UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q




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





For the
quarterly period ended September 30, 2009





OR





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





For the
transition period __________ to __________.





Commission
file number 001-32626




Hana
Biosciences, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
                (State
      or other jurisdiction of
                incorporation
      or organization)
              32-0064979
                (I.R.S.
      Employer Identification No.)7000
      Shoreline Ct., Suite 370
                South
      San Francisco, CA.
              94080(Address
      of principal executive offices)
              (Zip
      Code)




(650)
588-6404


(Registrant's
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 issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes  x  No  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes o      No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, or a non-accelerated filer, or a smaller reporting company. See
definition 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  oNon-accelerated
      filer  o
            Smaller
      reporting company  x(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 
o  No 
x




As of
November 12, 2009, there were 76,145,146 shares of the registrant's common
stock, $.001 par value, outstanding.









INDEX





PagePART
      I
                FINANCIAL
      INFORMATION
                4Item
      1.
                Unaudited
      Condensed Financial Statements
                4Unaudited
      Condensed Balance Sheets
                4Unaudited
      Condensed Statements of Operations and Other Comprehensive
      Loss
                5Unaudited
      Condensed Statement of Changes in Stockholders' Deficit
                6Unaudited
      Condensed Statements of Cash Flows
                7Notes
      to Unaudited Condensed Financial Statements
                8Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                18Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                25Item
      4T.
                Controls
      and Procedures
                25PART
      II
                OTHER
      INFORMATION
                27Item
      1.
                Legal
      Proceedings
                27Item
      1A.
                Risk
      Factors
                27Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                27Item
      3.
                Defaults
      Upon Senior Securities
                27Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                27Item
      5.
                Other
      Information
                27Item
      6.
                Exhibits
                27Signatures
                28Index
      of Exhibits Filed with this Report
                29


- 2
-


Forward-Looking
Statements





This
Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These forward-looking statements include, but are
not limited to, statements about:





·
            our ability to obtain adequate
      financing;





·
            the development of our drug
      candidates, including when we expect to undertake, initiate and complete
      clinical trials of our product
  candidates;





·
            the regulatory approval of our
      drug candidates;





·
            our use of clinical research
      centers and other
contractors;





·
            our ability to find collaborative
      partners for research, development and commercialization of potential
      products;





·
            acceptance of our products by
      doctors, patients or payors and the availability of reimbursement for our
      product candidates;





·
            our ability to market any of our
      products;





·
            our history of operating
      losses;





·
            our ability to secure adequate
      protection for our intellectual
property;





·
            our ability to compete against
      other companies and research
  institutions;





·
            the effect of potential strategic
      transactions on our
business;





·
            our ability to attract and retain
      key personnel; and





·
            the volatility of our stock
      price.





These
statements are often, but not always, made through the use of words or phrases
such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend” and similar words or phrases. For such statements,
we claim the protection of the Private Securities Litigation Reform Act of 1995.
Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the time
this Quarterly Report on Form 10-Q was filed with the Securities and Exchange
Commission, or SEC. These forward-looking statements are based largely on our
expectations and projections about future events and future trends affecting our
business, and are subject to risks and uncertainties that could cause actual
results to differ materially from those anticipated in the forward-looking
statements. Discussions containing these forward-looking statements may be found
throughout this report, including Part I, the section entitled “Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations.” These forward-looking statements involve risks and uncertainties,
including the risks discussed in our Annual Report on Form 10-K for the year
ended December 31, 2008 (the “2008 Form 10-K”), that could cause our actual
results to differ materially from those in the forward-looking statements.
Except as required by law, we undertake no obligation to publicly revise our
forward-looking statements to reflect events or circumstances that arise after
the filing of this report or documents incorporated by reference herein that
include forward-looking statements. The risks discussed in this report should be
considered in evaluating our prospects and future financial
performance.





In
addition, past financial or operating performance is not necessarily a reliable
indicator of future performance and you should not use our historical
performance to anticipate results or future period trends. We can give no
assurances that any of the events anticipated by the forward-looking statements
will occur or, if any of them do, what impact they will have on our results of
operations and financial condition.





References
to the “Company,” “Hana,” the “Registrant,” “we,” “us,” or “our” in this report
refer to Hana Biosciences, Inc., a Delaware corporation, unless the context
indicates otherwise.


- 3
-


PART
I - FINANCIAL INFORMATION




Item
1. Unaudited Condensed Financial Statements




HANA
BIOSCIENCES, INC.





CONDENSED
BALANCE SHEETS


September 30,
                                                        2009
                                                      
                                                      
                                                      December 31,
                                                        2008ASSETS
                                                      
                                                      (Unaudited)Current
      assets:Cash
      and cash equivalents
                                                      
                                                      $
                                                      2,960,891
                                                      
                                                      
                                                      $
                                                      13,999,080Available-for-sale
      securities
                                                      
                                                      
                                                      104,000
                                                      
                                                      
                                                      
                                                      128,000Prepaid
      expenses and other current assets
                                                      
                                                      
                                                      189,819
                                                      
                                                      
                                                      
                                                      131,663Total
      current assets
                                                      
                                                      
                                                      3,254,710
                                                      
                                                      
                                                      
                                                      14,258,743Property
      and equipment, net
                                                      
                                                      
                                                      272,709
                                                      
                                                      
                                                      
                                                      400,168Restricted
      cash
                                                      
                                                      
                                                      125,000
                                                      
                                                      
                                                      
                                                      125,000Debt
      issuance costs
                                                      
                                                      
                                                      1,240,478
                                                      
                                                      
                                                      
                                                      1,361,356Total
      assets
                                                      
                                                      $
                                                      4,892,897
                                                      
                                                      
                                                      $
                                                      16,145,267LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
                                                      
                                                      $
                                                      3,187,397
                                                      
                                                      
                                                      $
                                                      4,225,863Other
      short-term liabilities
                                                      
                                                      
                                                      54,744
                                                      
                                                      
                                                      
                                                      61,341Warrant
      liabilities, short-term
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      1,450,479Total
      current liabilities
                                                      
                                                      
                                                      3,242,141
                                                      
                                                      
                                                      
                                                      5,737,683Notes
      payable, net of discount
                                                      
                                                      
                                                      22,382,347
                                                      
                                                      
                                                      
                                                      16,851,541Warrant
      liabilities, long-term
                                                      
                                                      
                                                      3,899,699
                                                      
                                                      
                                                      
                                                      —Other
      long-term liabilities
                                                      
                                                      
                                                      11,732
                                                      
                                                      
                                                      
                                                      41,775Total
      long term liabilities
                                                      
                                                      
                                                      26,293,778
                                                      
                                                      
                                                      
                                                      16,893,316Total
      liabilities
                                                      
                                                      
                                                      29,535,919
                                                      
                                                      
                                                      
                                                      22,630,999Commitments
      and contingencies (Notes 4, 9 and 10):Stockholders'
      deficit:Common
      stock; $0.001 par value:100,000,000
      shares authorized, 32,583,004 and 32,386,130 shares issued and outstanding
      at September 30, 2009 and December 31, 2008, respectively
                                                      
                                                      
                                                      32,583
                                                      
                                                      
                                                      
                                                      32,386Additional
      paid-in capital
                                                      
                                                      
                                                      105,441,995
                                                      
                                                      
                                                      
                                                      104,431,469Accumulated
      other comprehensive income
                                                      
                                                      
                                                      12,000
                                                      
                                                      
                                                      
                                                      36,000Accumulated
      deficit
                                                      
                                                      
                                                      (130,129,600
                                                      )
                                                      
                                                      
                                                      (110,985,587
                                                      )Total
      stockholders' deficit
                                                      
                                                      
                                                      (24,643,022
                                                      )
                                                      
                                                      
                                                      (6,485,732
                                                      )Total
      liabilities and stockholders' deficit
                                                      
                                                      $
                                                      4,892,897
                                                      
                                                      
                                                      $
                                                      16,145,267




See
accompanying notes to unaudited condensed financial statements.


- 4
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS


(Unaudited)





Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      expenses:General
      and administrative
                
                $
                796,127
                
                
                $
                973,414
                
                
                $
                2,838,653
                
                
                $
                4,623,889Research
      and development
                
                
                3,643,014
                
                
                
                4,347,265
                
                
                
                11,367,715
                
                
                
                13,031,060Total
      operating expenses
                
                
                4,439,141
                
                
                
                5,320,679
                
                
                
                14,206,368
                
                
                
                17,654,949Loss
      from operations
                
                
                (4,439,141
                )
                
                
                (5,320,679
                )
                
                
                (14,206,368
                )
                
                
                (17,654,949
                )Other
      income (expense):Interest
      income
                
                
                470
                
                
                
                39,997
                
                
                
                12,626
                
                
                
                271,361Interest
      expense
                
                
                (935,993
                )
                
                
                (254,569
                )
                
                
                (2,496,143
                )
                
                
                (756,211
                )Other
      expense, net
                
                
                —
                
                
                
                (8,516
                )
                
                
                (4,908
                )
                
                
                (51,380
                )Gain
      (loss) on derivative liability
                
                
                (292,111
                )
                
                
                382,152
                
                
                
                (2,449,220
                )
                
                
                2,199,833Realized
      loss on marketable securities
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (108,000
                )Total
      other income (expense)
                
                
                (1,227,634
                )
                
                
                159,064
                
                
                
                (4,937,645
                )
                
                
                1,555,603Net
      loss
                
                $
                (5,666,775
                )
                
                $
                (5,161,615
                )
                
                $
                (19,144,013
                )
                
                $
                (16,099,346
                )Net
      loss per share, basic and diluted
                
                $
                (0.17
                )
                
                $
                (0.16
                )
                
                $
                (0.59
                )
                
                $
                (0.50
                )Weighted
      average shares used in computing net loss per share, basic and
      diluted
                
                
                32,580,138
                
                
                
                32,385,366
                
                
                
                32,494,165
                
                
                
                32,265,010Comprehensive
      loss:Net
      loss
                
                $
                (5,666,775
                )
                
                $
                (5,161,615
                )
                
                $
                (19,144,013
                )
                
                $
                (16,099,346
                )Unrealized
      holdings gains (losses) arising during the period
                
                
                (20,000
                )
                
                
                (20,000
                )
                
                
                (24,000
                )
                
                
                (128,000
                )Less:
      reclassification adjustment for losses included in net
loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                108,000Comprehensive
      loss
                
                $
                (5,686,775
                )
                
                $
                (5,181,615
                )
                
                $
                (19,168,013
                )
                
                $
                (16,119,346
                )





See
accompanying notes to unaudited condensed financial statements.


- 5
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


(Unaudited)





Period
from January 1, 2009 to September 30, 2009





Common stock
                                                                                                            
                                                                                                            
                                                                                                            Additional
                                                                                                              paid-in
                                                                                                            
                                                                                                            
                                                                                                            Accumulated
                                                                                                              Other
                                                                                                              Comprehensive
                                                                                                            
                                                                                                            
                                                                                                            Accumulated
                                                                                                            
                                                                                                            
                                                                                                            Total
                                                                                                              stockholders'Shares
                                                                                                            
                                                                                                            
                                                                                                            Amount
                                                                                                            
                                                                                                            
                                                                                                            Capital
                                                                                                            
                                                                                                            
                                                                                                            income
                                                                                                            
                                                                                                            
                                                                                                            Deficit
                                                                                                            
                                                                                                            
                                                                                                            DeficitBalance
      at January 1, 2009
                                                                                                            
                                                                                                            
                                                                                                            32,386,130
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            32,386
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            104,431,469
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            36,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            (110,985,587
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (6,485,732
                                                                                                            )Share-based
      compensation of employees amortized over vesting period of stock
      options
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            976,576
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            976,576Issuance
      of shares under employee stock purchase plan
                                                                                                            
                                                                                                            
                                                                                                            196,874
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            197
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            39,965
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            40,162Unrealized
      loss on available-for-sale securities
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (24,000
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (24,000
                                                                                                            )Expenses
      incurred related to sale of common stock in October 2009
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (6,015
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (6,015
                                                                                                            )Net
      loss
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (19,144,013
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (19,144,013
                                                                                                            )Balance
      at September 30, 2009
                                                                                                            
                                                                                                            
                                                                                                            32,583,004
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            32,583
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            105,441,995
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            12,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            (130,129,600
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (24,643,022
                                                                                                            )




See
accompanying notes to unaudited condensed financial statements.


- 6
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (19,144,013
                  )
                  
                  $
                  (16,099,346
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  137,354
                  
                  
                  
                  141,917Share-based
      compensation to employees for services
                  
                  
                  976,576
                  
                  
                  
                  1,882,539Share-based
      compensation to nonemployees for services
                  
                  
                  —
                  
                  
                  
                  (825
                  )Shares
      issued for license milestone
                  
                  
                  —
                  
                  
                  
                  125,000Amortization
      of discount and debt issuance costs
                  
                  
                  651,684
                  
                  
                  
                  192,176Realized
      loss on available for sale securities
                  
                  
                  —
                  
                  
                  
                  108,000Unrealized
      (gain) loss on derivative liability
                  
                  
                  2,449,220
                  
                  
                  
                  (2,199,832
                  )Loss
      on disposal of capital assets
                  
                  
                  —
                  
                  
                  
                  5,781Changes
      in operating assets and liabilities:Increase
      in prepaid expenses and other assets
                  
                  
                  (58,156
                  )
                  
                  
                  (249,198
                  )Decrease
      in accounts payable and accrued liabilities
                  
                  
                  (1,038,466
                  )
                  
                  
                  (910,357
                  )Net
      cash used in operating activities
                  
                  
                  (16,025,801
                  )
                  
                  
                  (17,004,145
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  —
                  
                  
                  
                  (80,378
                  )Net
      cash used in investing activities
                  
                  
                  —
                  
                  
                  
                  (80,378
                  )Cash
      flows from financing activities:Proceeds
      from exercise of warrants and options and issuance of shares under
      employee stock purchase plan
                  
                  
                  40,162
                  
                  
                  
                  53,724Payments
      on capital leases
                  
                  
                  (46,535
                  )
                  
                  
                  (21,242
                  )Expenses
      incurred related to sale of common stock in October 2009
                  
                  
                  (6,015
                  )
                  
                  
                  —Proceeds
      from issuances of notes payable
                  
                  
                  5,000,000
                  
                  
                  
                  —Net
      cash provided by financing activities
                  
                  
                  4,987,612
                  
                  
                  
                  32,482Net
      decrease in cash and cash equivalents
                  
                  
                  (11,038,189
                  )
                  
                  
                  (17,052,041
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  13,999,080
                  
                  
                  
                  20,795,398Cash
      and cash equivalents, end of period
                  
                  $
                  2,960,891
                  
                  
                  $
                  3,743,357Supplemental
      disclosures of cash flow data:Cash
      paid for interest
                  
                  $
                  $1,640,606
                  
                  
                  $
                  564,035Supplemental
      disclosures of noncash financing activities:Equipment
      financed with capital leases
                  
                  
                  9,895
                  
                  
                  
                  80,227Unrealized
      gain (loss) on available-for-sale securities
                  
                  
                  (24,000
                  )
                  
                  
                  84,000Common
      stock issued to as partial consideration for license
    agreement
                  
                  
                  —
                  
                  
                  
                  125,000





See
accompanying notes to unaudited condensed financial statements.


- 7
-


HANA
BIOSCIENCES, INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION





BUSINESS





Hana
Biosciences, Inc. (“Hana” or the “Company”) is a South San Francisco,
California-based biopharmaceutical company dedicated to developing and
commercializing new and differentiated cancer therapies designed to improve and
enable current standards of care. The Company’s two lead product candidates
target large markets and are in pivotal and/or proof-of-concept clinical trials.
Hana is developing Marqibo ® for the treatment of acute lymphoblastic leukemia
and lymphomas. Menadione topical lotion is a first-in-class compound that we are
developing for the potential prevention and/or treatment of skin toxicity
associated with epidermal growth factor receptor inhibitors. The Company has
additional pipeline opportunities that, like Marqibo, it believes may improve
delivery and enhance the therapeutic benefits of well-characterized, proven
chemotherapies and enable high potency dosing without increased
toxicity.





The
Company’s product candidates consist of the following:





·
            Marqibo® (vincristine sulfate
      liposomes injection), a novel, targeted OptisomeTM encapsulated formulation
      product candidate of the FDA-approved anticancer drug vincristine, being
      developed for the treatment of adult acute lymphoblastic
      leukemia.





·
            Menadione Topical Lotion, a novel
      supportive care product candidate, being developed for the prevention
      and/or treatment of the skin toxicities associated with the use of
      epidermal growth factor receptor inhibitors in the treatment of certain
      cancers.





·
            BrakivaTM (topotecan liposomes
      injection), a novel targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug topotecan, being developed
      for the treatment of solid tumors including small cell lung cancer and
      ovarian cancer.





·
            AlocrestTM (vinorelbine liposomes
      injection), a novel, targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug vinorelbine, being developed
      for the treatment of solid tumors such as non-small-cell lung
      cancer.





BASIS
OF PRESENTATION AND LIQUIDITY





The
accompanying unaudited condensed financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP)
for interim financial information and the instructions to Form 10-Q. In the
opinion of the Company’s management, the unaudited condensed financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the Company’s financial
position for the periods presented herein. These interim financial results are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2009 or any subsequent interim period.





As of
September 30, 2009, the Company has an accumulated deficit of approximately
$130.1 million, and for the nine months ended September 30, 2009, the Company
experienced a net loss of $19.1 million. The Company has financed operations
primarily through equity and debt financing and expects such losses to continue
over the next several years.  The Company currently has a limited supply of
cash available for operations. As of September 30, 2009, the Company had
available $3.1 million in cash and cash equivalents and available-for-sale
securities from which to draw upon.  An additional $2.5 million will become
available to the Company if it reaches a clinical development milestone pursuant
to an October 2007 loan facility agreement.  The Company does not
anticipate achieving this milestone unless it is able to obtain additional
financing.   See Note 4 below.





On
October 7, 2009, the Company entered into a securities purchase agreement
with a number of accredited investors pursuant to which it agreed to sell in a
private placement an aggregate of 54,593,864 units of its securities.  Each
unit consisted of either (i) one share of the Company’s common stock plus a
seven-year warrant to purchase one-tenth of one additional share of common stock
at an exercise price of $0.60 per share (referred to in the purchase agreement
as a Series B Warrant), or (ii) a seven-year warrant to purchase, at an exercise
price of $0.01 per share, one share of common stock (referred to in the purchase
agreement as a Series A Warrant), plus a Series B Warrant to purchase one-tenth
of one share of common stock. The purchase price per unit was $0.30, except that
to the extent an investor purchased units that included the Series A Warrants,
the purchase price was reduced to $0.29 to give effect to the additional $0.01
that would be paid upon exercise of the Series A Warrants.  Pursuant to the
purchase agreement, the Company sold an aggregate of 43,562,142 units consisting
of an equal number of shares of common stock and Series B Warrants to purchase
4,356,212 additional shares of common stock, and 11,031,722 units consisting of
Series A Warrants to purchase an equal number of shares of common stock and
Series B Warrants to purchase 1,103,170 additional shares of common stock. 
The aggregate purchase price for all of the securities sold under the purchase
agreement was approximately $16.27 million, before deducting expenses. Of this
total amount, approximately $12.4 million was paid in cash and approximately
$3.87 million represented the satisfaction of an outstanding obligation that the
Company owed to Deerfield.  See Note 4 for further discussion.  The
net proceeds available to the Company for operations from this financing
transaction were approximately $11.7 million. Pursuant to the purchase
agreement, the Company agreed to use the proceeds from the sale of these
securities solely for the clinical and regulatory development of its Marqibo
program.


- 8
-




HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


The
Company does not generate any recurring revenue and will require substantial
additional capital before it will generate cash flow from its operating
activities, if ever. The Company’s continued operations depend entirely on its
ability to obtain additional capital. The Company will be unable to continue the
progression of clinical compounds unless it is able to obtain additional funding
through equity or debt financings or from payments in connection with potential
strategic transactions.  The Company can give no assurances that any
additional capital that it is able to obtain, if any, will be sufficient to meet
its needs. Moreover, there can be no assurance that such capital will be
available to the Company on favorable terms or at all, especially given the
current economic environment which has severely restricted access to the capital
markets. Based on the anticipated use of cash resources of between $4.0 million
and $5.5 million per quarter, which includes any milestones pursuant to the
Company’s license agreements, the Company estimates that its current cash
resources are only sufficient to fund its planned research and development
activities into mid-2010.  However, if anticipated costs are higher than
planned, or if the Company is unable to raise additional capital, it will have
to significantly curtail its development activities to maintain operations
through 2010 and beyond. These
conditions, as well as the general financial condition of the Company discussed
in the preceding paragraph, raise substantial doubt as to the Company’s ability
to continue as a going concern.





NOTE
2. SIGNIFICANT ACCOUNTING POLICIES





Use
of Management's Estimates




The
preparation of financial statements in conformity with GAAP requires management
to make estimates based upon current assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Examples include provisions for deferred
taxes, the valuation of the warrant liabilities, the cost of contracted clinical
study activities and assumptions related to share-based compensation expense.
Actual results may differ materially from those estimates.





Segment
Reporting




The
Company has determined that it currently operates in only one segment, which is
the research and development of oncology therapeutics and supportive care for
use in humans. All assets are located in the United States.





Fair
Value of Financial Instruments





Financial
instruments include cash and cash equivalents, marketable securities, and
accounts payable. Marketable securities are carried at fair value. Cash and cash
equivalents and accounts payable are carried at cost, which approximates fair
value due to the relative short maturities of these instruments.  The fair
value of the Company’s notes payable at September 30, 2009 is $12.7
million.





Loss
Per Share





Basic net
loss per common share is calculated by dividing net loss by the weighted-average
number of common shares outstanding for the period. Diluted net loss per common
share is the same as basic net loss per common share, since potentially dilutive
securities from stock options and stock warrants would have an anti-dilutive
effect because the Company incurred a net loss during each period presented. The
number of shares potentially issuable at September 30, 2009 and 2008 upon
exercise or conversion that were not included in the computation of net loss per
share totaled 6,942,012 and 11,768,692, respectively.





Cash
and Cash Equivalents and Concentration of Risk




The
Company considers all highly-liquid investments with a maturity of three months
or less when acquired to be cash equivalents. Short-term investments
consist of investments acquired with maturities exceeding three months and are
classified as available-for-sale. All short-term investments are reported
at fair value, based on quoted market price, with unrealized gains or losses
included in other comprehensive loss.





Debt
Issuance Costs





As
discussed in Note 4, the debt issuance costs relate to fees paid in the form of
cash and warrants to secure a firm commitment to borrow funds.  These fees
are deferred, and if the commitment is exercised, amortized over the life of the
related loan using the interest method.  If the commitment expires
unexercised, the deferred fee is expensed immediately.


- 9
-




HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


Warrant
Liabilities and Payment of Redemption Price





On
October 30, 2007, the Company entered into a loan facility agreement with
Deerfield Private Design Fund, L.P., Deerfield Special Situations Fund, L.P.,
Deerfield Special Situations Fund International Limited and Deerfield Private
Design International, L.P. (collectively, “Deerfield”). Deerfield has committed
funds to assist with the development of the Company’s product candidates. 
As part of this agreement, the Company had issued to Deerfield warrants with an
exercise price of $1.31 per share.  Because the warrants were redeemable in
the event of a change in control or if the Company’s shares become delisted, the
fair value of the warrants based on the Black-Scholes-Merton option pricing
model was recorded as a liability and the Company updated its estimate of the
fair value of the warrant liabilities in each reporting period as new
information became available and any gains or losses resulting from the changes
in fair value from period to period were included as other income
(expense).





On
September 8, 2009, the Company received a delisting notice from the Staff of The
NASDAQ Stock Market indicating that the Company has failed to regain compliance
with NASDAQ listing requirements and that trading of its common stock on the
NASDAQ Capital Market would be suspended effective at the opening of business on
September 10, 2009.  In accordance with the terms of the warrants issued to
Deerfield in connection with the October 2007 loan facility agreement, Deerfield
had previously notified the Company of its intention to require the Company to
redeem the warrants upon such suspension.  However, pursuant to the terms
of a September 3, 2009 letter agreement, Deerfield and the Company agreed that,
in lieu of satisfying the warrant redemption price of approximately $3.87
million in cash, the Company could satisfy such obligation at Deerfield’s
election as follows:





·
            upon
      the completion by the Company of a “Qualified Financing” at any time or
      from time to time on or prior to June30, 2010, by the issuance to
      Deerfield of the same type of securities that Deerfield would have
      received had the redemption price been invested in such financing;
      or


·
            on
      any date on or prior to July 1, 2010 specified in a written notice by
      Deerfield to the Company, by the issuance to Deerfield of shares of the
      Company’s common stock equal to the redemption price divided by the lesser
      of $.60 or the average closing sale price of the common stock during the
      10 trading days immediately preceding the date of such
    notice.





The
Company satisfied the warrant redemption price by issuing to Deerfield
securities in connection with its October 2009 private placement.  See
“Note 12. Subsequent Events.”





Reclassification





Certain
prior year amounts have been reclassified to conform to the current year
presentation.





NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS




In April
2009, the FASB issued an amendment to ASC 825, entitled “Interim Disclosures About Fair Value
of Financial Instruments,” to require disclosures about fair value of
financial instruments not measured on the balance sheet at fair value in interim
financial statements as well as in annual financial statements. Prior to this
amendment, fair values for these assets and liabilities were only disclosed
annually. This amendment applies to all financial instruments within the scope
of ASC 825 and requires all entities to disclose the method(s) and significant
assumptions used to estimate the fair value of financial instruments. This
amendment was effective for interim periods ending after June 15, 2009. This
amendment does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption,
this amendment requires comparative disclosures only for periods ending after
initial adoption. The adoption did not have any impact on the Company’s
consolidated financial statements.





In
May 2009, the FASB issued ASC No. 855, “Subsequent Events,” or ASC
855, which established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. It sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC 855 was effective for financial
statements issued for interim and annual periods ending after June 15, 2009
and did not have any impact on the Company’s consolidated financial
statements.





In June
2009, the Financial Accounting Standards Board, or FASB, established the FASB
Accounting Standards Codification TM, or ASC, as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in preparation of financial statements in conformity with generally
accepted accounting principles in the United States. All other accounting
literature not included in the ASC is now nonauthoritative. The ASC was
effective for financial statements issued for interim and annual periods ending
after September 15, 2009 and its adoption did not have any impact on the
Company’s consolidated financial statements. The ASC is updated through the
FASB’s issuance of Accounting Standard Updates, or ASUs. Summarized below are
recently issued accounting pronouncements as described under the new ASC
structure.


- 10
-




HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair
Value,” or ASU 2009-05, which amends ASC 820 to provide clarification of
a circumstances in which a quoted price in an active market for an identical
liability is not available. A reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that uses
a) the quoted price of the identical liability when traded as an asset or b)
quoted prices for similar liabilities (or similar liabilities when traded as
assets) and/or 2) a valuation technique that is consistent with the principles
of ASC 820. ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. The
adoption of this ASU did not have an impact on the Company’s consolidated
financial statements.





In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements,” or ASU 2009-13, which amends existing revenue recognition
accounting pronouncements that are currently within the scope of ASC 605. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. ASU 2009-13 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010. The Company is currently evaluating the impact, if any, that the adoption
of this amendment will have on its consolidated financial
statements





NOTE
4.  FACILITY AGREEMENT





On
October 30, 2007, the Company entered into a Facility Agreement (the “loan
agreement”) with Deerfield under which Deerfield agreed to lend to the Company
an aggregate principal amount of up to $30 million. Of the total $30 million
funds committed pursuant to the loan agreement, $20 million is available for
disbursement in four installments every six months commencing October 30,
2007.  As of September 30, 2009, the Company had drawn down the entire $20
million pursuant to these funds.  The remaining $10 million is
subject to disbursement in three installments upon the achievement of clinical
development milestones relating to the Company’s Marqibo and Menadione product
candidates, of which it has drawn down $7.5 million as of September 30, 2009.
Deerfield’s obligation to disburse loan proceeds expires October 30, 2010, and
the Company must repay all outstanding principal and interest owing under the
loan agreement no later than October 30, 2013. The Company is also required to
make quarterly interest payments on outstanding principal, at a stated annual
rate of 9.85%. In accordance with and upon execution of the loan agreement, the
Company paid a loan commitment fee of $1.1 million to an affiliate of
Deerfield.  The Company’s obligations under the loan are secured by all of
its current and future assets, both tangible and intangible. The effective
interest rate on the $20 million of principal that were disbursable on the six
month installments, including discount on debt, is approximately 18.0%. 
The effective interest rate on the $7.5 million of principal payable related to
the achievement of development milestones, including discount on debt, is
approximately 11.6%.  As of September 30, 2009, the Company had accrued
$0.7 million in interest payable that was paid in October 2009.




As
additional consideration for the loan, on October 30, 2007, the Company issued
to Deerfield two series of 6-year warrants to purchase an aggregate of 5,225,433
shares of our common stock at an exercise price of $1.31 per share (subject to
adjustment for stock splits, combinations and similar events), which represented
the closing bid price of the Company’s common stock as reported on the Nasdaq
Global Market on the issuance date. One series of such warrants initially
represented the right to purchase 4,825,433 shares, which equaled 15% of the
Company’s outstanding common stock as of October 30, 2007. These warrants
contained an anti-dilution feature so that, as the Company issued additional
shares of its common stock during the term of the warrants, the number of shares
purchasable under this series was automatically increased so that they always
represented 15% of the Company’s then outstanding common stock. The exercise
price for any incremental shares that became purchasable due to this feature
remained fixed at $1.31 per share. The second series of warrants, representing
the right to purchase an aggregate of 400,000 shares of common stock, was
identical in form except that it did not contain such anti-dilution feature.
When the Company drew down the $7.5 million of funds conditioned upon the
achievement of clinical development milestones relating to the Marqibo and
Menadione programs on October 14, 2008, it was required to issue to Deerfield
additional warrants to purchase 850,136 shares of common stock, which
represented 2.625% of the total shares of common stock then outstanding. The
October 2008 warrants contained the same anti-dilution feature as those issued
by the Company on October 30, 2007.





As of
September 30, 2009, all warrants issued to Deerfield had been redeemed by the
Company and the satisfaction of this redemption obligation of $3.87 million was
payable in the Company’s securities pursuant to the terms of a September 3, 2009
agreement between Deerfield and the Company. In accordance with the terms of the
warrants, Deerfield required the Company to redeem the warrants upon the
suspension of trading on the NASDAQ Capital Market of the Company’s common stock
on September 8, 2009.   See Note 2 for additional details.  The
Company recognized additional loss on the revaluation of the liability
associated with the redemption of these warrants in the three months ending
September 30, 2009.  This liability was satisfied as part of the Company’s
private placement which closed on October 8, 2009, pursuant to which the Company
issued 12,906,145 shares of common stock and seven-year warrants to purchase an
additional 1,290,613 shares of common stock at an exercise price of $0.60 per
share to Deerfield.  See “Note 12. Subsequent Events” for further
discussion.





If the
Company draws down the remaining funds conditioned upon the achievement of
clinical development milestones, it will be required to issue to Deerfield
additional warrants to purchase up to an additional 0.875% of its then
outstanding common stock, which warrants will contain the same anti-dilution
feature as those issued by the Company on October 30, 2007 and October 14,
2008.  The Company does not anticipate achieving this milestone prior to
the middle of 2010.





As of
September 30, 2009, the Company had drawn down $27.5 million of the entire $30
million loan facility, which represented the entire amount available based on
installments and clinical development milestones achieved related to the Marqibo
and Menadione programs.


- 11
-




HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


Summary of Notes Payable. On
November 1, 2007, the Company drew down $7.5 million of the $30.0 million in
total loan proceeds available. On October 14, 2008 and November 12, 2008, the
Company drew down an additional $12.5 million and $2.5 million, respectively.
 The Company is not required to pay back any portion of the principal
amount until October 30, 2013. Of the $12.5 million borrowed on October 14,
2008, $7.5 million related to development milestones the Company had previously
achieved and was subsequently entitled to draw down additional funds pursuant to
the Deerfield agreement.  These warrants contained an anti-dilution feature
that provided Deerfield with the right to purchase shares of the Company’s
common stock equal to 2.625% of the total shares outstanding.  Upon
issuance of these shares, the fair value of the warrants was determined and
included as additional discount on the debt to Deerfield.  Because the
Company issued the warrants pursuant to the loan, the Company recognized a
discount on the note.  On May 20, 2009, the Company drew down $5.0 million
which was available pursuant to the terms of the loan agreement.  The table
below is a summary of the change in carrying value of the notes payable,
including the discount on debt for the nine months ended September 30, 2009 and
2008:





Carrying
                      Value at
                      January 1,
                    
                    
                    Gross
                      Borrowings
                      Incurred
                    
                    
                    Debt
                      Discount
                      Incurred
                    
                    
                    Amortized
                      Discount
                    
                    
                    Carrying
                      Value at
                      September 30,2009Notes
      payable
                    
                    $
                    22,500,000
                    
                    
                    $
                    5,000,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    27,500,000Discount
      on debt
                    
                    
                    (5,648,459
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    530,806
                    
                    
                    
                    (5,117,653
                    )Carrying
      value
                    
                    $
                    16,851,541
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    22,382,3472008Notes
      payable
                    
                    $
                    7,500,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    7,500,000Discount
      on debt
                    
                    
                    (5,474,376
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    164,092
                    
                    
                    
                    (5,310,284
                    )Carrying
      value
                    
                    $
                    2,025,624
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    2,189,716





A summary
of the debt issuance costs and changes during the periods ending September 30,
2009 and 2008 is as follows:





Deferred
                      Transaction
                      Costs on
                      January 1,
                    
                    
                    Amortized
                      Debt Issuance
                      Costs
                    
                    
                    Deferred
                      Transaction
                      Costs on
                      September 30,2009
                    
                    $
                    1,361,356
                    
                    
                    $
                    (120,878
                    )
                    
                    $
                    1,240,4782008
                    
                    $
                    1,423,380
                    
                    
                    $
                    (28,084
                    )
                    
                    $
                    1,395,296





NOTE
5. STOCKHOLDERS' DEFICIT





Stock Incentive Plans. We
have two stockholder-approved stock incentive plans under which we grant or have
granted options to purchase shares of our common stock and restricted stock
awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the 2004
Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the Chief
Executive Officer, to the extent authorized by the Board, is responsible for
administration of the Company’s employee stock incentive plans and determines
the term, exercise price and vesting terms of each option. In general, stock
options issued under the 2003 Plan and 2004 Plan have a vesting period of three
years and expire ten years from the date of grant.





On
October 2, 2009, the Company’s Board of Directors adopted amendments to the 2003
Plan and 2004 Plan.  Pursuant to the amendments, the number of shares of
common stock authorized for issuance under the 2003 Plan was reduced from
1,410,068 to 668,342, of which 399,664 shares are reserved for issuance pursuant
to the exercise of outstanding stock options, and 268,678 shares have previously
been issued under the 2003 Plan.  Similarly, the number of shares of common
stock authorized for issuance under the 2004 Plan was reduced from 7,000,000 to
5,013,257, of which 4,545,661 shares are reserved for issuance pursuant to the
exercise of outstanding stock options, and 467,596 shares have previously been
issued under the 2004 Plan.





The
Company also has adopted the 2006 Employee Stock Purchase Plan (the “2006 Plan”)
under which the Company's eligible employees may purchase shares of the
Company’s common stock through lump sum payments or payroll deductions. The 2006
Plan is intended to qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code. As adopted, the 2006 Plan
authorized the issuance of up to a maximum of 750,000 shares of common
stock.


- 12
-




HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


Stock Options. The following
table summarizes information about stock options outstanding at September 30,
2009 and changes in outstanding options in the nine months then ended, all of
which are at fixed prices:




Number of
                  Shares Subject
                  to Options
                  Outstanding
                
                
                Weighted
                  Average
                  Exercise
                  Price per
                  Share
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (in years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      January 1, 2009
                
                
                4,470,871
                
                
                $
                2.36Options
      granted
                
                
                1,285,000
                
                
                
                0.16Options
      cancelled
                
                
                (570,833
                )
                
                
                2.30Options
      exercised
                
                
                —
                
                
                
                —Outstanding
      September 30, 2009
                
                
                5,185,038
                
                
                
                1.82
                
                
                
                7.82
                
                
                $
                569,036Exercisable
      at September 30, 2009
                
                
                2,631,867
                
                
                $
                2.74
                
                
                
                6.91
                
                
                $
                40,794





Total
share-based compensation expense was approximately $1.0 million and $1.9 million
related to employee stock options recognized in the operating results for the
nine months ended September 30, 2009 and 2008, respectively.




The
following table summarizes information about stock options outstanding at
September 30, 2009:





Options Outstanding
                  
                  Options ExercisableExercise Price
                  
                  Number of
                    Shares
                    Subject to
                    Options
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life of
                    Options
                    Outstanding
                  
                  Number
                    of Options
                    Exercisable
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price$0.07 - $ 0.14
                  
                  
                  1,155,505
                  
                  
                  $
                  0.14
                  
                  9.1
      yrs
                  
                  
                  70,505
                  
                  
                  $
                  0.07$0.21 - $ 1.18
                  
                  
                  2,126,045
                  
                  
                  
                  0.98
                  
                  8.1
      yrs
                  
                  
                  946,378
                  
                  
                  
                  1.00$1.33 - $ 2.41
                  
                  
                  1,065,988
                  
                  
                  
                  1.68
                  
                  6.9
      yrs
                  
                  
                  864,652
                  
                  
                  
                  1.68$4.51 - $ 10.98
                  
                  
                  837,500
                  
                  
                  
                  6.45
                  
                  6.7 yrs
                  
                  
                  750,332
                  
                  
                  
                  6.41$0.07 - $10.98
                  
                  
                  5,185,038
                  
                  
                  $
                  1.82
                  
                  7.8 yrs
                  
                  
                  2,631,867
                  
                  
                  $
                  2.74





Employee Stock Purchase Plan.
The 2006 Plan allows employees to contribute a percentage of their gross salary
toward the semi-annual purchase of shares of our common stock. The price of each
share will not be less than the lower of 85% of the fair market value of our
common stock on the last trading day prior to the commencement of the offering
period or 85% of the fair market value of our common stock on the last trading
day of the purchase period. A total of 750,000 shares of common stock were
initially reserved for issuance under the 2006 Plan.  As of September 30,
2009, there were 421,504 shares available for issuance under this
plan.


- 13
-


HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




Assumptions. The following
table summarizes the assumptions used in applying the Black-Scholes-Merton
option pricing model to determine the fair value of awards granted during the
three and nine months ended September 30, 2009 and 2008,
respectively:





Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Employee stock optionsRisk-free
      interest rate
                    
                    
                    1.90
                    %
                    
                    
                    2.65
                    %
                    
                    
                    1.90
                    %
                    
                    
                    2.65
                    %Expected
      life (in years)
                    
                    
                    5.5 – 6.0
                    
                    
                    
                    6.0
                    
                    
                    
                    5.5 – 6.0
                    
                    
                    
                    5.5 – 6.0Volatility
                    
                    
                    0.85
                    
                    
                    
                    0.9
                    
                    
                    
                    0.85 – 0.95
                    
                    
                    
                    0.9Dividend
      Yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %Employee stock purchase
planRisk-free
      interest rate
                    
                    
                    0.27 - 1.11
                    %
                    
                    
                    3.05-3.49
                    %
                    
                    
                    0.27 - 1.11
                    %
                    
                    
                    3.05-49
                    %Expected
      life (in years)
                    
                    
                    0.5 - 2.0
                    
                    
                    
                    0.5 - 2.0
                    
                    
                    
                    0.5 - 2.0
                    
                    
                    
                    0.5 - 2.0Volatility
                    
                    
                    1.73 – 2.45
                    
                    
                    
                    0.75-0.80
                    
                    
                    
                    1.30 – 2.45
                    
                    
                    
                    0.75-0.80Dividend
      Yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %





The
Company estimates the fair value of each option award on the date of grant using
the Black-Scholes-Merton option-pricing model and we use the assumptions as
allowed by ASC 718, Compensation – Stock
Compensation.  As allowed by ASC 718-10-55, companies with a short
period of publicly traded stock history, the Company’s estimate of expected
volatility is based on the average expected volatilities of a sampling of three
companies with similar attributes to it, including industry, stage of life
cycle, size and financial leverage as well as the Company’s own historical data.
As the Company has so far only awarded “plain vanilla” options as described
by the SEC’s Staff Accounting Bulletin Topic No. 14, Share-Based Payment, it used
the “simplified method” for determining the expected life of the options
granted. The Company will continue to use the “simplified method” under certain
circumstances, which it will continue to use as it does not have sufficient
historical data to estimate the expected term of share-based award.  The
risk-free rate for periods within the contractual life of the option is based on
the U.S. treasury yield curve in effect at the time of grant valuation. ASC 718
does not allow companies to account for option forfeitures as they occur.
Instead, estimated option forfeitures must be calculated upfront to reduce the
option expense to be recognized over the life of the award and updated upon the
receipt of further information as to the amount of options expected to be
forfeited. Based on our historical information, the Company currently estimates
that 22% annually of its stock options awarded will be forfeited.





Warrants. As of September 30,
2009, all outstanding warrants were available for exercise. Warrants to acquire
258,927 shares of common stock at $1.85 per share expired in February of 2009.
 Warrants to acquire 892,326 shares of common stock at $1.57 per share
expire in April 2010. Warrants to acquire 864,648 shares of common stock at
$5.80 per share expire in October 2010.  On August 24, 2009, Deerfield
notified the Company that it was electing to require the Company to redeem
6,142,754 warrants, which constituted all warrants issued and outstanding to
Deerfield on such date.  As of September 30, 2009, all warrants issued to
Deerfield had been redeemed by the Company and the satisfaction of this
redemption obligation of $3.87 million was payable in the Company’s securities
pursuant to the terms of a September 3, 2009 agreement between Deerfield and the
Company.  See Note 2 for additional details. The following table
summarizes the warrants outstanding as of September 30, 2009 and the changes in
outstanding warrants in the period then ended:





Number Of
                    Shares Subject
                    To Warrants
                    Outstanding
                  
                  
                  Weighted-Average
                    Exercise PriceWarrants
      outstanding January 1, 2009
                  
                  
                  8,123,956
                  
                  
                  $
                  1.83Warrants
      granted
                  
                  
                  34,699
                  
                  
                  
                  1.31Warrants
      cancelled
                  
                  
                  (258,927
                  )
                  
                  
                  1.85Warrants
      redeemed
                  
                  
                  (6,142,754
                  )
                  
                  
                  1.31Warrants
      outstanding September 30, 2009
                  
                  
                  1,756,974
                  
                  
                  $
                  3.65


- 14
-


HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




NOTE
6. FAIR VALUE MEASUREMENTS




ASC 820,
Fair Value Measurements and
Disclosures 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 ASC 820
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 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, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value which are the following:





•
            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; and





•
            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
following table represents the fair value hierarchy for the Company’s financial
assets and liabilities measured at fair value on a recurring basis as of
September 30, 2009:





Assets
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalMoney
      market funds
                      
                      $
                      55,702
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      55,702Available-for-sale
      equity securities
                      
                      
                      104,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      104,000Total
                      
                      $
                      159,702
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      159,702





Liabilities
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3
                        
                        
                        TotalWarrant
      liabilities
                        
                        $
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        3,899,699
                        
                        
                        $
                        3,899,699Total
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        3,899,699
                        
                        
                        $
                        3,899,699





A summary of the activity of the fair
value of the Level 3 liabilities is as follows:





Beginning
                    Value of
                    Level 3
                    Liabilities
                  
                  
                  Realized
                    (Gain)/Loss on
                    Change in Fair
                    Value of
                    Level 3
                    Liabilities
                  
                  
                  Ending Fair
                    Value of
                    Level 3
                    LiabilitiesFor
      the period ended September 30, 2009
                  
                  $
                  1,450,479
                  
                  
                  $
                  2,449,220
                  
                  
                  $
                  3,
      899,699For
      the period ended September 30, 2008
                  
                  $
                  4,232,355
                  
                  
                  $
                  (2,199,832
                  )
                  
                  $
                  2,032,523





Inclusive
in the activity above, the Company recognized a loss of $0.3 million and a gain
of $0.4 million for the three months ended September 2009 and 2008,
respectively.  All level 3 liabilities relate to the obligation to
Deerfield pursuant to the warrants issued under the loan facility
agreement.  The contractual amount of this liability at September 30, 2009
was $3,87 million.





NOTE
7. AVAILABLE-FOR-SALE SECURITIES





On
September 30, 2009, the Company had $104,000 in total marketable securities
which consisted of shares of NovaDel Pharma, Inc. (“NovaDel”) purchased in 2004
in conjunction with a licensing transaction.





During
the nine months ended September 30, 2009, the Company recorded an unrealized
loss of $24,000, compared to an unrealized gain of $84,000 and a realized loss
of $108,000 for the nine months ended September 30, 2008.  The following
table summarizes the NovaDel shares classified as available-for-sale securities
during the nine months ended September 30, 2009 and 2008:





Beginning
                    Value
                  
                  
                  Net
                    Unrealized
                    Gain/(Loss)
                  
                  
                  Gross
                    Realized
                    Gain/(Loss)
                  
                  
                  Ending ValueNine
      months ended September 30, 2009
                  
                  $
                  128,000
                  
                  
                  $
                  (24,000
                  )
                  
                  $
                  —
                  
                  
                  $
                  104,000Nine
      months ended September 30, 2008
                  
                  $
                  96,000
                  
                  
                  $
                  84,000
                  
                  
                  $
                  (108,000
                  )
                  
                  $
                  72,000


- 15
-


HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




NOTE
8.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at September 30, 2009
and December 31, 2008:





September 30,
                    2009
                  
                  
                  December 31,
                    2008Trade
      accounts payable
                  
                  $
                  1,337,653
                  
                  
                  $
                  457,725Clinical
      research and other development related costs
                  
                  
                  738,192
                  
                  
                  
                  2,554,374Accrued
      personnel related expenses
                  
                  
                  169,821
                  
                  
                  
                  549,469Interest
      payable
                  
                  
                  682,753
                  
                  
                  
                  478,332Accrued
      other expenses
                  
                  
                  258,978
                  
                  
                  
                  185,963Total
                  
                  $
                  3,187,397
                  
                  
                  $
                  4,225,863




NOTE
9. COMMITMENTS





Employment
Agreements.   On June 6, 2008, the Company entered into a new
employment agreement with its President and Chief Executive Officer. This
agreement provides for an employment term that expires in December 2010. The
minimum aggregate amount of gross salary compensation to be provided for over
the remaining term of the agreement amounted to approximately $0.5 million at
September 30, 2009.





Lease. The
Company entered into a three year sublease, which commenced on May 31, 2006, for
property at 7000 Shoreline Court in South San Francisco, California, where the
Company’s executive offices are located. In May 2008, the Company and its
sublessor entered into an amendment to the sublease agreement, which increased
the term of the lease from three years to four years. Effective June 24, 2009,
the Company entered into a further amendment to the sublease, which extended the
term of the lease through March 2011 and reduced the monthly lease payments from
$2.80 per square foot to $2.45 per square foot for the eleven month period from
July 2009 through May 2010 and reduced the lease payments from $2.90 per square
foot to $1.95 per square feet for the ten month period from June 2010 through
March 2011.  The total cash payments due for the duration of the
sublease equaled approximately $0.7 million at September 30, 2009.





NOTE
10. RESTRICTED CASH





On May
31, 2006, the Company entered into a sublease agreement relating to its South
San Francisco, CA offices. The sublease required the Company to provide a
security deposit in the amount of $125,000. To satisfy this obligation the
Company obtained a $125,000 letter of credit with the sublessor as the
beneficiary in case of default or failure to comply with the sublease
requirements. In order to obtain the letter of credit, the Company was required
to deposit a compensating balance of $125,000 into a restricted money market
account with its financial institution. This compensating balance for the letter
of credit will be restricted for the entire five-year period of the
sub-lease.





NOTE
11. AMENDMENT TO TEKMIRA LICENSE AGREEMENT





On June
2, 2009, the Company and Tekmira executed an amendment to the license agreement
originally entered into on May 6, 2006 and which was amended on April 30, 2007
(the “Agreement”).  The amendment, which was effective on May 27,
2009, makes the following material amendments to the Agreement:





·
            As amended, the amount of the
      milestone payment required to be made by the Company to Tekmira upon the
      FDA’s approval of a Marqibo new drug application (“NDA”) was
      increased.




·
            The Agreement previously required
      the Company to make milestone payments upon the dosing of the first
      patient in any clinical trial of each of Alocrest and
      Brakiva.  After giving effect to the Amendment, the Agreement
      now provides that such milestones are payable following the FDA’s
      acceptance for review of an NDA for such product candidates.  In
      addition, the milestone payments payable under the Agreement upon the
      FDA’s approval of an NDA for Alocrest and Brakiva were both increased in
      amount.




·
            The Amendment reduces the amount
      of Tekmira’s share of any payments received by the Company from third
      parties in consideration of sublicenses granted to such third parties or
      for royalties received by Hana from such third
    parties.




·
            The maximum aggregate amount of
      milestone payments for all product candidates was increased from $30.5
      million to $37.0 million.





As a
result of this amendment, the Company reversed recognition of a previously
accrued milestone payment to Tekmira which was achieved upon the enrollment of
the first patient in the Company’s Phase 1 clinical trial in
Brakiva.


- 16
-


HANA
BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




NOTE
12. SUBSEQUENT EVENTS





The
Company performed an evaluation of subsequent events through November 12, 2009,
the filing date with the SEC.  No material subsequent events occurred
that have not been previously discussed or included in the financial statements
or the notes to the financial statements for this Form 10-Q for the period
ending September 30, 2009, except as set forth below.





On
October 2, 2009, the Company’s Board of Directors adopted amendments to the 2003
Plan and 2004 Plan (See Note 5).  Pursuant to the amendments, the
number of shares of common stock authorized for issuance under the 2003 Plan was
reduced from 1,410,068 to 668,342, of which 399,664 shares are reserved for
issuance pursuant to the exercise of outstanding stock options, and 268,678
shares have previously been issued under the 2003 Plan.  Similarly,
the number of shares of common stock authorized for issuance under the 2004 Plan
was reduced from 7,000,000 to 5,013,257, of which 4,545,661 shares are reserved
for issuance pursuant to the exercise of outstanding stock options, and 467,596
shares have previously been issued under the 2004 Plan.





On
October 7, 2009, the Company entered into a securities purchase agreement
with a number of accredited investors pursuant to which it agreed to sell in a
private placement an aggregate of 54,593,864 units of its securities. Each unit
consisted of either (i) one share of the Company’s common stock plus a
seven-year warrant to purchase one-tenth of one additional share of common stock
at an exercise price of $0.60 per share (referred to in the purchase agreement
as a Series B Warrant), or (ii) a seven-year warrant to purchase, at an exercise
price of $0.01 per share, one share of common stock (referred to in the purchase
agreement as a Series A Warrant), plus a Series B Warrant to purchase one-tenth
of one share of common stock.  The purchase price per unit was $0.30,
except that to the extent an investor purchased units that included the Series A
Warrants, the purchase price was reduced to $0.29 to give effect to the
additional $0.01 that would be paid upon exercise of the Series A
Warrants.  Pursuant to the purchase agreement, the Company sold an
aggregate of 43,562,142 units consisting of an equal number of shares of common
stock and Series B Warrants to purchase 4,356,212 additional shares of common
stock, and 11,031,722 units consisting of Series A Warrants to purchase an equal
number of shares of common stock and Series B Warrants to purchase 1,103,170
additional shares of common stock.  The aggregate purchase price for
all securities sold under the purchase agreement was approximately $16.27
million, before deducting expenses.  Of this total amount,
approximately $12.4 million was paid in cash and approximately $3.87 million
represented the satisfaction of an outstanding obligation that the Company owed
to Deerfield.  See Note 4 for further discussion.  The net
proceeds available to the Company for operations from this financing transaction
were approximately $11.7 million.  Pursuant to the purchase agreement, the
Company agreed to use the proceeds from the sale of these securities solely for
the clinical and regulatory development of is Marqibo program.





Pursuant
to a September 2009 agreement entered into between the Company and Deerfield,
and in full satisfaction of the redemption obligation (See Note 4), Deerfield
received 12,906,145 units consisting of an equal number of shares of common
stock and Series B Warrants to purchase 1,290,613 additional shares of common
stock (the “Deerfield Warrant Redemption Securities”) in the private
placement.


- 17
-


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




The following discussion of our
financial condition and results of operations should be read in conjunction with
the financial statements and the notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q. This discussion includes forward-looking
statements that involve risks and uncertainties. As a result of many factors,
such as those set forth under “Risk Factors” in Item 1A of Part I of the
2008 Form 10-K and Item 1A of Part II of this Form 10-Q, our actual
results may differ materially from those anticipated in these forward-looking
statements .





Overview





We are a
biopharmaceutical company dedicated to developing and commercializing new,
differentiated cancer therapies designed to improve and enable current standards
of care.  We currently have four product candidates in various stages
of development:




·
            Marqibo® (vincristine sulfate
      liposomes injection), a novel, targeted OptisomeTM encapsulated formulation
      product candidate of the FDA-approved anticancer drug vincristine, being
      developed for the treatment of adult acute lymphoblastic
      leukemia.




·
            Menadione Topical Lotion, a novel
      supportive care product candidate, being developed for the prevention
      and/or treatment of the skin toxicities associated with the use of
      epidermal growth factor receptor inhibitors (EGFRI), a type of anti-cancer
      agent used in the treatment of certain
  cancers.




·
            BrakivaTM (topotecan liposomes
      injection), a novel targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug topotecan, being developed
      for the treatment of solid tumors including small cell lung cancer and
      ovarian cancer.




·
            AlocrestTM (vinorelbine liposomes
      injection), a novel, targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug vinorelbine, being developed
      for the treatment of solid tumors such as non-small-cell lung
      cancer.





Revenues





We do not
expect to generate any significant revenue from product sales or royalties in
the foreseeable future. We anticipate that any revenues that we may recognize in
the near future will be related to upfront, milestone development funding
payments received pursuant to strategic license agreements or partnerships and
that we may have large fluctuations of revenue recognized from quarter to
quarter as a result of the timing and the amount of these payments. We may be
unable to control the development of commercialization of these products and may
be unable to estimate the timing and amount of revenue to be recognized pursuant
to these agreements. Revenue from these agreements and partnerships help us fund
our continuing operations. Our revenues may increase in the future if we are
able to develop and commercialize our products, license our technology and/or
enter into strategic partnerships. If we are unsuccessful, our future revenues
will decrease and we may be forced to limit our development of our product
candidates.




Research
and Development Expenses




Research
and development expenses, which account for the bulk of our expenses, consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for clinical development, manufacturing, legal
expenses resulting from intellectual property protection, business development
and organizational affairs and other expenses relating to the acquiring, design,
development, testing, and enhancement of our product candidates, including
milestone payments for licensed technology. We expense our research and
development costs as they are incurred.





While
expenditures on current and future clinical development programs are expected to
be substantial, particularly in light of our available resources, they are
subject to many uncertainties, including the results of clinical trials and
whether we develop any of our drug candidates with a partner or independently.
As a result of such uncertainties, we cannot predict with any significant degree
of certainty the duration and completion costs of our research and development
projects or whether, when and to what extent we will generate revenues from the
commercialization and sale of any of our product candidates. The duration and
cost of clinical trials may vary significantly over the life of a project as a
result of unanticipated events arising during clinical development and a variety
of factors, including:





·
            the number of trials and studies
      in a clinical program;





·
            the number of patients who
      participate in the trials;





·
            the number of sites included in
      the trials;


- 18
-




·
            the rates of patient recruitment
      and enrollment;





·
            the duration of patient treatment
      and follow-up;





·
            the costs of manufacturing our
      drug candidates; and





·
            the costs, requirements, timing
      of, and the ability to secure regulatory
  approvals.




General
and Administrative Expenses





General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including accounting
and general legal expenses.





Share-Based
Compensation





Share-based
compensation expenses consist primarily of expensing the fair-market value of a
share-based award over the vesting term.  This expense is included in our
operating expenses for each reporting period.





Critical
Accounting Policies





The
accompanying discussion and analysis of our financial condition and results of
operations are based on our condensed unaudited financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. We believe there are certain accounting policies that
are critical to understanding our condensed unaudited financial statements, as
these policies affect the reported amounts of expenses and involve management’s
judgment regarding significant estimates. We have reviewed our critical
accounting policies and their application in the preparation of our financial
statements and related disclosures with our Audit Committee of the Board of
Directors. Our critical accounting policies and estimates are described
below.




Share-Based
Compensation




We have
adopted revised authoritative guidance related to stock-based compensation under
FASB ASC TOPIC 718 Compensation – Stock Compensation.  We have adopted a Black-Scholes-Merton model to estimate the
fair value of stock options issued and the resultant expense is recognized in
the operating expense for each reporting period.  See Note 5 of our
unaudited condensed financial statements included elsewhere in this Form 10-Q
for further information regarding the required disclosures related to
share-based compensation.





Warrant Liabilities and Payment of Redemption
Price





On
October 30, 2007, we entered into a loan facility agreement withDeerfield Private Design
Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Special
Situations Fund International Limited and Deerfield Private Design
International, L.P.(“Deerfield”). As partial
consideration for the loan, we also issued to Deerfield warrants to purchase
shares of our common stock. Certain of these warrants included an anti-dilution
feature. This feature required that, as we issued additional shares of
our common stock during the term of the warrant, the number of shares
purchasable under this series was automatically increased so that they always
represented a fixed percentage of our then outstanding common stock. Because the
warrants were redeemable if certain events occurred, we recorded the fair value
of the warrants as a liability, updating our estimate of the fair value of the
warrant liabilities in each reporting period as new information became available
and any gains or losses resulting from the changes in fair value from period to
period being included as other income/(expense).  See Note 4 of our
unaudited condensed financial statements included elsewhere in this Form 10-Q
for further information regarding the warrant liabilities.





On
September 8, 2009, we received a notice from the Staff of The NASDAQ Stock
Market indicating that we has failed to regain compliance with NASDAQ listing
requirements and that trading of our common stock on the NASDAQ Capital Market
would be suspended effective at the opening of business on September 10,
2009.  In accordance with the terms of the warrants issued pursuant to
the October 2007 loan agreement, Deerfield had previously notified us of its
intention to require us redeem the warrants, upon such
suspension.  However, pursuant to the terms of a September 3, 2009
letter agreement, we and Deerfield agreed that, in lieu of satisfying the
warrant redemption price of approximately $3.87 million in cash, we could
satisfy such obligation at Deerfield’s election as follows:





·
            upon
      the completion by us of a “Qualified Financing” at any time or from time
      to time on or prior to June 30, 2010, by the issuance to Deerfield of the
      same type of securities that Deerfield would have received had the
      redemption price been invested in such financing;
  or


·
            on
      any date on or prior to July 1, 2010 specified in a written notice by
      Deerfield to we, by the issuance to Deerfield of shares of our common
      stock equal to the redemption price divided by the lesser of $.60 or the
      average closing sale price of the common stock during the 10 trading days
      immediately preceding the date of such
notice.


- 19
-


We
satisfied the warrant redemption price by issuing to Deerfield securities in
connection with our October 2009 private placement.  See “Note 12.
Subsequent Events” of the unaudited condensed financial statements included in
this report





Licensed
In-Process Research and Development




Licensed
in-process research and development relates primarily to technology,
intellectual property and know-how acquired from another entity. We evaluate the
stage of development as well as additional time, resources and risks related to
development and eventual commercialization of the acquired technology. As we
historically have acquired non-FDA approved technologies, the nature of the
remaining efforts for completion and commercialization generally include
completion of clinical trials, completion of manufacturing validation,
interpretation of clinical and preclinical data and obtaining marketing approval
from the FDA and other regulatory bodies. The cost in resources, probability of
success and length of time to commercialization are extremely difficult to
determine. Numerous risks and uncertainties exist with respect to the timely
completion of development projects, including clinical trial results,
manufacturing process development results and ongoing feedback from regulatory
authorities, including obtaining marketing approval. Additionally, there is no
guarantee that the acquired technology will ever be successfully commercialized
due to the uncertainties associated with the pricing of new pharmaceuticals, the
cost of sales to produce these products in a commercial setting, changes in the
reimbursement environment or the introduction of new competitive products. Due
to the risks and uncertainties noted above, we will expense such licensed
in-process research and development projects when incurred. However, the cost of
acquisition of technology is capitalized if there are alternative future uses in
other research and development projects or otherwise based on internal review.
All milestone payments will be expensed in the period the milestone is reached.





Clinical
Study Activities and Other Expenses from Third-Party Contract Research
Organizations




Much of
our research and development activities related to clinical study activity are
conducted by various third parties, including contract research organizations,
which may also provide contractually defined administration and management
services. Expense incurred for these contracted activities are based upon a
variety of factors, including actual and estimated patient enrollment rates,
clinical site initiation activities, labor hours and other activity-based
factors. On a regular basis, our estimates of these costs are reconciled to
actual invoices from the service providers, and adjustments are made
accordingly.





Recent
Accounting Pronouncements





Refer to
“Note 3. Recent Accounting Pronouncements” in the accompanying notes to the
unaudited condensed financial statements for a discussion of recent accounting
pronouncements.





Results
of Operations





Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008




General and administrative
expenses. For the three months ended September 30, 2009, general and
administrative, or G&A, expense was $0.8 million, as compared to $1.0
million for the three months ended September 30, 2008.  The decrease
of $0.2 million is due to decreased personnel related expenses of $0.1 million
and decreased professional and outside expenses of $0.1 million.





The $0.1
million decrease in employee-related expenses includes:





·
            a decrease in employee related
      share-based compensation expense due to decreased valuation of stock
      options issued to employees as a result of the decrease in value of the
      Company’s stock price; and





·
            a decrease in salary and
      benefits, due mainly to the reduction in headcount and decreased
      compensation measures.


- 20
-


Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the three months ended September 30, 2009 and 2008.  The
table also summarizes unallocated costs, which consist of personnel, facilities
and other costs not directly allocable to development programs.




For the three months ended
                    September 30,2009
                  
                  
                  2008R&D Expenses
                  
                  ($ in thousands)
                  
                  
                  Percentage
                    ChangeMarqibo
                  
                  $
                  1,518
                  
                  
                  $
                  1,054
                  
                  
                  
                  44
                  %Menadione
                  
                  
                  (81)
                  
                  
                  
                  834
                  
                  
                  
                  NABrakiva
                  
                  
                  100
                  
                  
                  
                  44
                  
                  
                  
                  127
                  %Alocrest
                  
                  
                  4
                  
                  
                  
                  164
                  
                  
                  
                  -98
                  %Discontinued/out-licensed
      product candidates
                  
                  
                  0
                  
                  
                  
                  (10)
                  
                  
                  
                  NATotal
      third party costs
                  
                  
                  667
                  
                  
                  
                  517
                  
                  
                  
                  29
                  %Allocable
      costs and overhead
                  
                  
                  237
                  
                  
                  
                  356
                  
                  
                  
                  -33
                  %Personnel
      related expense
                  
                  
                  995
                  
                  
                  
                  1,127
                  
                  
                  
                  -12
                  %Share-based
      compensation expense
                  
                  
                  203
                  
                  
                  
                  261
                  
                  
                  
                  -22
                  %Total
      research and development expense
                  
                  $
                  3,643
                  
                  
                  $
                  4,347
                  
                  
                  
                  -16
                  %




Marqibo.
 In the three
months ended September 30, 2009, we continued enrollment in our Phase 2,
registration-enabling, open-label trial in relapsed adult ALL, or rALLy study,
and our pilot Phase 2 trial in metastatic uveal melanoma. Marqibo costs
increased by $0.4 million compared to the same period in 2008, mostly related to
increased spending on the rALLy and uveal melanoma trials.  We
completed target enrollment in both of these trials in 2009.  We plan
to initiate a confirmatory trial in 2011 and we also intend to file an NDA for
accelerated approval in the ALL indication by mid 2010, pending the results of
our Phase 2 study in relapsed adult ALL.  We expect to spend
approximately $5.0 million on external project costs relating to Marqibo in
fiscal 2009, including the amounts expended in the first nine months of
2009.  We estimate that we will need to expend at least an additional
$8 million to obtain accelerated approval and an aggregate of approximately $45
million in order for us to obtain full FDA approval for Marqibo, if ever, which
includes milestone payments that would be owed to our licensor upon FDA
approval.  Through September 30, 2009, we have spent approximately $12.3
million on the development of Marqibo.  We expect that it will take
approximately three to four years until we will have completed development and
obtained full FDA approval of Marqibo, if ever.





Menadione.
 In the three months ended September 30, 2009, we continued enrollment in
our Phase 1 clinical trials in Menadione in cancer patients which we plan to
complete by early 2010.  For the three months ended September 30,
2009, Menadione costs decreased by $0.9 million compared to the same period in
2008, including a credit to expense due to a reduction of estimated accrued
expenses related to our Phase 1 clinical trial in Menadione.  The
decrease was due to lower spending on the Phase 1 clinical trial as we reduced
our costs to outside service providers for the study and decreased manufacturing
expenses.  As this drug candidate is early in its clinical
development, both the registrational strategy and total expenditures to obtain
FDA approval are still being evaluated. Including the amounts expended in the
first nine months of 2009, we expect to spend approximately $0.8 million on
external project costs relating to Menadione in 2009, and we estimate that we
will need to expend at least an aggregate of approximately $40 million of
additional funds in order for us to obtain full FDA approval for Menadione, if
ever, which includes milestone payments that would be owed to our licensor upon
FDA approval.  Through September 30, 2009, we have spent approximately $6.5
million on the development of Menadione.  We expect that it will take
approximately four to five years until we will have completed development and
obtained FDA approval, if ever. Per the terms of the securities purchase
agreement dated October 7, 2009, we agreed to use the proceeds of the sale of
those securities solely for the clinical and regulatory development of our
Marqibo program. As such, future development of Menadione is contingent on
obtaining additional funding, if any such funding is available in the
future.





Brakiva. We initiated a Phase 1 clinical trial in November 2008 and
continued enrollment in the nine months ended September 30,
2009.   For the three months ended September 30, 2009, Brakiva
costs increased by $0.1 million compared to the same period in
2008.  The increase was due to increased spending on clinical trial
costs for the Phase 1 trial.  We plan to complete enrollment in this
clinical trial in 2010 and expect that we will expend approximately $0.5 million
in 2009, including the amounts expended in the first nine months of
2009.  We are exploring options for further development of Brakiva
beyond the phase 1 trial.  As this drug candidate is early in its
clinical development, both the registrational strategy and total expenditures to
obtain FDA approval are still being evaluated.  Through September 30,
2009, we have spent approximately $3.8 million on the development of
Brakiva.





Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008.
This Phase 1 trial was designed to assess safety, tolerability and preliminary
efficacy in patients with advanced solid tumors. We are currently exploring
options for the continued development of Alocrest and do not expect to incur
significant project costs in 2009.  Through September 30, 2009, we
have spent approximately $3.5 million on the development of
Alocrest.  For the three months ended September 30, 2009, Alocrest
costs decreased by $0.2 million.  The decrease was due to the
decreased cost of the Phase 1 clinical trial that finished enrollment in
2008.


- 21
-


Discontinued/Out-licensed
projects. In the three months ended September 30, 2009, we
did not pursue development on our discontinued/out-licensed product candidates,
which includes Zensana (our rights to which were sublicensed in July 2007), IPdR
(program terminated in 2006) and Talvesta (program terminated in
2007).  We may incur only incidental expenses in 2009 related to the
continued disposition of these terminated products.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates decreased in the three months ended
September 30, 2009.  These costs are not directly allocable to an
individual product candidate and primarily relate to outside services and
professional fees related to indirect support of our R&D functions including
data management, regulatory and clinical development.  We expect these
costs to remain low in 2009 compared to 2008 as we seek to reduce external costs
in order to reduce our cash burn rate.  If we are able to obtain our
desired funding, we expect these costs to rise in the next twelve months as we
finish the rALLy study in Marqibo and prepare for the confirmatory study for
Marqibo as well as prepare for a possible NDA submission for Marqibo in the ALL
indication.  Allocable costs decreased slightly as a result of
cost-cutting measures that we pursued.  We expect these costs to
decrease in 2009 compared to 2008.  Personnel related costs increased
slightly in the three months ended September 30, 2009 and we expect these costs
to remain slightly higher in 2009 due to certain executive positions that have
been filled in later 2008 and early 2009.  Stock compensation expense
decreased the value of options issued in recent periods is less than those
issued in previous periods.  We expect share-based compensation will
continue to decrease until our stock price increases or the amount of options
issued increases.





Interest income. For the
three months ended September 30, 2009, interest income was less than $1,000
compared to interest income of $0.04 million for the three months ended
September 30, 2008. The change is a result of decreased cash balances in our
interest bearing accounts as well as decreasing interest rates.





Interest expense. For the
three months ended September 30, 2009, interest expense was $0.9 million as
compared to interest expense of $0.3 million for the three months ended
September 30, 2008. The increase resulted from a larger average balance
outstanding on our loan facility with Deerfield.  We originally
entered into this loan agreement in October 2007.





Gain or loss on change in fair
market value of warrant liabilities. For the three months ended September
30, 2009, we recognized a loss related to the change in fair market value of the
liability related to certain warrants issued to Deerfield as part of our October
2007 loan agreement of $0.3 million. In the three months ended September 30,
2008, we recognized a gain on this warrant liability of approximately $0.4
million.  The value of these warrants was largely dependent on the price of
our common stock, and as our stock price increased, increased, causing us to
recognize a loss. Similarly, as our stock price decreased, the value of these
warrants decreased, causing us to recognize a gain. As of September 30, 2009,
all warrants issued to Deerfield had been redeemed by the Company. See Note 4 of
our unaudited condensed financial statements included elsewhere in this Form
10-Q for further information regarding the Deerfield loan
agreement.





Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008




General and administrative
expenses. For the nine months ended September 30, 2009, general and
administrative, or G&A, expense was $2.8 million, as compared to $4.6
million for the nine months ended September 30, 2008.  The decrease of
$1.8 million is due to decreased personnel related expenses of $1.2 million,
decreased costs for outside services and professional services of $0.4 million
and decreased allocable expenses of $0.2 million.





The $1.2
million decrease in employee-related expenses includes:





·
            a decrease of $0.9 million in
      employee related share-based compensation expense due to decreased
      valuation of stock options issued to employees as a result of the decrease
      in value of the Company’s stock price
and





·
            a decrease of $0.3 million in
      salary and benefits, due mainly to the reduction in headcount and
      decreased compensation measures.





The $0.4
million decrease in outside services and professional fees
includes:





·
            a decrease of $0.2 million in
      market research on our leading product candidates
    and





·
            a decrease of $0.2 million in
      legal, accounting and other consulting
  fees.





The $0.2
million decrease of allocable expenses is mainly a result of cost reduction
measures undertaken by the Company to decelerate our cash burn.


- 22
-


Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the nine months ended September 30, 2009 and 2008.  The
table also summarizes unallocated costs, which consist of personnel, facilities
and other costs not directly allocable to development programs.




For the nine months ended
                    September 30,2009
                  
                  
                  2008R&D Expenses
                  
                  ($ in thousands)
                  
                  
                  Percentage
                    ChangeMarqibo
                  
                  $
                  4,097
                  
                  
                  $
                  3,047
                  
                  
                  
                  34
                  %Menadione
                  
                  
                  492
                  
                  
                  
                  1,650
                  
                  
                  
                  -70
                  %Brakiva
                  
                  
                  324
                  
                  
                  
                  896
                  
                  
                  
                  -64
                  %Alocrest
                  
                  
                  (4)
                  
                  
                  
                  584
                  
                  
                  NADiscontinued/out-licensed
      product candidates
                  
                  
                  2
                  
                  
                  
                  (20
                  )
                  
                  NATotal
      third party costs
                  
                  
                  1,715
                  
                  
                  
                  1,984
                  
                  
                  
                  -14
                  %Allocable
      costs and overhead
                  
                  
                  842
                  
                  
                  
                  1,085
                  
                  
                  
                  -23
                  %Personnel
      related expense
                  
                  
                  3,434
                  
                  
                  
                  3,335
                  
                  
                  
                  3
                  %Share-based
      compensation expense
                  
                  
                  466
                  
                  
                  
                  470
                  
                  
                  
                  -1
                  %Total
      research and development expense
                  
                  $
                  11,368
                  
                  
                  $
                  13,031
                  
                  
                  
                  -13
                  %





Marqibo.
 For the nine
months ended September 30, 2009, Marqibo costs increased by 1.1 million compared
to the same period in 2008, mostly related to increase spending on the rALLy and
uveal melanoma trials.





Menadione
For the nine months ended September 30, 2009, Menadione costs decreased by $1.2
million.  The decrease was due to lower spending on the Phase 1
clinical trial as we reduced our costs to outside service providers for the
study and decreased manufacturing expenses.





Brakiva. For the nine months ended September 30, 2009, Brakiva costs
decreased by $0.6 million.  The decrease was due to lower spending on
manufacturing the drug as most manufacturing for the Phase 1 trial was performed
in 2008.





Alocrest. For the nine months ended September 30, 2009, Alocrest costs
decreased by $0.6 million.  The decrease was due to the decreased cost
of the Phase 1 clinical trial that finished enrollment in 2008





Discontinued/Out-licensed
projects. We did not pursue development on our
discontinued/out-licensed product candidates in the nine months ended September
30, 2009, which includes Zensana which was out-licensed in 2007, and IPdR and
Talvesta, which were terminated in 2006 and 2007, respectively.  We
may incur only incidental expenses in 2009 related to the continued disposition
of these terminated products.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates decreased by $0.3 million in the nine
months ended September 30, 2009.  These costs are not directly
allocable to an individual product candidate and primarily relate to outside
services and professional fees related to indirect support of our R&D
functions including data management, regulatory and clinical
development.  We expect these costs to remain low in 2009 compared to
2008 as we seek to reduce external costs in order to reduce our cash burn
rate.  If we are able to obtain our desired funding, we expect these
costs to rise in the next twelve months as we finish the rALLy study in Marqibo
and prepare for the confirmatory study for Marqibo as well as prepare for a
possible NDA submission for Marqibo in the ALL indication.




Allocable
costs decreased by $0.2 million as a result of cost-cutting measures that we
have pursued.  We expect these costs to continue to decrease in 2009
compared to 2008.





Personnel
related costs increased by $0.1 million in the nine months ended September 30,
2009 and we expect these costs to remain slightly higher in 2009 due to certain
executive positions that have been filled in later 2008 and early
2009.





While
share-based compensation was roughly flat for the nine months ended September
30, 2009 compared to the same period in 2008, we expect share-based compensation
will decrease in the future until our stock price increases or the amount of
options issued increases.





Interest income. For the nine
months ended September 30, 2009, interest income was approximately $13,000
compared to interest income of $0.3 million for the nine months ended September
30, 2008. The change is a result of decreased cash balances in our interest
bearing accounts as well as decreasing interest rates.


- 23
-


Interest expense. For the
nine months ended September 30, 2009, interest expense was $2.5 million as
compared to interest expense of $0.8 million for the nine months ended September
30, 2008. The increase resulted from a larger average balance outstanding on our
loan facility with Deerfield.  We originally entered into this loan
agreement in October 2007.





Gain or loss on change in fair
market value of warrant liabilities. For the nine months ended September
30, 2009, we recognized a loss related to the change in fair market value of the
liability related to certain warrants, pursuant to the warrants issued to
Deerfield as part of the Facility Loan of $2.4 million. See Note 4 of our
unaudited condensed financial statements included elsewhere in this Form 10-Q
for further information regarding the Deerfield loan agreement. In the nine
months ended September 30, 2008, we recognized a gain on this warrant liability
of approximately $2.2 million.  The value of these warrants was largely
dependent on the price of our common stock, and as our stock price increased,
increased, causing us to recognize a loss. Similarly, as our stock price
decreased, the value of these warrants decreased, causing us to recognize a
gain. As of September 30, 2009, all warrants issued to Deerfield had been
redeemed by us. See Note 4 for additional details.





Impairment on
investments. For the nine months ended September 30, 2009, we
did not recognize any impairment on our available-for-sale
securities.  For nine months ended September 30, 2008, we recognized
an other-than-temporary impairment in the available-for-sale securities of
$108,000.





Liquidity
and Capital Resources




As of
September 30, 2009, we had aggregate cash and cash equivalents and
available-for-sale securities of $3.1 million. In connection with our October
2009 private placement, described below, we received net cash proceeds of
approximately $11.7 million after expenses. In addition, pursuant to the
Deerfield loan facility, we have $2.5 million that may become available to us if
we achieve a certain milestone in the development of our product candidate
Menadione.  However, we do not anticipate achieving this milestone by
the middle of 2010, unless we are able to obtain additional capital by such
time.  We have drawn down $27.5 million of the total $30 million
available under the loan facility agreement.





Through
September 30, 2009, we have an accumulated deficit of $130.1
million.  Management expects this deficit to increase in future
periods as we continue to develop our product candidates.  Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing.
Through September 30, 2009, a significant portion of our financing has been and
will continue to be through private placements of common stock, preferred stock
and debt financing.





On
October 7, 2009, we entered into a securities purchase agreement with a
number of accredited investors pursuant to which we agreed to sell in a private
placement an aggregate of 54,593,864 units of our securities. Each unit
consisted of either (i) one share of our common stock plus a seven-year warrant
to purchase one-tenth of one additional share of common stock at an exercise
price of $0.60 per share (referred to in the purchase agreement as a Series B
Warrant), or (ii) a seven-year warrant to purchase, at an exercise price of
$0.01 per share, one share of common stock (referred to in the purchase
agreement as a Series A Warrant), plus a Series B Warrant to purchase one-tenth
of one share of common stock. The purchase price per unit was $0.30, except that
to the extent an investor purchased units that included the Series A Warrants,
the purchase price was reduced to $0.29 to give effect to the additional $0.01
that would be paid upon exercise of the Series A Warrants.  Pursuant
to the purchase agreement, we sold an aggregate of 43,562,142 units consisting
of an equal number of shares of our common stock and Series B Warrants to
purchase 4,356,212 additional shares of common stock, and 11,031,722 units
consisting of Series A Warrants to purchase an equal number of shares of common
stock and Series B Warrants to purchase 1,103,170 additional shares of common
stock.  The aggregate purchase price for all of the securities sold
under the purchase agreement was approximately $16.27 million, before deducting
expenses. Of this total amount, approximately $12.4 million was paid in cash and
approximately $3.87 million represented the satisfaction of an outstanding
obligation that we owed to Deerfield.  See Note 4 of our unaudited
condensed financial statements included elsewhere in this Form 10-Q for further
discussion.  The net cash proceeds available to us for operations from
this financing transaction were approximately $11.7 million.  Pursuant
to the purchase agreement, we agreed to use the proceeds from the sale of these
securities solely for the clinical and regulatory development of our Marqibo
program.




We can
give no assurances that any additional capital that we are able to obtain will
be sufficient to meet our needs which raises substantial doubt about our ability
to continue operating as a going concern.  Given the current and
desired pace of clinical development of our product candidates, we estimate that
we only have sufficient cash on hand to fund clinical development into
mid-2010.  We will be required to raise additional capital in 2010 in
order to fund our future development activities, likely by selling shares of our
capital stock or through debt financing. If we are unable to raise additional
capital or enter into strategic partnerships and/or license agreements, we will
be required to cease operations or curtail our desired development activities,
which will delay the development of our product candidates.  There can
be no assurance that such capital will be available to us on favorable terms or
at all, particularly in light of the general economic conditions, which have
severely limited our access to the capital markets. We will need additional
financing thereafter until we can achieve profitability, if ever. If we were to
raise funds in the future through the sale of our common stock, we would need
shareholder approval to authorize the issuance of additional common stock beyond
the currently authorized 100,000,000 shares.


- 24
-


Current and Future Financing
Needs. Our plan of operation for the year ending December 31, 2009 is to
continue implementing our business strategy, including the continued development
of our four product candidates that are currently in various clinical phases.
 We expect our principal expenditures during the next 12 months to
include:




·
            operating expenses, including
      expanded research and development and general and administrative
      expenses;




·
            product development
      expenses, including the costs incurred with respect to applications to
      conduct clinical trials in the United States, as well as outside of the
      United States, for our product candidates, including manufacturing,
      intellectual property prosecution and regulatory
      compliance.




As part
of our planned research and development, we intend to use clinical research
organizations and third parties to help perform our clinical studies and
manufacturing. As indicated above, at our current and desired pace of clinical
development of our product candidates, over the next 12 months we expect to
spend approximately between $16.0 million and $18.0 million on clinical
development (including milestone payments that we expect to be triggered under
the license agreements relating to our product candidates).  We expect
to spend approximately $3.5 million on general corporate and administrative
expenses as well as $0.5 million on facilities and rent.





We
believe that our cash, cash equivalents and marketable securities, which totaled
$12.9 million after giving effect to our October 2009 private placement, will be
sufficient to meet our anticipated operating needs through the first half of
2010 based upon current operating and spending assumptions. However, we expect
to incur substantial expenses as we continue our drug development efforts,
particularly to the extent we advance our lead candidate Marqibo through a
pivotal clinical study.  Pursuant to the terms of the October 2009
private placement, we agreed to use those proceeds solely for the clinical and
regulatory development of our Marqibo program. Future development of our other
products, including Menadione, is therefore contingent on obtaining additional
financing. We cannot guarantee that future financing will be available in
amounts or on terms acceptable to us, if at all.





The
actual amount of funds we will need to operate is subject to many factors, some
of which are beyond our control. These factors include the
following:




·
            costs associated with conducting
      clinical testing;





·
            costs of establishing
      arrangements for manufacturing our product
    candidates;





·
            payments required under our
      current and any future license agreements and
      collaborations;





·
            costs, timing and outcome of
      regulatory reviews;





·
            costs of obtaining, maintaining
      and defending patents on our product candidates;
  and





·
            costs of increased general and
      administrative expenses.




We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our stock or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at
all.  If we raise funds by selling additional shares of common stock
or other securities convertible into common stock, the ownership interest of our
existing stockholders will be diluted.  If we are not able to obtain
financing when needed, we will be unable to carry out our business plan. As a
result, we will have to significantly limit our operations and our business,
financial condition and results of operations would be materially
harmed.





Off-Balance
Sheet Arrangements




We do not
have any “off-balance sheet agreements,” as that term is defined by SEC
regulation.





Item
3.  Quantitative and Qualitative Disclosures About Market Risk




Not
applicable.




- 25
-
 Item
4T. Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures


We
conducted an evaluation as of September 30, 2009, under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, which are defined under SEC rules as
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within required time periods. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were
effective.





Limitations
on the Effectiveness of Controls





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefit of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Hana have been detected. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.




Changes
in Internal Controls Over Financial Reporting





During
the quarter ended September 30, 2009, there were no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.


- 26
-


PART
II - OTHER INFORMATION





Item
1. Legal Proceedings




None.




Item
1A.  Risk Factors.





Investment
in our common stock involves significant risk. You should carefully consider the
information described in the following risk factors, together with the other
information appearing elsewhere in this report, before making an investment
decision regarding our common stock. You should also consider the risk factors
set forth in our Annual Report on Form 10-K for the year ended December 31, 2008
(“2008 Annual Report”) under the caption “Item 1A. Risk
Factors,”  If any of the risks
described below or in our 2008 Annual Report actually occur, our business,
financial conditions, results of operation and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market
price of our common stock could decline, and you may lose all or a part of your
investment in our common stock.


Moreover,
the risks described below and in our 2008 Annual Report are not the only ones
that we face. Additional risks not presently known to us or that we currently
deem immaterial may also affect our business, operating results, prospects or
financial condition.





Because
our common stock is primarily traded on the OTC Bulletin Board, the volume of
shares traded and the prices at which such shares trade may result in lower
prices than might otherwise exist if our common stock was traded on a national
securities exchange.





We were
delisted from the Nasdaq Capital Market in September 2009 and trading in our
common stock has since been conducted on the OTC Bulletin Board. Stocks traded
on the OTC Bulletin Board are often less liquid than stocks traded on national
securities exchanges, not only in terms of the number of shares that can be
bought and sold at a given price, but also in terms of delays in the timing of
transactions and reduced coverage of us by security analysts and the media. This
may result in lower prices for our common stock than might otherwise be obtained
if our common stock were traded on a national securities exchange, and could
also result in a larger spread between the bid and asked prices for our common
stock.




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 Securities Holders





None




Item
5. Other Information





None





Item
6. Exhibits





Exhibit No.
              
              Description10.1
              
              Agreement
      dated September 3, 2009 by and among Hana Biosciences, Inc., Deerfield
      Private Design Fund, L.P., Deerfield Special Situations Fund L.P.,
      Deerfield Special Situations Fund International Limited, and Deerfield
      Private Design International, L.P. (incorporated by reference to Exhibit
      10.1 to the Registrant's Current Report on Form 8-K filed on September 9,
      2009)31.1
              
              Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
              
              Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).


- 27
-


SIGNATURES




In
accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




HANA
      BIOSCIENCES, INC.Dated:
      November 12, 2009
              By:
              /s/ Steven R. Deitcher,
    MDSteven
      R. Deitcher, MDPresident
      and Chief Executive OfficerDated:
      November 12, 2009
              By:
              /s/ John P. IparraguirreJohn
      P. Iparraguirre
                Vice
      President, Chief Financial
Officer




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Index
to Exhibits Filed with this Report
  Exhibit No.
                
                Description31.1
                
                Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
                
                Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
                
                Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).




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