive Offices, Including Zip Code and Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One.

Large Accelerated Filer o	Accelerated Filer þ	Non- Accelerated Filer o	Smaller Reporting Company o
		(Do not check if smaller reporting company)

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

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 76,363,101 as of October 31, 2008

		Page
	TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION			3
Item 1.	Financial Statements (Unaudited)		3
	Condensed Balance Sheets at September 30, 2008 and December 31, 2007		3
	Condensed Statements of Operations for the three and nine months ended September 30, 2008 and 2007		4
	Condensed Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 and for the period from February 1, 2002 (date of inception) to September 30, 2008.		5
	Notes to Condensed Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		22
Item 4.	Controls and Procedures		22
PART II: OTHER INFORMATION			24
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3.	Defaults Upon Senior Securities		24
Item 4.	Submission of Matters to a Vote of Security Holders		24
Item 5.	Other Information		24
Item 6.	Exhibits		24
SIGNATURES			25
EXHIBIT 3.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Bionovo, Inc

(A Development Stage Company)

Condensed Balance Sheets

	September 30,			December 31,
	2008			2007
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	6,664,427		$	28,472,485
Short-term investments		10,645,621			4,823,938
Receivables		262,233			285,899
Prepaid expenses and other current assets		1,159,263			405,381
Total current assets		18,731,544			33,987,703
Property and equipment, net		6,777,308			3,900,248
Other assets and patent pending, net		1,027,306			277,220
Total assets	$	26,536,158		$	38,165,171
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	881,452		$	299,677
Accrued clinical and costs of other studies		102,814			298,559
Accrued compensation and benefits		870,435			462,485
Current portion of lease obligation		793,242			706,710
Other current liabilities		467,088			949,200
Total current liabilities		3,115,031			2,716,631
Non-current portion of lease obligation		693,519			526,346
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.0001 par value, 190,000,000 shares authorized; 76,363,101 and 76,343,101 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively		7,636			7,634
Additional paid-in capital		58,737,205			57,660,045
Accumulated other comprehensive income		(53,450	)		4,480
Accumulated deficit		(35,963,783	)		(22,749,965	)
Total shareholders’ equity		22,727,608			34,922,194
Total liabilities and shareholders’ equity	$	26,536,158		$	38,165,171

See accompanying notes

3

Bionovo, Inc

(A Development Stage Company)

Condensed Statements of Operations

(Unaudited)

													Accumulated from
													February 1, 2002
		Three months ended						Nine months ended					(Date of Inception) to
		September 30,						September 30,							September 30,
		2008			2007			2008			2007				2008
Revenues	$	—		$	243,375		$	—		$	250,875			$	659,490
Operating expenses:
Research and development		3,941,303			2,444,674			8,881,340			7,212,445				24,673,545
General and administrative		1,222,319			1,129,402			4,852,648			2,689,246				12,304,415
Merger cost		—			—			—			—				1,964,065
Total operating expenses		5,163,622			3,574,076			13,733,988			9,901,691				38,942,025
Loss from operations		(5,163,622	)		(3,330,701	)		(13,733,988	)		(9,650,816	)			(38,282,535	)
Change in fair value of warrant liability		—			—			—			—				831,288
Interest income		142,815			170,272			638,562			517,958				1,706,979
Interest expense		(36,286	)		(42,370	)		(98,198	)		(68,898	)			(335,216	)
Other income (expense)		(1,322	)		(5,241	)		(16,938	)		(5,241	)			127,959
Loss before income tax		(5,058,415	)		(3,208,040	)		(13,210,562	)		(9,206,997	)			(35,951,525	)
Income tax provision		—			—			(3,256	)		(2,400	)			(12,258	)
Net loss	$	(5,058,415	)	$	(3,208,040	)	$	(13,213,818	)	$	(9,209,397	)		$	(35,963,783	)
Basic and diluted net loss per common share	$	(0.07	)	$	(0.05	)	$	(0.17	)	$	(0.15	)		$	(0.88	)
Shares used in computing basic and diluted net loss per common share		76,363,100			65,571,108			76,350,180			63,368,561				40,805,306

See accompanying notes

4

Bionovo, Inc

(A Development Stage Company)

Condensed Statements of Cash Flows

(Unaudited)

							Accumulated from
							February 1, 2002
	Nine Months ended						(Date of inception) to
	September 30,							September 30,
	2008			2007				2008
Cash flows from operating activities:
Net loss	$	(13,213,818	)	$	(9,209,397	)		$	(35,963,783	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		773,874			482,166				1,800,220
Amortization and accretion of investments		47,724			—				42,488
Non-cash compensation for warrants issued		—			—				1,964,065
Stock based compensation expense		1,059,163			837,018				2,969,048
Amortization of note discount		—			—				139,084
Amortization of deferred stock compensation		—			—				16,472
Change in fair value of warrant liability		—			—				(831,288	)
Changes in operating assets and liabilities:
Receivables		23,666			—				(260,436	)
Prepaid and other current assets		(753,882	)		(358,898	)			(1,154,314	)
Other assets		(472,720	)		—				(472,720	)
Accounts payable and accrued expenses		989,725			405,680				1,853,812
Accrued clinical trial costs		(195,745	)		—				102,813
Deferred revenue		—			(11,250	)			—
Other accrued liabilities		(416,492	)		24,900				413,616
Net cash used in operating activities	$	(12,158,505	)	$	(7,829,781	)		$	(29,380,923	)
Cash flows from investing activities:
Capital expenditures		(2,758,184	)		(1,137,146	)			(5,591,522	)
Acquisition of intangible assets		(299,844	)		(118,718	)			(587,807	)
Advance to officers		—			—				(1,796	)
Purchases of available-for-sale investments		(15,989,408	)		(485,000	)			(27,540,446	)
Proceeds from sales and maturities of investments		10,062,070			775,044				16,801,145
Net cash used in investing activities	$	(8,985,366	)	$	(965,820	)		$	(16,920,426	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net		—			14,504,529				49,733,909
Payments under capital lease obligation		(682,187	)		(310,115	)			(1,511,030	)
Proceeds from exercise of warrants and options		18,000			4,581,629				4,880,298
Proceeds from convertible notes payable		—			—				(50,000	)
Payments for financing costs for convertible notes		—			—				(87,401	)
Net cash provided by (used in) financing activities	$	(664,187	)	$	18,776,043			$	52,965,776
Net increase (decrease) in cash and cash equivalents		(21,808,058	)		9,980,442				6,664,427
Cash and cash equivalents at beginning of period		28,472,485			2,571,439				—
Cash and cash equivalents at end of period	$	6,664,427		$	12,551,881			$	6,664,427
Supplemental disclosure of cash flow information:
Interest paid	$	98,198		$	68,898			$	324,751
Income taxes paid	$	750		$	—			$	8,952
Supplemental disclosure of non-cash investing and financing
Non-cash warrant expense for warrants issued	$	—		$	—			$	1,964,065
Adjustment in warranty liability		—			—				7,030,026
Conversion of notes payable to common stock		—			—				450,000
Assets acquired under capital lease		870,270			1,211,148				3,031,032
Stock based compensation		1,059,163			837,018				2,774,048
Issuance of common stock for services		—			—				165,000
Conversion of accrued interest payable		—			—				11,697
Issuance of common stock with reverse merger	$	—		$	—			$	4,000

See accompanying notes

5

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements

1. Business

Bionovo, Inc. (“Bionovo” or the “Company”) is a clinical stage drug discovery and development company focusing on cancer and women’s health. Currently, the Company is conducting research and development activity which integrates scientific research with natural substances derived from botanical sources which have novel mechanisms of action. The Company is developing drugs to treat breast and other cancers, and for menopausal symptoms. Based on the results of our clinical trials and preclinical studies to date, we believe that we have discovered new classes of drug candidates with the potential to be leaders in their markets.

Bionovo, Inc. was incorporated in Nevada on January 29, 1998 under the name Lighten Up Enterprises International, Inc. Bionovo Biopharmaceuticals, Inc. (“Biopharma”), was incorporated and began operations in the State of California in February 2002. BioPharma completed a reverse merger transaction on April 6, 2005 with Lighten Up Enterprises International, Inc. On April 6, 2005, Bionovo, Inc., (formerly known as “Lighten Up Enterprises International, Inc.), acquired all the outstanding shares of BioPharma in a reverse triangular merger (the “Merger”). Effective with the merger, the directors and management of BioPharma thereupon became the directors and management of Bionovo, Inc. which has been considered the acquirer in this transaction, accounted for as a recapitalization. The business of BioPharma is now the sole business of the Company. BioPharma remains a wholly-owned subsidiary of Bionovo, Inc.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other future period.

The condensed consolidated balance sheet at December 31, 2007, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Bionovo, Inc. Annual Report on Form 10-K for the year ended December 31, 2007.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of Bionovo, Inc. and its wholly owned subsidiary Bionovo Biopharmaceuticals, Inc. Our operations are treated as one operating segment. All significant inter-company balances and transactions have been eliminated.

Use of Estimates`

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

Management makes estimates that affect certain accounts including deferred income tax assets, estimated useful lives of property and equipment, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the year in which such adjustments are determined.

Revenue Recognition

Revenue is generated from collaborative research and development arrangements, technology licenses, and government grants. To date only revenue from technology licenses and grant proceeds have been received.

Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) transfer of technology (intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured.

6

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements – (Continued)

Revenues from government contracts are recognized on a qualified cost reimbursement basis.

Technology (Drug) license agreements generally consist of nonrefundable upfront license fees and royalty payments. In accordance with Staff Accounting Bulletin 101 and 104, nonrefundable upfront license fees are recognized over the license term using the straight-line method of accounting when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of the Company’s continuing research and development efforts.

Research and Development

Research and development expenses include internal and external costs. Internal costs include salaries and employment related expenses and allocated facility costs. External expenses consist of costs associated with outsourced clinical research organization activities, sponsored research studies, product registration, and investigator sponsored trials. In accordance with SFAS No. 2, “Accounting for Research Development Costs”, all such costs are charged to expense as incurred.

Development Stage Company

The Company has not generated any significant revenue since inception. The accompanying financial statements have, therefore, been prepared using the accounting formats prescribed by SFAS No. 7 for a development stage enterprise (DSE). Although the Company has recognized some nominal amount of revenue, the Company is devoting, substantially, all its efforts on developing the business and, therefore, still qualifies as a DSE.

Recent Accounting Pronouncements

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.

Effective January 1, 2008, the Company adopted EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption did not have a material impact on the Company’s consolidated results or operations or financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable as:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted FASB EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” and EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.” Both of these EITFs state that an employer should recognize a liability for postretirement benefits based on these life insurance arrangements. The adoption of these EITFs will not have a significant impact on the Company’s future results of operations, financial condition or liquidity.

7

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

The Company also adopted EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards” as of January 1, 2008. This EITF indicates that tax benefits of dividends on unvested restricted stock are to be recognized in equity as an increase in the pool of excess tax benefits. Should the related awards forfeit or no longer become expected to vest, the benefits are to be reclassified from equity to the income statement. The adoption of this EITF does not have a significant impact on the Company’s results of operations, financial condition or liquidity.

In December 2007, EITF No.07-1, “Accounting for Collaborative Arrangements” was issued. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008 and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is in the process of evaluating the impact, if any, of adopting EITF 07-1 on its financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective on a prospective basis for all business combinations for which the acquisition date is on after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. We are currently evaluating the effects, if any, that SFAS 141R may have on our financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 may have on our financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently assessing the potential impact that adoption of SFAS No. 161 may have on our financial statements.

In April 2008, the FASB issued (FSP) FAS No. 142-3, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141, “Business Combinations.” The FSP is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The FSP is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.

8

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

In June 2008, the FASB issued (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

3. Investments

Cash, Cash Equivalents and Investments

As part of our cash management program, the Company maintains a portfolio of marketable investment securities. The securities are investment grade and generally mature within one year and may include tax exempt securities and certificates of deposit. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market. The Company maintains its cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents.

The following is a summary of cash, cash equivalents, and available-for-sale securities at September 30, 2008 and December 31, 2007:

	September 30, 2008
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	781,530	$	—	$	—		$	781,530
Money market funds		1,287,380		—		—			1,287,380
US term deposits		4,601,272		—		(5,755	)		4,595,517
Total cash and cash equivalents	$	6,670,182	$	—	$	(5,755	)	$	6,664,427
Available-for-sale investments:
US govt. agency obligations		6,500,076		—		(14,916	)		6,485,160
Corporate Notes		4,193,240		—		(32,779	)		4,160,461
Total available-for-sale investments	$	10,693,316	$	—	$	(47,695	)	$	10,645,621

	December 31, 2007
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	46,445	$	—	$	—		$	46,445
Money market funds		9,152,550		—		—			9,152,550
US term deposits		19,267,962		—		5,528			19,273,490
Total cash and cash equivalents	$	28,466,957	$	—	$	5,528		$	28,472,485
Available-for-sale investments:
US govt. agency obligations		4,006,491		—		(241	)		4,006,250
Corporate Notes		818,495		—		(807	)		817,688
Total available-for-sale investments	$	4,824,986	$		$	(1,048	)	$	4,823,938

As of September 30, 2008 unrealized loss on available-for-sale securities of $53,450 was included in accumulated other comprehensive income in the accompanying unaudited Condensed Consolidated Balance Sheets.

9

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

4. Fair Value

Measurement

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability based upon an exit price model.

Valuation Hierarchy

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and short-term investments) measured at fair value on a recurring basis as of September 30, 2008:

	Level 1		Level 2		Level 3		Total
Money market funds	$	1,287,380	$	—	$	—	$	1,287,380
US term deposits		—		4,595,517		—		4,595,517
U.S. government agencies		—		6,485,160		—		6,485,160
U.S. corporate debt		—		4,160,461		—		4,160,461
Total	$	1,287,380	$	15,241,138	$	—	$	16,528,518

5. Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:

Office and Laboratory equipment	3 to 5 years
Computer equipment and software	3 years
Leasehold improvements	Term of lease agreement

As of September 30, 2008, the Company had $4.7 million in lab equipment (of which $3.0 million is leased), $233,000 of computer equipment and software, $83,000 in office furniture and equipment, $298,000 in leasehold improvements and $3.2 million in construction-in-process and accumulated depreciation of $1.8 million.

As of September 30, 2007, the Company had $3.5 million in lab equipment (of which $2.2 million is leased), $306,000 in computer equipment and software, $73,000 in office furniture and equipment, and $298,000 in leasehold improvements  and $59,000 in construction-in-process and accumulated depreciation of $763,000.

For the nine months ended September 30, 2008, the Company had $755,000 in depreciation expense and $476,000 for the same period in 2007.

Intangible assets - Patent Costs

Intangible assets consist of patent licensing costs incurred to date. The Company is amortizing the patent cost incurred to date, over a 15 year period. If the patents are not awarded, the costs related to those patents will be expensed in the period that determination is made. As of September 30, 2008, the Company had capitalized $469,000 in patent licensing costs and recorded amortization expense of $22,000.

10

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

6. Basic and Diluted Loss per Share

In accordance with SFAS No. 128, “Earnings per Share,” the basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per common share:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Numerator:
Net Loss	$	(5,058,415	)	$	(3,208,040	)	$	(13,213,818	)	$	(9,209,397	)
Denominator:
Weighted average common shares outstanding		76,363,100			65,571,108			76,350,180			63,368,561
Net loss per common share:
Basic and diluted	$	(0.07	)	$	(0.05	)	$	(0.17	)	$	(0.15	)

The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:

	Nine months ended
	September 30,
	2008		2007
Options to purchase common stock		5,137,088		4,777,254
Options to purchase common stock - Outside plan		103,212		103,212
Warrants to purchase common stock		10,466,633		5,142,858
Potential equivalent shares excluded		15,706,933		10,023,324

7. Comprehensive Loss

Comprehensive loss includes net loss and other comprehensive income, which for us is primarily comprised of unrealized holding gains or losses on our available-for-sale securities that are excluded from the statement of operations in computing net loss and reported separately in shareholders’ equity. Comprehensive loss and its components are as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(5,058,415	)	$	(3,208,040	)	$	(13,213,818	)	$	(9,209,397	)
Other comprehensive income:
Change in unrealized gain on available-for-sale securities		(20,014	)		—			(57,930	)		—
Comprehensive loss	$	(5,078,429	)	$	(3,208,040	)	$	(13,271,748	)	$	(9,209,397	)

8. Stock Compensation

Stock Option Plan

On April 6, 2005, in connection with the completion of the reverse merger, the board of directors assumed and adopted the Stock Incentive Plan, as amended, (the “Plan”) of Bionovo Biopharmaceuticals and 3,496,788 shares of common stock for issuance under the Plan. In May 2006, shareholders approved an increase of 3,000,000 additional shares for the Plan. In April 2008, the Board adopted Amendment No. 5 to the Plan, approved by stockholders in June 2008, to increase the number of shares covered by, and reserved for issuance under, the Plan from 6,496,788 shares to 9,496,788 shares. Such share reserve consists of the number of shares that remain available for issuance under the Plan and shares subject to outstanding options. The Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company's stock at the dates of grant. Stock options are typically granted throughout the year and generally are fully vested four years thereafter and expire five years from the date of the award, unless otherwise specified. Option grants issued to Board members vest immediately. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period for each stock option award.

11

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

Valuation Assumptions

The compensation expense related to stock options recognized under FAS 123R was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used were as follows:

	Nine months ended
	September 30,
	2008			2007
Dividend yield		0.00	%		0.0	%
Average risk-free rate of return		2.8	%		4.2	%
Expected volatility		92.9	%		93.0	%
Forfeiture rate		6.4	%		0.0	%
Expected term (years)		5			5

In estimating the expected term, we considered our historical stock option exercise experience including forfeitures, our post vesting termination pattern and the term of the options outstanding. The annual risk free rate of return was based on the U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards. We based our determination of expected volatility on our historical stock price volatility over the expected term.

Employee Stock-Based Compensation

The table below presents information related to stock option activity under the Plan, net of options previously exercised, as follows:

							Weighted
	Shares			Number of			Average
	Available			Options			Exercise
	For Grant			Outstanding			Price
Options outstanding at December 31, 2007		1,369,534			4,750,588		$	2.09
Plan additions		3,000,000			—			—
Options granted		(649,000	)		649,000			1.26
Options exercised		—			(20,000	)		0.90
Options cancelled or forfeited		201,667			(201,667	)		3.07
Options expired		40,833			(40,833	)		3.56
Options outstanding at September 30, 2008		3,963,034			5,137,088		$	1.95
Options exercisable at September 30, 2008		—			2,796,005		$	1.30

For the three month period ended September 30, 2008, there was no option exercise. The aggregate intrinsic value of in-the-money stock options outstanding was $0.4 million.

The following table summarizes information about stock options outstanding as of September 30, 2008:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Price	Outstanding		Life (In Years)		Price		Exercisable		Price
$0.10 - $1.00		1,882,254		4.79	$	0.62		1,882,254	$	0.62
$1.01 - $2.00		1,190,334		3.95		1.44		356,001		1.47
$2.01 - $3.00		1,350,000		3.85		2.85		383,750		2.94
$3.01 - $4.00		200,000		8.92		3.94		50,000		3.94
$4.01 - $5.00		330,000		3.92		4.40		62,500		4.40
$5.01 - $6.00		184,500		3.51		5.75		61,500		5.75
		5,137,088		4.41	$	1.95		2,796,005	$	1.30

The estimated fair value of grants of stock options and warrants to non-employees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under the option plan as described above.

12

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

As of September 30, 2008, the total remaining unrecognized cost related to non-vested options was approximately $3.4 million to be recognized over the next 2.74 years.

The following table summarizes stock compensation expense related to employee stock options and employee stock based compensation under FAS 123R for the three and nine months ended September 30, 2008 and 2007 which was incurred as follows:

	Three months ended September 30,				Nine months ended September 30,
	2008		2007		2008		2007
Research and development	$	169,823	$	261,871	$	379,159	$	526,759
General and administrative		178,680		239,966		680,004		310,259
Stock compensation expense	$	348,503	$	501,837	$	1,059,163	$	837,018
Effect of earnings per share – basic and diluted	$	0.00	$	0.0	$	0.01	$	0.01

Shares Reserved for Future Issuance

The Company had reserved shares of common stock for future issuance at September 30, 2008 and 2007 as follows:

	Nine months ended
	September 30,
	2008		2007
Options to purchase common stock - Plan		5,137,088		4,777,254
Options to purchase common stock - Outside Plan		103,212		103,212
Warrants to purchase common stock		10,466,633		5,142,858
Shares available for option grants		3,963,034		1,649,534
Total		19,669,967		11,672,858

9.  Stock Warrants

The Company issues warrants to investors as part of its overall financing strategy. There were no warrants issued for the three and nine months ended September 30, 2008, respectively, and there were 10.5 million warrants to purchase Bionovo shares outstanding with a weighted average price of $2.58 and an aggregate price of $27.0 million.

The estimated fair value of the warrants was calculated using the Black-Scholes valuation model. The following assumptions were used: (i) no expected dividends, (ii) risk free interest rate of 4.0%, (iii) expected volatility of 90%, and (iv) expected life in the stated life of the warrant. The fair value of the warrants ranged from $0.10 to $0.89. The fair value of warrants granted are included in additional paid-in capital along with the proceeds from issuance of common stock.

The following table summarizes information about all callable warrants outstanding as of September 30, 2008:

	Warrants Outstanding						Warrants Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Price	Outstanding		Life (In Years)		Price		Exercisable		Price
$0.50 - $1.00		1,550,489		1.43	$	0.51		1,550,489	$	0.51
$1.50 - $2.00		604,185		3.30		1.50		604,185		1.50
$2.25 - $3.00		2,988,184		3.30		2.25		2,988,184		2.25
$3.25 - $4.00		5,323,775		4.09		3.50		5,323,775		3.50
		10,466,633		3.43	$	2.58		10,466,633	$	2.58

13

Bionovo, Inc

(A Development Stage Company)

Notes to Consolidated Financial Statements - (Continued)

10. Leases, Commitments and Contingencies

Leases

The Company leases certain office and laboratory equipment under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the Balance Sheets as property and equipment and was $3.0 million at September 30, 2008 and $2.2 million at September 30, 2007. Accumulated amortization of leased equipment at September 30, 2008 was $878,000 and $338,000 for the same period in 2007. Amortization of assets under capital leases is included in depreciation expense.

In March 2008, the Company entered into a new equipment financing facility for $1.3 million with General Electric Capital Corporation (GE). As of September 30, 2008, we had financed equipment purchases of $870,270, leaving $429,730 available for future equipment financing. The terms of this agreement required a security deposit of 25% or $217,568 as collateral for the outstanding loan portion. Security deposits are included in the Balance Sheets as other assets.

The Company leases its laboratory and office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2010. The leases provide for increases in future minimum annual rental payments and the agreements generally require the Company to pay executory costs (real estate taxes, insurance, and repairs), which are approximately $16,000 per month. Operating lease expense totaled $487,000 for the nine months ended September 2008 and $455,000 for the nine months ended September 30, 2007.

In February 2008, the Company signed a new lease for additional office space in Emeryville, California, with fixed monthly rent of $3,903.

On May 15, 2008, we agreed to an amendment (the “Fourth Amendment”) with our current landlord, to lease approximately 32,000 square foot of office and laboratory space located at 5858 Horton Street, Suite 400, Emeryville, CA 94608, for a period of 10 years. We intend to relocate and consolidate all our Emeryville staff and personnel to this location when the build-out of the space is completed by the fourth quarter of 2008. Monthly base rent for the first 12 months will be approximately $107,000 and shall increase by three percent on each annual anniversary of the commencement date. The old premises lease shall cease after the company fulfills its obligation to relocate and vacate the old premises.

Future minimum lease payments under non-cancelable capital and operating leases are as follows:

	Capital			Operating
Period Ended December 31, 2008	Leases			Leases
2008(1)	$	290,586		$	177,981
2009		759,609			1,616,161
2010		489,046			1,561,070
2011		81,871			1,607,902
2012		—			1,656,139
2013 and thereafter		—			10,847,132
Total minimum lease payments	$	1,621,112		$	17,466,385
Less: Amount representing interest		(134,351	)
Present value of minimum lease payments		1,486,761
Less: Current portion		(793,242	)
Obligations under capital lease, net of current portion	$	693,519

(1)   For the three months ending December 31, 2008.

Letter of Credit

Merrill Lynch Bank has issued a Letter of Credit to the Company, in the approximate aggregate amount of $381,000, to secure our lease of laboratory equipment. This lease is scheduled to expire as of December 31, 2008.

11. Income Tax

The Tax Reform Act of 1986 under Section 382, as amended, limits the annual use of net operating loss and tax credit carry forwards in certain situations where changes occur in stock ownership of a company. We have not performed an ownership analysis but it is possible that there has been a “Section 382” change in ownership. In the event we have a change in ownership, as defined, the annual utilization of such carry forwards could be limited and our loss and credit carry forwards may expire unused. Our net operating losses and tax credit carry forwards are more fully described in our 2007 Annual Report on Form 10-K.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal or state income tax examinations by tax authorities for all years in which we reported net operating losses that are being carried forward for tax purposes. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

14

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

The following should be read in conjunction with our consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and other documents filed by us from time to time with the Securities and Exchange Commission. Statements made in this Item other than statements of historical fact, including statements about us and our subsidiaries and our respective clinical trials, research programs, product pipeline, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. We do not undertake any obligation to update forward-looking statements.

Overview

We completed a reverse merger transaction on April 6, 2005 with Lighten Up Enterprises International, Inc., or Lighten Up, a Nevada corporation initially formed on January 29, 1998. Until the merger, Lighten Up engaged in the development, publishing, marketing and sale of a cook book of recipes, which we discontinued following the merger and succeeded to the business of Bionovo Biopharmaceuticals, Inc. The directors and management of Bionovo Biopharmaceuticals thereupon became the directors and management of Lighten Up. Bionovo Biopharmaceuticals was considered the acquirer in this transaction, frequently referred to as a “reverse merger” of a shell company, and accounted for as a recapitalization. Bionovo Biopharmaceuticals’ financial statements are the historical financial statements of the post-merger entity, Bionovo, Inc. Accordingly, no goodwill or other adjustment in basis of assets is recorded, the shares of the shell, the legal surviving entity, are treated as issued as of the date of the transaction, and the shares held by the controlling shareholders after the transaction, are treated as outstanding for the entirety of the reporting periods. Bionovo Biopharmaceuticals, Inc. was incorporated and began operations in the State of California in February 2002 and subsequently reincorporated into the State of Delaware in March 2004. Until June 28, 2005, the name of Bionovo Biopharmaceuticals was Bionovo, Inc. On June 29, 2005, we changed our corporate name from Lighten Up Enterprises International, Inc. to Bionovo, Inc. and changed our state of incorporation from Nevada to Delaware. Bionovo Biopharmaceuticals currently remains a wholly-owned subsidiary of Bionovo, Inc.

Business

We are a clinical stage drug discovery and development company focusing on women’s health and cancer, two large markets with significant unmet needs. Building on our understanding of the biology of menopause and cancer, we design new drugs derived from botanical sources which have novel mechanisms of action. Based on the results of our clinical trials and preclinical studies to date, we believe that we have discovered new classes of drug candidates with the potential to be leaders in their markets.

Our lead drug candidate, MF101, represents a new class of receptor sub-type selective estrogen receptor modulator for the treatment of vasomotor symptoms of menopause, or “hot flashes.” We have designed MF101, an orally delivered product, to selectively modulate estrogen receptor beta (ERβ) and to provide a safe and effective alternative to existing FDA-approved therapies that pose a significant risk to the patient for developing breast cancer and other serious diseases. In preclinical studies, MF101 inhibited tumor growth as well as bone resorption known to cause osteoporosis, which is commonly developed during menopause. This activity, if confirmed in clinical testing, would differentiate MF101 from some existing therapies and other therapies in clinical development for hot flashes. In our completed, randomized, placebo-controlled Phase II clinical trial involving 217 patients for which we announced results in June 2007, the higher of two MF101 doses tested was well tolerated and resulted in a statistically significant reduction of hot flashes when compared to placebo at 12 weeks of treatment. Additional analysis from the Phase 2 trial showed that MF101 reduced the number of times women were woken up from sleep due to hot flashes, also know as "night awakenings" or "night sweats". The median percent in night time awakenings from hot flashes for women randomized to the higher dose of MF101 was 67% and this reduction was statistically superior compared to the placebo (p=0.05). We plan to seek approval of the Food and Drug Administration (FDA) to conduct further clinical testing. We believe that MF101’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (HT) and serotonin-norepinephrine reuptake inhibitors (SNRI) therapies that are sometimes used off-label.

We have also identified a potential orally active anti-cancer agent for advanced breast cancer, BZL101. Unlike most other anti-cancer drugs and drug candidates, which try to control cancer through genomic and proteomic signaling pathways, BZL101 is designed to take advantage of the unique metabolism of cancer cells. BZL101 inhibits glycolysis, a metabolic pathway on which cancer cells rely. Glycolysis inhibition leads to DNA damage and death of cancer cells without harm to normal cells. We believe that BZL101 may have a preferential effect on hormone-independent cancers, a subset with few treatment options. We have completed two BZL101 Phase I clinical trials comprising a total of 48 patients. No significant adverse events were noted in either of the two Phase 1 trials. We are currently enrolling 80 women, at 17 U.S clinical sites, with a diagnosis of metastatic breast cancer to our Phase 2 clinical trial of BZL101. In addition, we intend to explore the use of BZL101 on other forms of cancer, including pancreatic cancer and adjuvant use in breast cancer for women with estrogen receptor negative breast cancer.

15

We have submitted an investigational new drug, or IND, application and plan to initiate a Phase I clinical trial for another drug candidate, VG101, for the treatment of post-menopausal vaginal or vulvar atrophy or vaginal dryness.

Our drug development process targets herbs and other botanical sources, used in traditional Chinese medicine, believed to produce biologically active compounds. We apply our clinical knowledge, experience with natural compounds and knowledge of proper scientific screening tools to derive botanical compounds and extracts for pharmaceutical development. In June 2004, the FDA released a document to provide drug developers with guidance on submitting IND applications, conducting clinical trials, and seeking approval for botanical drugs. This guidance states that applicants may submit reduced documentation of non-clinical (preclinical) safety and of chemistry, manufacturing and controls to support an IND application for initial clinical studies of botanicals. The first botanical extract drug developed pursuant to these guidelines was approved by the FDA in October 2006. To date, all of our drug candidates are derived from botanical extracts and are being developed in accordance with this FDA guidance. In addition, we have identified the active chemical components underpinning the mechanism of action for our novel drugs, and in some cases, we have developed synthetic methods of production.

We expect to continue to incur significant operating losses over at least the next several years, and do not expect to generate profits until and unless our drug candidates have been approved and are being marketed with commercial partners. Historically we have funded our operations primarily through private placements and public offerings of our capital stock, equipment lease financings, license fees and interest earned on investments. As of September 30, 2008, we had an accumulated deficit of $36.0 million.

Development Stage Company

We have not generated any significant revenue since inception. The accompanying financial statements have, therefore, been prepared using the accounting formats prescribed by SFAS No. 7 for a development stage enterprise (DSE). Although the Company has recognized some nominal amount of revenue, the Company is devoting, substantially, all its efforts on developing the business and, therefore, still qualifies as a DSE.

The Company is primarily engaged in the development of pharmaceuticals, derived from botanical sources, to treat cancer and women’s health. The initial focus of the Company’s research and development efforts will be the generation of products for the treatment of breast, and other cancers and to alleviate the symptoms of menopause. The production and marketing of the Company’s products and its ongoing research and development activities are and will continue to be subject to extensive regulation by numerous governmental authorities in the United States. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the FDA. The Company has limited experience in conducting and managing the preclinical and clinical testing necessary to obtain regulatory approval. There can be no assurance that the Company will not encounter problems in clinical trials that will cause the Company or the FDA to delay or suspend clinical trials.

The Company’s success will depend in part on its ability to obtain patents and product license rights, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantage.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to clinical trial accruals, income taxes (including the valuation allowance for deferred tax assets), restructuring costs and stock-based compensation. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

We consider the following accounting policies related to revenue recognition, clinical trial accruals, stock-based compensation, income tax and research and development expenses to be the most critical accounting policies, because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

16

Revenue Recognition

Our revenues are derived from collaborative research and development arrangements, technology licenses, and government grants.

Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) transfer of technology has been completed or services have been rendered; (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured.

Technology license agreements generally consist of nonrefundable upfront license fees and royalty payments. Nonrefundable upfront license fees are recognized over the license term using the straight-line method of accounting when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of our continuing research and development efforts.

Accruals

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves communicating with our 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 we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our 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 selected service providers and make adjustments, if necessary. Examples of estimated accrued expenses include:

·   fees paid to contract research organizations 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 clinical trial materials; and professional service fees.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-Based Compensation

We record expenses relating to stock options granted to employees based on the fair value at the time of grant. The fair value of stock options and warrants are calculated using the Black-Scholes pricing method on the date of grant. This option valuation model requires input of highly subjective assumptions. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our management’s opinion, the existing model does not necessarily provide a reliable single measure of fair value of our employee stock options. Stock-based compensation to outside consultants is recorded at fair market value in general and administrative expense.

Income Tax

Effective January 1, 2007, we adopted the provisions of Financial Accounting Standard Board, Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48. Additionally, effective December 1, 2007, we adopted FIN 48-1 (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation No. 48”, an amendment to FIN 48, which clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS 109. The interpretation applies to all tax positions accounted for in accordance with SFAS 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date.

We file income tax returns in the U.S. federal jurisdiction and the California state jurisdiction. To date, we have not been audited by the Internal Revenue Service or any state income tax jurisdiction. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. As of September 30, 2008, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.

17

We have generated net losses since inception and accordingly did not record a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding our ability to continue to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. Additionally, the future utilization of our NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. We have not yet determined whether such an ownership change has occurred. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

Research and Development Activities

Research and development costs are charged to expense when incurred. The major components of research and development costs include clinical manufacturing costs, pre-clinical and clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and facilities costs

Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites and clinical research organizations. In the normal course of business we contract with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, and the completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract. We monitor service provider activities to the extent possible; however, if we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.

During the three and nine months ended September 30, 2008, we incurred research and development expenses of $3.9 million and $8.9 million, respectively. We further expect that research and development expenses will increase over the coming months as we continue development of our drugs in clinical trials.

Results of Operations

Three and nine months ended September 30, 2008 and 2007.

Revenues

	Three months ended							Nine months ended
	September 30,				Change in			September 30,				Change in
	2008		2007		Percent			2008		2007		Percent
Revenues:
Licensing	$	—	$	3,750		(100	)%	$	—	$	11,250		(100	)%
NIH grant		—		239,625		(100	)%		—		239,625		(100	)%
Total revenues	$	—	$	243,375		(100	)%	$	—	$	250,875		(100	)%

Revenues consist primarily of licensing fees. We did not receive any revenue in the three and nine months ended September 2008 compared to $3,750 and $11,250 for the same period in 2007 received from a licensing and technology transfer agreement with a Taiwanese company. In October of 2007, we terminated the agreement following notice of material breach of the Agreement by that company and we recognized the remaining deferred revenue of $91,250 in December 2007.

Research and Development Expenses

	Three months ended							Ninemonths ended
	September 30,				Change in			September 30,				Change in
	2008		2007		Percent			2008		2007		Percent
Research and development	$	3,941,303	$	2,444,674		61	%	$	8,881,340	$	7,212,445		23	%

Research and development (R&D) expenses reflect costs for the development of drugs and include salaries, contractor and consultant fees and other support costs, including employee stock-based compensation expense. The increases of $1.5 million and $1.7 million for the three and nine months ended September 30, 2008, compared to the same period in 2007, were due primarily to the increase in clinical trials expenses related to the development of our lead drug candidates.

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For the three and nine months ended September 30, 2008, we recognized $169,823 and $379,159 in employee stock-based compensation expenses charged to R&D expenses compared to $261,871 and $526,759 for the same periods in 2007. The decrease in stock-based compensation expense is due primarily to fewer options granted to R&D personnel. All costs incurred for research and development are expensed as incurred.

General and Administrative Expenses

	Three months ended							Nine months ended
	September 30,				Change in			September 30,				Change in
	2008		2007		Percent			2008		2007		Percent
General and administrative	$	1,222,319	$	1,129,402		8	%	$	4,852,648	$	2,689,246		80	%

General and administrative (G&A) expense includes personnel costs for finance, administration, information systems, marketing, professional fees as well as facilities expenses. We do not have any dedicated sales support or marketing personnel. Marketing and communications expenses include public relations related to our drug development and clinical trials, participation in conventions and tradeshows, and website related expenses. The increase of $2.2 million for the nine months ended September 30, 2008 in G&A expenses, compared to the same periods in 2007, was primarily due to activities in support of business operations, including increases in payroll expenses, facilities rental, consulting and legal expenses, and payment to the state of  Delaware for business license fees. For the three and nine months ended September 30, 2008, we recognized $55,000 and $156,000 in marketing and communications expenses charged to G&A expenses, compared to $11,000 and $114,000 for the same period in 2007. The increases of $44,000 and $42,000 in the three and nine months ended September 30, 2008 compared to the same period in 2007are due primarily to our website development costs and travel expenses for attendance of industry events related to our lead drug candidates.

For the three and nine months ended September 30, 2008, we recognized $178,680 and $680,004 in employee stock-based compensation expenses charged to G&A expenses, compared to $239,966 and $310,259 for the same period in 2007. The increase of $369,754 in September 30, 2008 compared to the same period in 2007 reflects an increase in option grants to additional G&A personnel.

Interest Income, Interest Expense and Other Expense

	Three months ended									Nine months ended
	September 30,						Change in			September 30,						Change in
	2008			2007			Percent			2008			2007			Percent
Interest income, interest expense and other expense:
Interest income	$	142,815		$	170,272			(16	)%	$	638,562		$	517,958			23	%
Interest expense		(36,286	)		(42,370	)		(14	)%		(98,198	)		(68,898	)		43	%
Other income (expense), net		(1,322	)		(5,241	)		(75	)%		(16,938	)		(5,241	)		223	%
Total interest income and expense	$	105,207		$	122,661			(14	)%	$	523,426		$	443,819			18	%

Interest income is derived from cash balances and short term investments. The decrease in interest income for the three months ended September 30, 2008 compared to the same period in 2007, is due primarily to a higher average balance in 2007 related to an increase in cash receipts from warrant exercises. The increase in interest income for the nine months ended September 30, 2008 compared to the same period in 2007 reflects a higher average cash balance as a result of proceeds from our public offering completed in October 2007.

Interest expense includes interest expense from lease agreements for laboratory equipment. The $29,000 increase in interest expense for the nine months ended September 30, 2008 compared to the same period in 2007 represents interest on additional capital leases agreements contracted to purchase laboratory equipment.

Other expense is due primarily to an upfront fee related to our equipment lease financing and expensing an over-accrual of NIH revenue drawdown.

Income Taxes

We anticipate losses for the current fiscal year and no federal income tax provision for the current quarter has been provided. We recorded $3,000 in California state tax provisions for the nine months ended September 30, 2008. In addition, we have substantial net operating loss carry forwards available to offset future taxable income for federal and state income tax purposes. Our ability to utilize our net operating losses may be limited due to changes in our ownership as defined by Section 382 of the Internal Revenue Code.

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Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on leasing, public and private financing to fund our operations.

At September 30, 2008 we had cash, equivalents and short term investments of $17.3 million, including $381,000 security deposit related to an outstanding letter of credit for our capital lease of laboratory equipment, compared to $12.7 million at September 30, 2007. The increase in cash, cash equivalents and short term investments for the nine months ended September 30, 2008 compared to the same period in 2007, is due primarily to our public offering completed in October 2007, which raised aggregate net cash proceeds of $24.0 million, compared to $14.5 million raised in our private investment in public equity (PIPE) completed in January 2007.

Net cash used in investing activities was $9.0 million for the nine months ended September 30, 2008 compared to net cash used in investing activities of $1.0 million for the same period in 2007. Cash used by net short-term investment activities was $5.9 million due to purchases and maturities of short-term investments exceeding similar instruments compared to cash proceeds of $290,000 for the same period in 2007. In 2008 we entered into new capital lease agreements to purchase additional laboratory equipment related to our R&D operations. Cash used in capital expenditures increased $1.6 million for the nine months ended September 30, 2008 compared to the same period in 2007. Legal and other costs associated with pending patent application increased by $181,000 for the nine months ended September 30, 2008 compared to the same period in 2007, due to an increase in new patent applications filed with the US Patent office.

Net cash used by financing activities was $664,000 for the nine months ended September 30, 2008 representing payments on leased equipment, compared to net cash provided for the same period in 2007 of $18.8 million. Cash flows in 2007 was driven primarily by proceeds of $14.5 million, net of expenses, raised from our private investment in public equity (PIPE) completed in January 2007 and a call notice on March 9, 2007 to warrant holders for $2.6 million and option exercise receipts of 2.0 million offset by lease obligation payments of $310,000.

As of September 30, 2008, we had an accumulated deficit of $36.0 million, working capital of $15.6 million and shareholders’ equity of $22.7 million. Management believes that cash and cash equivalents on hand at September 30, 2008, will be sufficient to enable us meet our obligations through at least the next year. However, if we change our development plans, we may need additional funds sooner than we expect. In addition, we anticipate that our costs for the MF101 and BZL101 programs will increase over the next few years. While these costs are unknown at the current time, we will need to raise additional capital to continue the program in future periods through and beyond 2009. We intend to seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources.

Our contractual obligations and future minimum lease payments that are non-cancelable at September 30, 2008 are disclosed in the following table.

		Payment due by period
		Total		2008(1)		2009		2010		2011		2012		2013+
Unconditional purchase obligations	$	1,926,912	$	1,926,912	$	—	$	—	$	—	$	—	$	—
Operating lease obligations		17,466,385		177,981		1,616,161		1,561,070		1,607,902		1,656,139		10,847,132
Capital lease obligations		1,621,112		290,586		759,609		489,046		81,871		—		—
Total contractual commitments	$	21,014,409	$	2,395,479	$	2,375,770	$	2,050,116	$	1,689,773	$	1,656,139	$	10,847,132

(1)   For the three months ending December 31, 2008.

Off-Balance Sheet Financings and Liabilities

Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries.

Recent Accounting Pronouncements

Effective January 1, 2008, the Company adopted SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.

Effective January 1, 2008, the Company adopted EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.

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Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable as:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted FASB EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” and EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.” Both of these EITFs state that an employer should recognize a liability for postretirement benefits based on these life insurance arrangements. The adoption of these EITFs will not have a significant impact on the Company’s future results of operations, financial condition or liquidity.

The Company also adopted EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards” as of January 1, 2008. This EITF indicates that tax benefits of dividends on unvested restricted stock are to be recognized in equity as an increase in the pool of excess tax benefits. Should the related awards forfeit or no longer become expected to vest, the benefits are to be reclassified from equity to the income statement. The adoption of this EITF does not have a significant impact on the Company’s results of operations, financial condition or liquidity.

In December 2007, EITF No.07-1, “Accounting for Collaborative Arrangements” was issued. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008 and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is in the process of evaluating the impact, if any, of adopting EITF 07-1 on its financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective on a prospective basis for all business combinations for which the acquisition date is on after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. We are currently evaluating the effects, if any, that SFAS 141R may have on our financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 may have on our financial statements.

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In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently assessing the potential impact that adoption of SFAS No. 161 may have on our financial statements.

In April 2008, the FASB issued FSP FAS No. 142-3, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141, “Business Combinations.” The FSP is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The FSP is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.

In June 2008, the FASB issued (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

As of September 30, 2008, we had cash, cash equivalents and short-term investments of $17.3 million, consisting of cash, cash equivalents and highly liquid short-term investments. Our short-term investments will likely decline by an immaterial amount if market interest rates increase and, therefore, we believe our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from short-term investments.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures: We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

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Inherent Limitations on Effectiveness of Controls: We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our CEO and our CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.

Changes in internal controls: There were no significant changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On October 16, 2007, the former CFO of the Company filed a complaint against Bionovo, Inc. and two of its officers, alleging breach of contract as a result of the rescission of the employment agreement in September 2007. This complaint was filed with the Superior Court of the State of California in and for the County of Alameda.As a part of his compensation, Mr. Stapleton was to receive 300,000 shares of common stock, followed by an additional 300,000 shares of common stock over a two-year period from the date of grant subject to various limitations. In his complaint, Mr. Stapleton alleges that the Company failed to accelerate the vesting of the 300,000 shares to him, thereby breaching the employment agreement.

In September 2008 the Company was notified of an order by the Superior Court, dated August 29, 2008, granting in part motion to compel binding arbitration for a subset of the claims. We are in the process of finalizing the selection of an Arbitrator.

In the opinion of management, the ultimate outcome of this matter will not materially affect the Company's financial position, results of operations or cash flows and we have not accrued any amounts for a contingent liability.

Item 1A. Risk Factors

Not applicable.

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

None.

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

Exhibit No.			Description
	3	.1*	Amended and Restated Certificate of Incorporation of Bionovo, Inc.
	3	.2(1)	Amended and Restated By-Laws of Bionovo, Inc.
	31	.1*	Certification of Principal Executive Officer
	31	.2*	Certification of Principal Executive Officer
	32	.1*	Certification of the Chief Executive Officer and the Chief Financial Officer

*	Filed herewith
(1)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2008.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on the 4th day of November 2008.

BIONOVO, INC.
By:	/s/ Isaac Cohen
	Isaac Cohen
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Thomas Chesterman
	Thomas Chesterman
	Senior Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.			Description
	3	.1*	Amended and Restated Certificate of Incorporation of Bionovo, Inc.
	3	.2(1)	Amended and Restated By-Laws of Bionovo, Inc.
	31	.1*	Certification of Principal Executive Officer
	31	.2*	Certification of Principal Executive Officer
	32	.1*	Certification of the Chief Executive Officer and the Chief Financial Officer

*	Filed herewith
(1)	Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on January 7, 2008.

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