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CORRESP
1
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    Unassociated Document

    Discovery
Laboratories, Inc.

    200 Kelly
Red, Suite 100

    Warrington,
PA  18976-3622

    CONFIDENTIAL

    VIA
EDGAR

    November
10, 2010

    Jim B.
Rosenberg

    Division
of Corporation Finance

    United
States Securities and Exchange Commission

    100 F
Street, N.E.

    Washington,
D.C. 20549

    Re:         Discovery
Laboratories, Inc. (the “Company”)

    Form 10-K
for the Year Ended December 31, 2009 (“2009 10-K”)

    Form
10-K/A for the Year Ended December 31, 2009

    Forms
10-Q for the Quarterly Periods Ended March 31 and June 30, 2010

    File No.
000-26422

    Dear Mr.
Rosenberg:

    We refer
to the following:

    (a) the
September 17, 2010 comment letter of the staff (the “Staff”) of the Securities
and Exchange Commission (the “Commission”) on the Company’s Annual Report on
Form 10-K for the Year Ended December 31, 2009, the amendment to such Annual
Report on Form 10-K/A and the Quarterly Reports on Form 10-Q for the Quarterly
Periods Ended March 31 and June 30, 2010, and to the Company’s responses thereto
of October 1, 2010;

    (b) a
telephone call on November 5, 2010 between Messrs. Ira Kotel and Roland Chase of
our counsel, SNR Denton US LLP, and Ms. Ibolya Ignat of the Staff, in which Ms.
Ignat conveyed additional comments on behalf of the Staff;

    (c) our
response dated November 8, 2010 to such comments (the “November 8 Response”),
which was filed as correspondence on EDGAR; and

    (d) a
telephone call on November 9, 2010 between Mr. Kotel and Mr. Marc Brunhofer of
the Staff, in which Mr. Brunhofer relayed preliminary feedback on the November 8
Response.

    Securities
and Exchange Commission

    November
10, 2010

    Page
2

    As discussed in the conversations with
the Staff yesterday and today, and in order to assist the Staff in its review,
we are enclosing as Appendix A hereto a
draft of Amendment No. 2 to our Annual Report on Form 10-K for the Year Ended
December 31, 2009 and as Appendix B hereto a
draft of Amendment No. 1 to our Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 2010, both which the Company proposes to file and which
includes the financial statement impact of the change in accounting treatment to
reflect the reclassification of the affected warrants from equity to liability
in an amount equal to the fair value of the warrants, as of the dates of
issuance, calculated using the Black Scholes option pricing model. The
restatement will not have an impact on any other amounts previously reported,
including Assets; Revenues; Research and Development Expenses and other
operating expenses; Cash Flows; Loans, Equipment Loan and Accounts Payables; and
Contractual Obligations. It is our intention to provide draft disclosure with
respect to Amendment No. 1 to our Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 2010 as soon as possible this week.

    If you
have any questions, or if we may be of any assistance, please do not hesitate to
contact the undersigned at (415) 488-9347 or Ira Kotel or Roland Chase at our
counsel, SNR Denton US LLP, at (973) 912-7100.

                  Sincerely,

                  /s/ Mary B. Templeton

                  Mary
      B. Templeton

                  Senior
      Vice President and

                  Deputy
      General Counsel

    Copy
to:

    Ibolya
Ignat, Staff Accountant

    Marc
Brunhofer, Accounting Reviewer

    Jennifer
C. Riegel,  Staff Attorney

    Division
of Corporation Finance

    United
States Securities and Exchange Commission

    100 F
Street, N.E.

    Washington,
D.C. 20549

    John C.
Cooper

    David L.
Lopez

    Discovery
Laboratories, Inc.

    200 Kelly
Red, Suite 100

    Warrington,
PA  18976-3622

    Ira L.
Kotel

    SNR
Denton US LLP

    Two World
Financial Center

    New York,
NY 10281-1008

    Securities
and Exchange Commission

    November
10, 2010

    Page
3

    Roland S.
Chase

    SNR
Denton US LLP

    101 JFK
Parkway

    4th
Floor

    Short
Hills, NJ 07078-2708

      Appendix
A

      DRAFT -
FOR DISCUSSION PURPOSES ONLY

    UNITED
STATES

    SECURITIES
AND EXCHANGE COMMISSION

    WASHINGTON,
D.C.  20549

    FORM
10-K/A

    (Amendment
No. 2)

              x

              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

    For the
fiscal year ended December 31, 2009

    or

              ¨

              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

    For the
transition period from
    to

    Commission
file number 000-26422

    DISCOVERY
LABORATORIES, INC.

    (Exact
name of registrant as specified in its charter)

                Delaware

                94-3171943

                (State
      or other jurisdiction of

                incorporation
      or organization)

                (I.R.S.
      Employer

                Identification
      Number)

                2600
      Kelly Road, Suite 100

                Warrington,
      Pennsylvania 18976-3622

                (Address
      of principal executive offices)

    (215)
488-9300

    (Registrant’s
telephone number, including area code)

    Securities
registered pursuant to Section 12(b) of the Act:

                  Title of each class

                  Name of each exchange on which
      registered

                  Common
      Stock, $0.001 par value

                  The
      Nasdaq Capital Market

                  Preferred
      Stock Purchase Rights

    Securities
registered pursuant to Section 12(g) of the Act:

    None

    __________________

    Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES  ¨
  NO  x

    Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  YES  ¨
  NO  x

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

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

    Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K/A
or any amendment to this Form 10-K. 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.

                Large
      accelerated filer

                ¨

              Accelerated
      filer        x

                Non-accelerated
      filer

                ¨

                Smaller
      reporting company

                x

    Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

    YES
¨
  NO  x

    The
aggregate market value of shares of voting and non-voting common equity held by
non-affiliates of the registrant computed using the closing price of common
equity as reported on The Nasdaq Global Market under the symbol DSCO on June 30,
2009, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $126 million.  For the purposes of
determining this amount only, the registrant has defined affiliates to include:
(a) the executive officers named in Part III of this Annual Report on Form 10-K;
(b) all directors of the registrant; and (c) each shareholder, if any, that has
informed the registrant by March 1, 2009 that it is the beneficial owner of 10%
or more of the outstanding shares of common stock of the
registrant.

    As of
November 12, 2010, 206,652,815 shares of the registrant’s common stock were
outstanding.

    DOCUMENTS
INCORPORATED BY REFERENCE:

          DRAFT -
FOR DISCUSSION PURPOSES ONLY

    EXPLANATORY
NOTE

    We are
filing this Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, which was filed with the Securities and
Exchange Commission (“SEC”) on March 10, 2010 (“Annual Report on Form 10-K”),
(i) to amend Item 1A – “Risk Factors” to add to the risk factors previously
provided in our Annual Report on Form 10-K additional risk factors related to
the restatement of our financial statements, (ii) to amend Item 6 – “Selected
Financial Data, ” and Item 8 – “Financial Statements and Supplementary Data” to
restate our audited financial statements for the fiscal year ended December 31,
2009 to reflect the reclassification of certain warrants from equity to
liabilities, as discussed below, (iii) to make corresponding amendments to Item
7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” (“MD&A”) and to provide in MD&A additional disclosure with
respect to research and development expenses, (iv) to amend Item 9A – “Controls
and Procedures,” to reflect that the restatement of our audited financial
statements for the fiscal year ended December 31, 2009 resulted from ineffective
disclosure controls and procedures which in turn led to ineffective control over
financial reporting.

    Other
than the foregoing, and the new certifications required by Rule 13a-14(a) under
the Securities and Exchange Act of 1934 (“Exchange Act”), our Annual Report
on Form 10-K is not being amended or updated in any respect.  This
Amendment No. 2 continues to describe the conditions as of the date of the
Annual Report on Form 10-K, and, except as contained herein, we have not
modified or updated the disclosures contained in the Annual Report on Form
10-K.  This Amendment No. 2 should be read in conjunction with our
filings made with the SEC subsequent to the filing of the Annual Report on Form
10-K, including any amendment to those filings.

    Restatement
of Financial Statements

    In
connection with a review of our Annual Report on Form 10-K among the Audit
Committee of our Board of Directors (the “Audit Committee”), and our management,
with the assistance of  Ernst & Young LLP (“Ernst & Young”), our
independent registered public accounting firm, and our outside legal advisors,
the Audit Committee has reassessed the accounting classification of certain
warrants that we
issued in May 2009 with respect to ASC 815 “Derivatives and Hedging — Contracts
in Entity’s Own Equity” (“ASC 815,” formerly known as Emerging Issues Task Force
Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”).  The review was conducted
to respond to certain comments raised by the Staff of the SEC following its
periodic review of our Annual Report on Form 10-K.

    We have
historically accounted for warrants, which prior to May 2009 were issued in
private transactions, as equity instruments.  Our warrants generally
provide that, in the event the related registration statement or an exemption
from registration is not available for the issuance or resale of the warrant
shares, the holder  may exercise the warrant on a cashless basis.
 However, notwithstanding the availability of cashless exercise and without
any evaluation of remoteness or probability, ASC 815, as interpreted,
establishes a presumption that, in the absence of express language to the
contrary, registered warrants may be subject to net cash settlement, as it is
not within our absolute control to provide freely-tradable shares in all
circumstances.

    After
extensive discussion, the Audit Committee, together with our management and in
consultation with Ernst & Young and our outside legal advisors, determined
that, notwithstanding the highly–remote and theoretical possibility of net cash
settlement, the warrants identified above should have been recorded as
liabilities, measured at fair value calculated using the Black Scholes option
pricing model on the date of issue, with changes in the fair values recognized
in our quarterly statement of operations in its quarterly financial
reports.  Accordingly, the Audit Committee also concluded on November
8, 2010 that our previously-filed consolidated financial statements for the
fiscal year ended December 31, 2009 on Form 10-K; Ernst & Young’s reports on
the financial statements and the effectiveness of internal control over
financial reporting for the fiscal year ended December 31, 2009; each of the
consolidated financial statements included in our Quarterly Reports on Form 10-Q
for the periods ended June 30, 2009 and September 30, 2009; and all related
earnings releases and similar communications that we issued with respect to the
foregoing, should no longer be relied upon. As
a result, we are restating our previously-filed consolidated financial
statements for the fiscal year ended December 31, 2009 on Form 10-K.  We do
not plan to amend our consolidated financial statements included in our
Quarterly Reports on Form 10-Q for the periods ended June 30, 2009 and September
30, 2009.

        ii

      DRAFT - FOR DISCUSSION PURPOSES ONLY

    The
restatements will have no impact on amounts previously reported for Assets;
Revenues; Operating Expenses; Cash Flows; Loans, Equipment Loan and Accounts
Payables; and Contractual Obligations.  The restatements will have no
effect on our development programs, including Surfaxin®, anticipated development
milestones, business strategy or operations. See, Item
7 – “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in this Amendment No. 2.

    We have
also determined that ineffective disclosure controls and procedures that
resulted in the restatement constituted a material weakness in our internal
control over financial reporting. The material weakness related to the initial
classification and subsequent accounting of registered warrants as either
liabilities or equity instruments.  See, “Item 9A - Controls and
Procedures.”

    Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc., and its wholly-owned, presently
inactive subsidiary, Acute Therapeutics, Inc.

    FORWARD-LOOKING
STATEMENTS

    This
Amendment No. 2 contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of
the Exchange Act.  The forward-looking statements include all matters that
are not historical facts.  Forward-looking statements are only predictions
and provide our current expectations or forecasts of future events and financial
performance and may be identified by the use of forward-looking terminology,
including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,”
“intends,” “may,” “will” or “should” or, in each case, their negative, or other
variations or comparable terminology, though the absence of these words does not
necessarily mean that a statement is not forward-looking.  We intend that
all forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995.