**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 quarter ended June 30, 2006





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 000-50782**





**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**
            **94080**(Address
                of principal executive offices)
            (Zip
                Code)




**(650)
      588-6404**


(Registrant's
      Telephone Number, Including Area Code)





**400
      Oyster Point Blvd, Suite 215, South San Francisco, CA
      94080**


(Former
      Name, Former Address and Former Fiscal Year, if changed since last
      report)





Indicate
      by check mark whether the registrant: (1) 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 is a large accelerated filer, accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act (check
      one):





Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x




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 August 10, 2006, there were 28,742,784 shares of the registrant's common
      stock, $.001 par value, outstanding.











**INDEX**





**Page****PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Unaudited
                Condensed Financial Statements
            3Unaudited
                Condensed Balance Sheets
            3Unaudited
                Condensed Statements of Operations and Comprehensive Loss
            4Unaudited
                Condensed Statement of Changes in Stockholders' Equity
            5Unaudited
                Condensed Statements of Cash Flows
            6Notes
                to Unaudited Condensed Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            23Item
                4.
            Controls
                and Procedures
            23**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            24Item
                1A.
            Risk
                Factors
            24Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            40Item
                3.
            Defaults
                Upon Senior Securities
            40Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            40Item
                5.
            Other
                Information
            41Item
                6.
            Exhibits
            41Signatures
            42Index
                of Exhibits Filed with this Report
            43




1




**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:


· the
        development of our drug 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;
  · our
        ability to market any of our products;
  · our
        history of operating losses; our ability to compete against other companies
        and
        research institutions;
  · our
        ability to secure adequate protection for our intellectual property; our
        ability
        to attract and retain key personnel;
  · availability
        of reimbursement for our product candidates;
  · the
        effect of potential strategic transactions on our business; our ability to
        obtain adequate financing; 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. Accordingly, these
          statements involve estimates, assumptions and uncertainties that could
          cause
          actual results to differ materially from those expressed in them. Discussions
          containing these forward-looking statements may be found throughout this
          Form
          10-Q, 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 below in Part II, Item 1A ** “Risk
          Factors,” that could cause our actual results to differ materially from those in
          the forward-looking statements. We undertake no obligation to publicly
          release
          any revisions to the forward-looking statements or reflect events or
          circumstances after the date of this document. The risks discussed below
          in Part
          II, Item 1A “Risk Factors” and elsewhere in this report should be considered in
          evaluating our prospects and future financial performance.


2





**PART
      I - FINANCIAL INFORMATION**




**Item
      1. Unaudited Condensed Financial Statements**





**HANA
      BIOSCIENCES, INC.**




**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      BALANCE SHEETS**




**June
                30,**
            
            
            **December
                31,****2006**
            
            
            **2005****(Unaudited)****ASSETS**Current
              assets:Cash
                and cash equivalents
            
            $
            44,266,298
            
            $
            17,082,521Short-term
                investments
            
            
            2,332,051
            
            
            472,000Prepaid
                expenses and other current assets
            
            
            69,744
            
            
            74,729Total
                current assets
            
            
            46,668,093
            
            
            17,629,250Property
                and equipment, net
            
            
            323,899
            
            
            76,496Other
                assets
            
            
            --
            
            
            20,453Restricted
                cash
            
            
            125,166
            
            
            --Total
                assets
            
            $
            47,117,158
            
            $
            17,726,199**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,091,750
            
            $
            671,491Accrued
                expenses
            
            
            2,742,488
            
            
            865,135Total
                liabilities
            
            
            3,834,238
            
            
            1,536,626Commitments
                and contingenciesStockholders'
                equity:Common
                stock to be issued
            
            
            185,841
            
            
            --Common
                  stock; $0.001 par value100,000,000
                  shares authorized; 28,742,784 and 22,348,655 shares issued and
                  outstanding
                  at June 30, 2006 and December 31, 2005,
                  respectively
            
            
            28,743
            
            
            22,349Additional
                paid-in capital
            
            
            85,372,186
            
            
            34,400,345Accumulated
                other comprehensive loss
            
            
            (96,000
            )
            
            (164,000
            )Deficit
                accumulated during the development stage
            
            
            (42,207,850
            )
            
            (18,069,121
            )Total
                stockholders' equity
            
            
            43,282,920
            
            
            16,189,573Total
                liabilities and stockholders' equity
            
            $
            47,117,158
            
            $
            17,726,199




See
      accompanying notes to unaudited condensed financial statements.








3




**HANA
      BIOSCIENCES, INC.**




**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**


**(Unaudited)**


**Cumulative****Period
                    from****December
                    6,****Three
                    Months
                    Ended**
                
                
                **Six
                    Months
                    Ended**
                
                
                **2002
                    (date of inception)
                    to****June
                    30,**
                
                
                **June
                    30,**
                
                
                **June
                    30,****2006**
                
                
                **2005**
                
                
                **2006**
                
                
                **2005**
                
                
                **2006**Operating
                  expenses:Selling,
                    General and administrative
                
                $
                2,576,308
                
                $
                963,270
                
                $
                3,560,283
                
                $
                1,670,483
                
                $
                10,393,865Research
                    and development
                
                
                18,368,374
                
                
                1,150,447
                
                
                20,946,506
                
                
                2,872,172
                
                
                32,360,602Total
                    operating expenses
                
                
                20,944,682
                
                
                2,113,717
                
                
                24,506,789
                
                
                4,542,655
                
                
                42,754,467Loss
                    from operations
                
                
                (20,944,682
                )
                
                (2,113,717
                )
                
                (24,506,789
                )
                
                (4,542,655
                )
                
                (42,754,467
                )Other
                    income (expense):Interest
                    income, net
                
                
                249,426
                
                
                30,495
                
                
                384,752
                
                
                50,062
                
                
                583,533Other
                    expense, net
                
                
                (8,800
                )
                
                (2,633
                )
                
                (16,692
                )
                
                (10,137
                )
                
                (36,916
                )Total
                    other income (expense)
                
                
                240,626
                
                
                27,862
                
                
                368,060
                
                
                39,925
                
                
                546,617Net
                    loss
                
                $
                (20,704,056
                )
                $
                (2,085,855
                )
                $
                (24,138,729
                )
                $
                (4,502,730
                )
                $
                (42,207,850
                )Net
                    loss per share, basic and diluted
                
                $
                (0.81
                )
                $
                (0.13
                )
                $
                (1.00
                )
                $
                (0.29
                )Shares
                    used in computing net loss per share, basic and diluted
                
                
                25,640,398
                
                
                15,726,776
                
                
                24,037,103
                
                
                15,402,248Comprehensive
                    loss:Net
                    loss
                
                $
                (20,704,056
                )
                $
                (2,085,855
                )
                $
                (24,138,729
                )
                $
                (4,502,730
                )Unrealized
                    gain (loss)
                
                
                (156,000
                )
                
                -
                
                
                68,000
                
                
                -Comprehensive
                    loss
                
                $
                (20,860,056
                )
                $
                (2,085,855
                )
                $
                (24,070,729
                )
                $
                (4,502,730
                )




See
      accompanying notes to unaudited condensed financial statements.


4




**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**CONDENSED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY**


**(Unaudited)**





Period
      from January 1, 2006 to June 30, 2006




**Common stock****Shares**
                
                
                **Amount**
                
                
                **Additional**
                
                
                
                
                
                **Accumulated**
                
                
                **Deficit**
                
                
                **Total****paid-in**
                
                
                
                
                
                **other**
                
                
                **accumulated**
                
                
                **stockholders'****capital**
                
                
                **Common**
                
                
                **comprehensive**
                
                
                **during**
                
                
                **equity****stock
                    to be**
                
                
                **income
                    (loss)**
                
                
                **development****issued**
                
                
                
                
                
                **stage**Balance
                    at January 1, 2006
                
                22,348,655
                
                $
                22,349
                
                $
                34,400,345
                
                
                --
                
                $
                (164,000
                )
                
                (18,069,121
                )
                $
                16,189,573Issuance
                    of shares upon exercise of warrants, options and restricted
                    stock
                
                574,461
                
                
                574
                
                
                773,601
                
                
                --
                
                
                --
                
                
                --
                
                
                774,175Stock-based
                    compensation of employees amortized over vesting period of stock
                    options
                
                --
                
                
                --
                
                
                2,636,905
                
                
                --
                
                
                --
                
                
                --
                
                
                2,636,905Proceeds
                    from registered direct placement, net of $2,881,611 in
                    fees
                
                4,701,100
                
                
                4,701
                
                
                37,113,850
                
                
                --
                
                
                --
                
                
                --
                
                
                37,118,551Stock-based
                    compensation of non-employees
                
                --
                
                
                --
                
                
                168,964
                
                
                --
                
                
                --
                
                
                --
                
                
                168,964Shares
                    to be issued
                
                --
                
                
                --
                
                
                --
                
                
                185,841
                
                
                --
                
                
                --
                
                
                185,841Inex
                    license agreement - 1,118,568 shares issued
                
                1,118,568
                
                
                1,119
                
                
                10,278,521
                
                
                --
                
                
                --
                
                
                --
                
                
                10,279,640Net
                    loss
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (24,138,729
                )
                
                (24,138,729
                )Unrealized
                    gain on marketable securities
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                68,000
                
                
                --
                
                
                68,000Balance
                    at June 30, 2006
                
                **28,742,784**
                
                **$**
                **28,743**
                ****
                **$**
                85,372,186
                ****
                **$**
                **185,841**
                ****
                **$**
                **(96,000**
                **)**
                **$**
                **(42,207,850**
                **)**
                **$**
                **43,282,920**
                ****


See
      accompanying notes to unaudited condensed financial statements.




5




**HANA
      BIOSCIENCES, INC.**




**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Six
                Months Ended**
              **June
                30,**
            
            **Cumulative**
                **Period
                  from**
                **December
                  6, 2002**
                **(date
                  of inception)****2006**
            
            **2005**
            
            **to
                June 30,**
              **2006****Cash
              flows from operating activities:**Net
                loss
            
            $
            (24,138,729
            )
            $
            (4,502,730
            )
            $
            (42,207,850
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            29,500
            
            
            14,998
            
            
            101,484Stock-based
                compensation of employees
            
            
            2,636,905
            
            
            414,912
            
            
            4,000,724Issuance
                of stock and options to nonemployees for services
            
            
            354,805
            
            
            20,587
            
            
            909,503Services
                rendered for satisfaction of unearned consulting fee
            
            
            --
            
            
            --
            
            
            212,445Services
                rendered in lieu of payment of subscription receivable
            
            
            --
            
            
            --
            
            
            36,000Shares
                to be issued to employees for services rendered
            
            
            --
            
            
            34,913
            
            
            249,750Issuance
                of shares in partial consideration for license agreement
            
            
            10,279,640
            
            
            --
            
            
            10,779,640Changes
                in operating assets and liabilities:(Increase)
                decrease in prepaid expenses and other assets
            
            
            (16,615
            )
            
            968
            
            
            (111,795
            )Increase
                (decrease) in accounts payable
            
            
            420,259
            
            
            (317,822
            )
            
            1,091,750Increase
                (decrease) in accrued and other current liabilities
            
            
            1,877,353
            
            
            (166,304
            )
            
            2,742,488Net
                cash used in operating activities
            
            
            (8,556,882
            )
            
            (4,500,478
            )
            
            (22,195,861
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (276,900
            )
            
            (6,016
            )
            
            (425,382
            )Purchase
                of equity securities
            
            
            --
            
            
            --
            
            
            (636,000
            )Purchase
                of marketable securities
            
            
            (1,750,000
            )
            
            --
            
            
            (1,750,000
            )Restricted
                cash
            
            
            (125,166
            )
            
            --
            
            
            (125,166
            )Net
                cash used in investing activities
            
            
            (2,152,066
            )
            
            (6,016
            )
            
            (2,936,548
            )**Cash
                flows from financing activities:**Proceeds
                from issuances of notes payable to stockholders
            
            
            --
            
            
            --
            
            
            801,619Collection
                of subscription receivable
            
            
            --
            
            
            --
            
            
            4,000Repayment
                of notes payable to stockholders
            
            
            --
            
            
            --
            
            
            (651,619
            )Proceeds
                from private placements of preferred and common stock, net
            
            
            37,118,550
            
            
            4,678,066
            
            
            67,927,517Proceeds
                from exercise of warrants and options
            
            
            774,175
            
            
            
            
            
            1,317,190Net
                cash provided by financing activities
            
            
            37,892,725
            
            
            4,678,066
            
            
            69,398,707Net
                increase in cash and cash equivalents
            
            
            27,183,777
            
            
            171,572
            
            
            44,266,298Cash
                and cash equivalents, beginning of period
            
            
            17,082,521
            
            
            6,584,361
            
            
            --Cash
                and cash equivalents, end of period
            
            $
            44,266,298
            
            $
            6,755,933
            
            $
            44,266,298Supplemental
                disclosures of cash flow data:Cash
                paid for interest
            
            $
            932
            
            $
            --
            
            $
            40,385Supplemental
                disclosures of noncash financing activities:Common
                stock issued for repayment of debt
            
            $
            --
            
            $
            --
            
            $
            150,000Unrealized
                gain/(loss) on marketable securities
            
            $
            68,000
            
            $
            --
            
            $
            (96,000
            )Common
                stock issued to employees for services rendered in 2004
            
            $
            --
            
            $
            249,750
            
            $
            249,750Common
                stock issued to as partial consideration for license
                agreement
            
            $
            10,279,642
            
            $
            --
            
            
            10,779,642





See
      accompanying notes to unaudited condensed financial
      statements.


6


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**








**NOTE
      1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Basis
      of Presentation*





The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with United States generally accepted accounting principles for
      interim financial information of “publicly held companies” and, accordingly,
      they do not include all required disclosures for complete annual financial
      statements. These interim financial statements include all adjustments that
      the management of Hana Biosciences, Inc. (“Hana,” the “Company,” “we,” “us” or
“our”) believes are necessary for a fair presentation of the periods presented.
      These interim financial results are not necessarily indicative of results to
      be
      expected for the full fiscal year.





The
      accompanying condensed financial information should be read in conjunction
      with
      the audited consolidated financial statements for the year ended December 31,
      2005, included in the Company's Annual Report on Form 10-K for the year ended
      December 31, 2005 (the “Form 10-K”) filed with the Securities and Exchange
      Commission (“SEC”) on March 16, 2006. The accompanying condensed balance sheet
      as of December 31, 2005 has been derived from the audited balance sheet as
      of
      that date included in the Form 10-K.





*Use
      of Management's Estimates*




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      based upon current assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual conditions may differ materially
      from
      our current assumptions of liabilities, assets, share-based compensation and
      expenses.  This may result in our estimates being incorrect and may require
      us to record additional charges or benefits in operations.





*Segment
      Reporting*




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





*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, stock warrants, restricted
      stock and convertible preferred stock would have an antidilutive effect because
      the Company incurred a net loss during each period presented. The number of
      shares potentially issuable at June 30, 2006 and 2005 upon exercise or
      conversion that were not included in the computation of net loss per share
      totaled 6,291,518 and 4,387,105, respectively.




*Cash
      and Cash Equivalents*




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




*Concentration
      of Risk*




Financial
      instruments that potentially expose the
      Company to concentrations of credit risk consist primarily of cash and cash
      equivalents, and short-term investments. The Company maintains its cash and
      cash equivalents with high credit quality financial institutions and short-term
      investments consist of U.S. government and government agency securities,
      corporate notes, bonds and commercial paper.




**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS No. 123R”) requiring that the compensation cost relating to all
      share-based payment transactions including employee stock options, be recognized
      in financial statements. As explained in Note 4, the Company adopted SFAS No.
      123R on January 1, 2006. Prior to the adoption of SFAS 123R, the Company used
      the intrinsic value method to account for employee stock options and only
      recorded compensation expense if the option’s fair market value exceeded the
      exercise price at the date of grant.




In
        June
        2006, the Financial Accounting Standards Board (FASB) issued FASB
        Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income
        Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with FASB
        Statement of Financial Accounting Standards No. 109, “Accounting for Income
        Taxes.” This Interpretation defines the minimum recognition threshold a tax
        position is required to meet before being recognized in the financial
        statements. FIN 48 is effective for fiscal years beginning after
        December 15, 2006. We are currently evaluating the effect that the
        adoption of FIN 48 will have on our financial position and results of
        operations.


7




**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





**NOTE
      3. LIQUIDITY AND CAPITAL RESOURCES**





The
      Company reported a net loss of $20.7 million and $24.1 million, respectively,
      for the three and six months ended June 30, 2006. The net loss from date of
      inception, December 6, 2002 to June 30, 2006 amounted to $42.2 million. The
      Company's operating activities have used $22.1 million in cash since its
      inception.





The
      Company has financed its operations since inception primarily through equity
      and
      debt financing. During the six months ended June 30, 2006, the Company had
      a net
      increase of $27.2 million in cash and cash equivalents. This increase primarily
      resulted from net proceeds of $37.1 million raised through the sale of common
      stock in May 2006, and $0.8 million in proceeds from stock option and warrant
      exercises, offset by net cash used in operating activities of $8.6 million
      and
      net cash used in investing activities of $2.2 million for the six months ended
      June 30, 2006. Total capital resources as of June 30, 2006 were $44.3 million
      compared to $17.1 million at December 31, 2005.





The
      Company’s continued operations will depend on whether it is able to continue the
      progression of clinical compounds, identify and acquire new and innovative
      oncology focused products, and whether the Company is able to successfully
      commercialize and sell Zensana. Through June 30, 2006, a significant portion
      of
      the Company’s financing has been through private placements of common stock,
      preferred stock and debt financing. The Company will continue to fund operations
      from cash on hand and through the similar sources of capital previously
      described. The Company can give no assurances that any additional capital that
      it is able to obtain will be sufficient to meet its needs. On May 6, 2006,
      the
      Company entered into a License Agreement with Inex Pharmaceuticals Corporation
      pursuant to which the Company licensed the worldwide rights to develop and
      commercialize three additional product candidates from Inex (See Note 8). Given
      the current and desired pace of clinical development of our six product
      candidates, the Company estimates that it will have sufficient cash on hand
      to
      fund clinical development into 2007. The Company may, however, choose to raise
      additional capital before in order to fund its future development activities,
      likely by selling shares of its common stock or other securities. If the Company
      is unable to raise additional capital, it will likely be forced to curtail
      its
      desired development activities beyond 2007, which will delay the development
      of
      the Company’s product candidates. There can be no assurance that such capital
      will be available to the Company on favorable terms or at all. The Company
      will
      need additional financing thereafter until it can achieve profitability, if
      ever.





**NOTE
      4. STOCKHOLDERS' EQUITY**





*Stock
      Option Plans* The Company has several stockholder approved stock option plans under which
      it
      grants or has granted options to purchase shares of its common stock to
      employees




In
        October 2003, the Company’s Board of Directors approved and adopted the 2003
        Stock Option Plan (the “2003 Plan”). The 2003 Plan authorizes a total of
        1,410,068 shares of common stock for issuance. Following the adoption of
        the
        Company’s 2004 Stock Incentive Plan (the “2004 Plan”) in September 2004, no
        grants or awards have been made under the 2003 Plan. The Company has no current
        intention of issuing future awards under the 2003 Plan. Instead, the
        Company intends to make equity incentive awards only under the 2004 Plan.
        At the
        May 9, 2006 Annual Meeting, the Company’s Stockholders also ratified and
        approved the 2003 Plan.
 
 In
        September 2004, the Company’s Board of Directors approved and adopted the 2004
        Plan, which initially reserved 2,500,000 shares of common stock for issuance.
        On
        March 31, 2006, the board approved, subject to stockholder approval, an
        amendment to the 2004 Plan to increase the total number of shares authorized
        for
        issuance thereunder to 4,000,000. At the May 9, 2006 Annual Meeting, the
        Company’s Stockholders also ratified and approved the 2004 Plan and the
        amendment to the 2004 Plan.
 
 At
        the
        May 9, 2006 Annual Meeting, the Company’s Stockholders also ratified and
        approved the Company’s 2006 Employee Stock Purchase Plan (the “2006 Plan”). The
        2006 Plan was adopted, subject to stockholder approval, by the Company’s Board
        of Directors on March 31, 2006. The purpose of the 2006 Plan is to advance
        the
        interests of the Company by furnishing an additional tool to attract and
        retain
        talented employees, who will be necessary for the Company’s continued growth and
        success. The 2006 Plan provides the Company’s eligible employees with the
        opportunity to purchase shares of Company common stock through payroll
        deductions. The 2006 Plan is intended to qualify as an “employee stock purchase
        plan” under Section 423 of the Internal Revenue Code. There will be a
        maximum of 750,000 shares of common stock available for purchase under the
        2006
        Plan.





8


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




*Restricted
      stock awards* The
      Company’s Board of Directors has issued 524,264 restricted stock awards as of
      June 30, 2006 at no cost to the Company’s executive officers and directors
      pursuant to the 2004 Plan. Of these awards 514,264 remain unvested at June
      30,
      2006.





10,000
        restricted stock awards were granted to a board member and vested immediately
        upon the approval of the award by shareholders during the Annual Meeting
        held on
        May 9, 2006.
  484,887
        restricted stock awards were granted to the Company’s Chief Executive Officer in
        2006. Of the restricted stock awards granted 85,000 shares vest in equal
        increments of 42,500 shares each on November, 1 2006 and November, 1 2007,
        325,000 shares vest in equal increments of 162,500 shares each on May 19,
        2007
        and May 19, 2008 and 57,613 shares vest on January 1, 2007, 4,313 vest on
        February 15, 2007, 3,765 vest on February 26, 2007 and 9,196 vest on July
        20,
        2007.


In
          2006
          the Board of Directors granted 22,000 restricted stock awards to the Company’s
          senior vice president and Chief Medical Officer of which 11,000 shares
          vest on
          November, 1 2006 and November, 1 2007.
  In
          2006
          the Board of Directors granted 7,377 restricted stock awards to the Company’s
          vice president and Chief Business Officer of which 100% vest on January
          1, 2007.
  A
          summary
          of the status of the Company’s restricted stock awards as of December 31, 2005
          and changes during the six months ended June 30, 2006 is as
          follows:




**Nonvested
                Restricted Stock Awards**
            
            
            **Number of Shares**
            
            
            **Weighted Average**
              **Grant-Date**
              **Fair
                Value**Nonvested
                at December 31, 2005
            
            
            -
            
            $
            -Granted
            
            
            524,264
            
            
            10.68Vested
            
            
            (10,000
            )
            
            10.90Cancelled/Forfeited
            
            
            -
            
            
            -Nonvested
                at June 30, 2006
            
            
            514,264
            
            $
            10.68




As
      of June 30, 2006, we estimate that there is $5.0 million in total,
      unrecognized compensation costs related to employee nonvested restricted stock
      awards, which is expected to be recognized over a weighted average period of
      1.57 years.




*Adoption
      of SFAS 123(R)* Effective
      January 1, 2006, the Company adopted the provisions of SFAS No.123R requiring
      that compensation cost relating to all share-based employee payment transactions
      be recognized in the financial statements. The cost is measured at the grant
      date, based on the fair value of the award using the Black-Scholes option
      pricing model, and is recognized as an expense over the employee's requisite
      service period (generally the vesting period of the equity award). The Company
      adopted SFAS No.123R using the modified prospective method for share-based
      awards granted after the Company became a public entity and the prospective
      method for share-based awards granted prior to the Company becoming a public
      entity and, accordingly, financial statement amounts for prior periods presented
      in this Form 10-Q have not been restated to reflect the fair value method of
      recognizing compensation cost relating to stock options.




In
      applying the modified prospective transition method of SFAS No. 123R, the
      Company estimated the fair value of each option award is estimated on the date
      of grant using the Black-Scholes option-pricing model. As allowed by SFAS
      No. 123R for companies with a short period of publicly traded stock
      history, our estimate of expected volatility is based on the average expected
      volatilities of a sampling of five companies with similar attributes to our
      Company, including **** industry, stage of life cycle, size and financial leverage. As the Company
      have
      so far only awarded “plain vanilla options” as described by the SEC's Staff
      Accounting Bulletin No. 107, the Company used the “simplified method” for
      determining the expected life of the options granted. This method is allowed
      until December 31, 2007, after which the Company will be required to adopt
      another method to determine expected life of the option awards. 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. SFAS
      No. 123R 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 10% annually of our stock options awarded will be
      forfeited. For options granted while the Company was a nonpublic entity, the
      Company applied the prospective method in which the awards that were valued
      under the minimum value method for proforma disclosure purposes will continue
      to
      be expensed using the intrinsic value method of APB 25.




9




**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





Prior
      to January 1, 2006, the Company accounted for option grants to employees using
      the intrinsic value method in accordance with Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and
      related interpretations. The Company also followed the disclosure requirements
      of Statement of Financial Accounting Standards No. 123, “Accounting for
      Stock-Based Compensation”, as amended by Statement of Financial Accounting
      Standards No. 148, “Accounting for Stock-Based Compensation-Transition and
      Disclosure”. Under the guidelines of APB No. 25, the Company was only required
      to record a charge for grants of options to employees if on the date of grant
      they had an “intrinsic value” which was calculated based on the excess, if any,
      of the market value of the option over the exercise price.





*Share-based
      Compensation* .
      The Company currently awards stock option grants under its 2003 Plan and its
      2004 Plan. Under the 2003 Plan, the Company may grant incentive and
      non-qualified stock options to employees, directors, consultants and service
      providers to purchase up to an aggregate of 1,410,068 shares of its common
      stock. Under the 2004 Plan, the Company may grant incentive and non-qualified
      stock options to employees, directors, consultants and service providers to
      purchase up to an aggregate of 4,000,000 shares. Historically, stock options
      issued under these plans primarily vest ratably on an annual basis over the
      vesting period, which has generally been three years.





The
      following table summarizes information about stock options outstanding at June
      30, 2006 and changes in outstanding options in the six 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
            
            
            AGGREGATE
                INTRINSIC VALUEOutstanding
                January 1, 2006
            
            
            2,452,887
            
            $
            1.01Options
                granted
            
            
            1,524,179
            
            
            5.49Options
                cancelled
            
            
            --
            
            
            --Options
                exercised
            
            
            (309,760
            )
            
            0.98Outstanding
                June 30, 2006
            
            
            3,667,306
            
            
            3.07
            
            
            8.5
            
            $
            22,221,585Exercisable
                at June 30, 2006
            
            
            1,177,649
            
            $
            1.20
            
            
            7.8
            
            $
            9,272,511





The
      total aggregate intrinsic value of stock options exercised during the three
      and
      six months ended June 30, 2006 was $2.1 million and $2.6 million, respectively.
      Under SFAS No. 123R, there was approximately $2.5 million and $2.6 million
      of
      compensation cost related to employee stock options and restricted stock
      recognized in the operating results for the three and six months ended June
      30,
      2006, compared to approximately $206,000 and $415,000 of share-based
      compensation expense recognized in the same periods for 2005. As of June 30,
      2006, we estimate that there was $17.0 million in total, unrecognized
      compensation costs related to non-vested employee share based compensation
      arrangements, which is expected to be recognized over a weighted average period
      of 2.15 years.


10


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





The
      following table summarizes information about stock options outstanding at June
      30, 2006:






**Number
                of Shares Subject to Options**
            
            
            **Weighted
                Average Remaining Contractual Life of
                Options**
            
            
            **Number
                of Options****Exercise
                Price**
            
            
            **Outstanding**
            
            
            **Outstanding**
            
            
            **Exercisable**$  
                0.07 - $ 0.83
            
            
            753,284
            
            
            7.5
                yrs.
            
            
            527,258$  
                1.01 - $ 1.69
            
            
            1,092,440
            
            
            8.3
                yrs.
            
            
            542,257$ 
                2.17 - $ 3.70
            
            
            347,403
            
            
            0.9
                yrs.
            
            
            98,134$
                4.32 - $ 5.10
            
            
            1,132,679
            
            
            9.3
                yrs
            
            
            10,000$
                5.53 - $ 7.11
            
            
            137,000
            
            
            9.5
                yrs
            
            
            -$
                8.08 - $ 9.30
            
            
            109,500
            
            
            8.8
                yrs
            
            
            -$
                10.73 - $ 11.81
            
            
            95,000
            
            
            9.3
                yrs
            
            
            -$
                0.07 - $ 11.81
            
            
            3,667,306
            
            
            8.5
                yrs
            
            
            1,177,649





For
      purposes of comparison, we calculated the pro forma net loss for the three
      and
      six months ended June 30, 2005 as if all options had originally been calculated
      consistent with the requirements of SFAS No. 123R, adding back to the net loss
      all compensation expense recognized using the intrinsic value method, as
      described in APB No. 25 except for options granted while the Company was a
      nonpublic entity. Under SFAS 12 these options are excluded from proforma
      disclosures.


**Three
                      Months Ended June 30, 2005**
                  
                  **Six
                      Months Ended**
                    **June
                      30, 2005**Net
                      loss, as reported
                  
                  $
                  (2,085,855
                  )
                  $
                  (4,502,730
                  )Add:
                      Total stock-based employee compensation cost determined under
                      intrinsic
                      value method for stock options granted under APB No.25
                  
                  
                  126,256
                  
                  
                  252,511Deduct:
                      Total stock-based employee compensation expense determined
                      under the fair
                      value method under SFAS No.123R
                  
                  
                  (230,936
                  )
                  
                  (432,603
                  )Pro
                      forma net loss
                  
                  $
                  (2,190,535
                  )
                  $
                  (4,682,822
                  )Loss
                      per share of common stock:
                  
                  $
                  (0.14
                  )
                  $
                  (0.30
                  )Basic
                      - as reported
                  
                  $
                  (0.13
                  )
                  $
                  (0.29
                  )







The
      following table summarizes share-based compensation expense related to employee
      stock options and restricted stock units for the three and six months ended
      June 30, 2006 which was allocated as follows (in thousands):




**Three Months**
              **Ended June 30,**
              **2006**
            
            
            **Six Months**
              **Ended June 30,**
              **2006**Research
                and development
            
            
            1,088
            
            
            1,188Selling,
                general and administrative
            
            
            1,363
            
            
            1,449Total
                share-based compensation expense related to employee stock
                options
            
            $
            2,451
            
            $
            2,637





11


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**








The
      following table summarizes the assumptions used in applying the Black-Scholes
      option pricing model to determine the fair value of options granted during
      the
      three and six months ended June 30, 2006 and June 30, 2005,
      respectively:





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005*****Employee
                stock options***Risk-free
                interest rate
            
            
            5.01
            %
            
            3.5%
                -4.00
            %
            
            5.01
            %
            
            3.5%-4.00
            %Expected
                life (in years)
            
            
            5.0
                - 6.0
            
            
            8.0
            
            
            5.0
                - 6.0
            
            
            8.0Volatility
            
            
            0.7
            
            
            0.87-1.06
            
            
            0.7
            
            
            0.87-1.06Dividend
                Yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %





The
      Company’s computation of expected volatility for the six months ended June 30,
      2006 is based on historical volatilities of peer companies. Peer companies’
historical volatilities are used in the determination of expected volatility
      due
      to the short trading history of the Company’s common stock, which is
      approximately one and a half years as of June 30, 2006. In selecting the
      peer companies, the Company considered the following factors: industry, stage
      of
      life cycle, size, and financial leverage. To determine the expected term of
      the
      Company’s employee stock options granted in fiscal 2006 we utilized the
      simplified approach as defined by SEC Staff Accounting Bulletin No. 107,
“Share-Based Payment” (SAB 107). This approach resulted in expected terms of 5
      to 6 years for options granted during the three and six months ended June 30
      2006. The interest rate for periods within the contractual life of the award
      is
      based on the U.S. Treasury yield curve in effect at the time of grant.





*Non-Employee
      Stock Options.* The
      Company has also granted stock options to non-employee consultants. For the
      three and six months ended June 30, 2006, the Company recognized $0.2 million
      of
      stock-based compensation expense related to stock options held by non-employee
      consultants. In accordance with Emerging Issues Task Force Issue 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring or in Conjunction with Selling, Goods or Services” (EITF 96-18),
      compensation cost for options issued to non-employee consultants is measured
      at
      each reporting period and adjusted until the commitment date is reached, being
      either the date that a performance commitment is reached or the performance
      of
      the consultant is complete. The Company utilized a Black-Scholes option pricing
      model to determine the fair value of such awards.





During
      the three and six months ended June 30, 2006, the Company issued 254,614 and
      574,461 shares of common stock, respectively, upon the exercise of warrants,
      stock options and restricted stock grants issuances. Of these shares issued,
      199,760 and 319,760 related to the exercise of stock options and restricted
      stock grants during the three and six months ended June 30, 2006, respectively
      including the issuance of 10,000 shares of common stock upon vesting. The
      exercises of these derivative securities resulted in aggregate net proceeds
      of
      $774,175.




*Warrants* .
        The
        following table summarizes the warrants outstanding as of June 30, 2006 and
        the
        changes in outstanding warrants in the six months then ended:




NUMBER
                OF
              SHARES SUBJECT
              TO
                WARRANTS
              OUTSTANDING
            
            WEIGHTED-AVERAGE
              EXERCISE
                PRICEWarrants
                outstanding January 1, 2006
            
            
            2,448,982
            
            $
            3.31Warrants
                exercised
            
            
            (254,701
            )
            
            1.91Warrants
                cancelled
            
            
            (2,069
            )
            
            1.85Warrants
                outstanding June 30, 2006
            
            
            2,192,212
            
            $
            3.48





*Financings* On
      May
      16, 2006, the Company entered into definitive agreements to sell 4,701,100
      shares of its common stock to private investors. The transaction was completed
      on May 19, 2006. Of the total number of shares sold, 4,629,500 shares were
      sold at a price of $8.50 per share and 71,600 shares were sold to affiliates
      of
      the Company at a price of $9.07 per share, or the fair market value of the
      Company’s common stock on May 16, 2006, which resulted in total gross proceeds
      to the Company of approximately $40.0 million. In connection with the sale,
      the
      Company paid an aggregate of approximately $2.4 million in commissions to
      placement agents. The Company also incurred approximately $0.5 million of legal
      and other expenses paid related to the financing.




12


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





On
      April
      22, 2005, we completed a private placement of 3,916,082 shares of our common
      stock at a price of $1.28 per share, resulting in gross proceeds to us of
      approximately $5.0 million. In connection with the private placement, we issued
      to the investors and placement agents five-year warrants to purchase an
      aggregate of 1,525,629 shares of common stock at an exercise price of $1.57
      per
      share, of which warrants to purchase an aggregate of 997,791 shares remain
      outstanding.  The terms of the warrants provide that we may, at our option,
      redeem the warrants after such time that the average closing price of our common
      stock exceeds $3.14 per share for a 30-day period, which condition was satisfied
      in August 2005.  Accordingly, we may, at our election, redeem the warrants,
      at a redemption price of $0.01 per warrant share, at any time upon 30
      days’ prior written notice to the warrant holders.  The warrants remain
      exercisable by the holders until the expiration of such 30-day notice period.
      In
      connection with the private placement, we paid an aggregate of approximately
      $321,000 in commissions to placement agents.  Included in the amounts paid
      to placement agents were $52,500 in commissions and warrants to purchase 58,593
      shares of common stock to Paramount BioCapital, Inc., a related party. We also
      incurred approximately $14,000 of legal expenses for the private
      placement.





**NOTE
      5. SHORT-TERM INVESTMENTS**





On
      June 30, 2006, the Company had $2,332,051 in total marketable securities which
      consisted of shares of NovaDel Pharma, Inc (NovaDel) purchased in conjunction
      with the Zensana license agreement, and auction rate securities.





In
      October 2004, the Company acquired 400,000 shares of common stock from NovaDel
      for $2.50 a share. The Company paid a premium of $0.91 per share over the market
      value of the NovaDel shares, which was $1.59 on the purchase date. Of the $1.0
      million paid for the 400,000 shares, the premium of $0.91 per share, or
      $364,000, was expensed upon acquisition. The remaining fair market value of
      $636,000 was recorded as an available-for-sale security. As a result of
      restrictions on its ability to sell the shares, the Company was required by
      SFAS
      No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” to
      account for those shares using the cost method through October 2005 and
      thereafter as marketable equity securities. Since October 2005, the Company
      has
      classified the shares as available-for-sale and recorded changes in their value
      as part of its comprehensive income. The market value of these shares on June
      30, 2006, was $540,000 and for the six months ended June 30, 2006, the Company
      had an unrealized gain of $68,000.





At
      June 30, 2006, the Company had $1,792,051 of marketable securities invested
      in
      auction rate securities. These are highly liquid, investment-grade securities.
      All auction rate securities have effective maturity dates within sixty days
      and
      as of June 30, 2006, there were no unrealized gains or losses associated with
      these securities.





**NOTE
      6. RESTRICTED CASH**





On
      May 31, 2006, the Company entered into a sublease agreement. The sublease
      required the Company to issue a security deposit in the amount of $125,000.
      To
      satisfy this obligation the Company opened a $125,000 line of credit, with
      the
      sublessor as the beneficiary in case of default or failure to comply with the
      sublease requirements. In order to fund the line of credit, the Company was
      required to deposit a compensating balance of $125,000 into a restricted money
      market account with our financial institution. This compensating balance for
      the
      line of credit will be restricted for the entire period of the sub-lease or
      three years.





**NOTE
      7. COMMITMENTS**





The
      Company entered into a written three year employment agreement with its
      President and Chief Executive Officer dated November 1, 2003. This agreement
      was
      amended in December 2005 to provide for an employment term that expires in
      November 2008. The aggregate amount of compensation to be provided over the
      remaining term of the agreement amounted to approximately $618,250 at June
      30,
      2006.




The
      Company entered into a written two year employment agreement with its Vice
      President, Chief Business Officer on January 25, 2004. This agreement was
      amended in December 2005 and now provides for an employment term that expires
      in
      November 2008. The aggregate amount of compensation to be provided over the
      remaining term of the agreement amounted to approximately $450,000 at June
      30,
      2006.





The
      Company entered into a written three year employment agreement with its Senior
      Vice President and Chief Medical Officer on October 21, 2004. The aggregate
      amount of compensation to be provided for over the remaining term of the
      agreement amounted to approximately $320,000 at June 30, 2006.





13





**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





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 has relocated its executive offices. The total cash payments due for
      the
      duration of the sublease equaled approximately $1.8 million on June 30, 2006.
      The Company will also make total cash payments of approximately $60,000 for
      the
      six months remaining on a lease for the previous headquarters at 400 Oyster
      Point Boulevard in South San Francisco, California. The Company ceased to use
      the 400 Oyster Point property in the third quarter of fiscal 2006.





**NOTE
      8. LICENSE AGREEMENT WITH INEX PHARMACEUTICALS CORPORATION**




On
        May 6,
        2006, the Company entered into a series of related agreements with Inex
        Pharmaceuticals Corporation, a Vancouver, British Columbia-based biotechnology
        company. Pursuant to a license agreement with Inex, the Company received
        an
        exclusive, worldwide license to patents, technology and other intellectual
        property relating to three product candidates held by Inex: Marqibo (vincristine
        sulfate) Sphingosomal Injection, sphingosome encapsulated vinorelbine and
        sphingosome encapsulated topotecan. Under the license agreement, the Company
        also received an exclusive, worldwide sublicense to other patents and
        intellectual property relating to these product candidates held by the
        University of Texas M.D. Anderson Cancer Center, or MDACC. In addition, the
        Company entered into a sublicense agreement with Inex and the University
        of
        British Columbia, or UBC, which licenses to Inex other patents and intellectual
        property relating to the technology used in Marqibo, sphingosome encapsulated
        vinorelbine and sphingosome encapsulated topotecan. Further, Inex assigned
        to
        the Company its rights under a license agreement with Elan Pharmaceuticals,
        Inc., from which Inex had licensed additional patents and intellectual property
        relating to the three sphingosomal product candidates. The Company also acquired
        certain laboratory equipment having a fair value of approximately $153,000
        pursuant to an asset purchase agreement which were capitalized and are included
        in the Company’s property and equipment on the condensed balance sheet.
        Consistent with the Company’s policy, all acquired technology will be expensed
        in the period of the transaction unless the Company concludes that there
        is a
        possible alternative future use for the acquired technology in the Company’s
        R&D projects or otherwise.


In
      consideration for the rights and assets acquired from Inex, the Company paid
      to
      Inex aggregate consideration of $11.5 million, consisting of $1.5 million in
      cash and 1,118,568 shares of its common stock. The number of shares of common
      stock issued was determined by dividing $10 million by $8.94, which was the
      weighted average price of the Company's common stock during the 20 trading
      days
      prior to the parties' March 16, 2006 letter of intent relating to the
      transaction.  Upon signing the March 16, 2006 letter of intent, the Company
      and Inex entered into an escrow agreement in which the Company deposited
      with the Escrow Agent $500,000 in cash and 111,857 shares of its common stock
      and Inex deposited with the Escrow Agent $200,000 in cash. The date of this
      escrow agreement was determined to be the commitment date for the Inex agreement
      as the Company considered the escrow agreement to be a performance commitment
      under EITF 96-18. Accordingly, the 1,118,568 shares given as partial
      payment for the license agreement were valued as the closing price of Hana
      common stock on March 16, 2006 of $9.19. Accordingly, the Company
      recorded an additional $280,000 of transaction expense, net of fixed assets acquired,
      as
      the fair market value of the share price on the commitment date was higher
      than
      the weighted average price of the Company's common stock during the 20 trading
      days prior to the parties' March 16, 2006 letter of intent relating to the
      transaction. The Company also agreed to pay to Inex a royalty on net sales
      of
      the licensed products as well as upon the achievement of specified development
      and regulatory milestones and up to a maximum aggregate amount of $30.5 million
      for all product candidates. At the Company's election, the future milestone
      payments may be paid in shares of our common stock.  In addition, the
      Company assumed all of Inex's royalty, milestone and other payment obligations
      owing to its licensors relating to the intellectual property underlying the
      three product candidates. The milestones and other payments may include annual
      license maintenance fees of up to $155,000, as well as $2.5 million in milestone
      payments.





14




**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 accompanying
      those statements included elsewhere in this 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 II
      of this Form 10-Q, our actual results may differ materially from those
      anticipated in these forward-looking statements.





**Overview**





We
      are a South San Francisco, California based development stage biopharmaceutical
      company focused on the acquisition, development and commercialization of
      innovative products to enhance cancer care. We aim to acquire proprietary rights
      to these products, by license or otherwise, fund their research and development
      and bring the products to market. Since our inception in December 2002, our
      efforts and resources have been focused primarily on acquiring and developing
      our pharmaceutical technologies, raising capital and recruiting
      personnel.





We
      currently have six products in development:





·
            *Zensana**TM**(ondansetron HCI) Oral Spray*-*Bioequivalent to 8mg Oral Zofran Tablet with Multidose Convenience
                and
                Desirable Route of Administration.*We believe that Zensana, which we licensed from NovaDel Pharma, Inc.
                in
                October 2004, is the only multidose oral spray product candidate
                currently
                in development which utilizes a micro mist spray technology to deliver
                full doses of ondansetron to patients experiencing chemo- and
                radiotherapy-induced nausea and vomiting. Ondansetron, a selective
                blocking agent of the hormone serotonin, is an FDA-approved drug
                that is
                commonly used in tablet form to prevent chemotherapy- and
                radiation-induced and post-operative nausea and vomiting. Many patients
                receiving chemo and radiation therapy have difficulty swallowing
                and are
                potentially unable to tolerate other forms of ondansetron and other
                therapies intended to prevent nausea and vomiting, known as antiemetics.
                We believe that the convenience of drug delivery via a spray may
                offer a
                desirable alternative to tablets and other forms of ondansetron.
                In
                addition, we believe that drug delivery via a spray to the oral mucosa
                may
                avoid degradation of the drug in the gastrointestinal tract and metabolism
                by liver enzymes. All spray pump components used in our clinical
                trials for Zensana are standard components, and with the exception
                of the
                oral applicator, are currently being used for DDAVP® Nasal Spray
                manufactured for Aventis Pharmaceuticals Inc. by Ferring AB. The
                oral
                applicator is currently being used for Lamisil® Spray marketed by Novartis
                AG. We completed certain limited clinical trials of Zensana related
                to
                bioequivalence and bioavailability in early 2006, and in June we
                filed a
                new drug application, or NDA, under Section 505(b)(2) of the Food,
                Drug
                and Cosmetic Act, or FDCA. If approved by the FDA, we intend to
                commercially launch Zensana in the United States in
                2007.




·
            *Marqibo
                (vincristine sulfate) Liposomes Injection - A Novel Targeted Anti-Cancer
                Compound for Non-Hodgkin's Lymphoma and Acute Lymphocytic
                Leukemia*.
                Marqibo, which we licensed from Inex Pharmaceuticals Corporation,
                or Inex,
                in May 2006, is a novel, targeted sphingosome encapsulated formulation
                of
                the FDA-approved cancer drug vincristine. Sphingosomal drug delivery
                consists of using an FDA-approved cancer agent (such as vincristine)
                encapsulated in a lipid envelope. The encapsulated agent is carried
                through the bloodstream and delivered to disease sites where it is
                released to carry out its therapeutic action. We believe sphingosomal
                encapsulation of vincristine significantly increases drug delivery
                to
                tumors and provides prolonged drug exposure for cell-cycle specific
                agents. Targeted sphingosomal drugs are designed to spare healthy
                tissues,
                selectively accumulate inside the tumor, and sustain cytotoxic drug
                levels
                for a longer period of time at the tumor site. Therefore, we believe
                that
                Marqibo possesses a potential pharmacologic advantage over vincristine
                in
                terms of dose intensity and toxicity. Based on clinical trials in
                over 500
                patients to date, we intend to request regulatory authorization to
                commence a Phase III clinical trial of Marqibo in hematological
                malignancies in the second half of
                2006.




·
            *Talvesta
                (talotrexin)******-
                A Novel Antifolate for Solid and Hematological
                Malignancies.*Talvesta, which we licensed from Dana-Farber Cancer Institute, Inc.,
                or
                DFCI, and Ash Stevens, Inc. in December 2002, is a novel antifolate
                drug
                candidate under development for treatment of various types of tumors.
                Antifolates, also known as folic acid analogs, are a class of cytotoxic
                or
                antineoplastic agents which inhibit or prevent the maturation and
                proliferation of malignant cells. Antifolates have been used for
                more than
                30 years to treat both solid and hematological cancers such as breast
                cancer and acute lymphocytic leukemia, or ALL, as well as inflammatory
                diseases such as rheumatoid arthritis. Talvesta has demonstrated
                enhanced
                antitumor activity in a broad spectrum of cancer models by targeting
                the
                enzyme DHFR to prevent DNA synthesis in tumor cells and inhibit tumor
                growth. Preclinical studies performed by the DFCI and the National
                Cancer
                Institute, or NCI, suggest that Talvesta, as compared to methotrexate,
                the
                most widely used antifolate, enters into cells up to 10 times more
                efficiently and demonstrates 10- to 100-fold more potency in overcoming
                polyglutamation, a well-established mechanism of antifolate resistance.
                Talvesta also binds more tightly to its anti-tumor target DHFR, which
                we
                believe may further inhibit tumor growth. We commenced a Phase I
                clinical
                trial in solid tumors in February 2005, a Phase I/II clinical trial
                in
                NSCLC in March 2004, and a Phase I/II clinical trial in ALL in May
                2005.
                In May 2006, the FDA approved our application for orphan drug status
                of
                Talvesta for the treatment of ALL.




15




·
            *Ropidoxuridine********(IPdR)
                - Oral Prodrug to Enhance Radiation Therapy for Brain and Other
                Cancers.*Ropidoxuridine,
                which we licensed from Yale University and the Research Foundation
                of
                State University of New York in February 2004, is a novel oral prodrug
                of
                the radiation sensitizer IUdR. Data from Phase II clinical trials
                performed by the NCI on IUdR suggested a potential survival advantage
                in
                patients with anaplastic astrocytoma, a type of brain tumor. Due
                to its
                toxicity profile, however, IUdR was never developed beyond Phase
                II. In
                preclinical studies conducted at Yale University and the NCI,
                ropidoxuridine****suggested improved activity with a significantly lower toxicity profile,
                including lower gastrointestinal and hematological side effects.
                Preclinical studies have also demonstrated that ropidoxuridine****has a dose responsive and synergistic effect when combined with radiation
                in human glioblastoma models. We have commenced a Phase I clinical
                trial
                assessing the safety, toxicity and pharmacokinetics of
                ropidoxuridine****in patients with solid tumors undergoing radiation therapy. In June
                2006,
                the FDA approved our application for orphan drug status of Ropidozuridine
                for the treatment of glioblastoma, the most common type of brain
                cancer.




·
            *Sphingosome
                Encapsulated Vinorelbine - A Novel Targeted Anti-Cancer Compound
                for
                Breast and Lung Cancer.*Sphingosome encapsulated vinorelbine is our proprietary formulation
                of
                vinorelbine, a microtubule inhibitor that is FDA-approved for use
                as a
                single agent or in combination with cisplatin for the first-line
                treatment
                of unresectable, advanced NSCLC. We obtained the rights to develop
                and
                commercialize sphingosome encapsulated vinorelbine from Inex in May
                2006.
                Sphingosome encapsulated vinorelbine is in preclinical development
                and we
                plan to request regulatory authorization to commence Phase I clinical
                trials in the July of 2006.In
                August 2006 we initiated a Phase I study to assess the safety,
                tolerability and preliminary efficacy of sphingosome encapsulated
                vinorelbine in patients with advanced solid tumors. We are developing
                this
                compound for patients with non-small cell lung cancer and breast
                cancer,
                among others. The study is being conducted at the Cancer Therapy
                and
                Research Center, San Antonio and McGill University,
                Montreal.




·
            *Sphingosome
                Encapsulated Topotecan - A Novel Targeted Anti-Cancer Compound for
                Small-Cell Lung Cancer and Ovarian Cancer.*Sphingosome encapsulated topotecan is our proprietary formulation
                of
                topotecan, a topoisomerase I inhibitor that is FDA-approved for use
                in
                relapsed small-cell lung cancer and in relapsed ovarian cancer. We
                obtained the rights to develop and commercialize sphingosome encapsulated
                topotecan from Inex in May 2006. Sphingosome encapsulated topotecan
                is in
                preclinical development and we plan to we expect to file an IND in
                the
                second half of 2006 and to initiate clinical trials in
                2007.





To
      date, we have not received approval for the sale of any drug candidates in
      any
      market and, therefore, have not generated any revenues from our drug candidates.
      The successful development of our product candidates is highly uncertain.
      Product development costs and timelines can vary significantly for each product
      candidate and are difficult to accurately predict. Various laws and regulations
      also govern or influence the manufacturing, safety, labeling, storage, record
      keeping and marketing of each product. The lengthy process of seeking these
      approvals, and the subsequent compliance with applicable statutes and
      regulations, require the expenditure of substantial resources. Any failure
      by us
      to obtain, or any delay in obtaining, regulatory approvals could materially
      adversely affect our business.




Since
      our inception in December 2002, we have completed five financings resulting
      in
      total gross proceeds of $72.4 million, before selling commissions and related
      offering expenses. We are a development stage company and have no product sales
      to date and we will not receive any product sales until we receive approval
      from
      the FDA or equivalent foreign regulatory bodies to begin selling our
      pharmaceutical candidates. Developing pharmaceutical products, however, is
      a
      lengthy and very expensive process. Assuming we do not encounter any unforeseen
      safety issues during the course of developing our product candidates, we do
      not
      expect to complete the development of a product candidate until approximately
      2007, when we expect to commercially launch Zensana. In addition, as we continue
      the development of our remaining product pipeline, our research and development
      expenses will further increase. To the extent we are successful in acquiring
      additional product candidates for our development pipeline, our need to finance
      further research and development will continue increasing. Accordingly, our
      success depends not only on the safety and efficacy of our product candidates,
      but also on our ability to finance the development of these product candidates.
      Our major sources of working capital have been proceeds from various private
      financings, primarily private sales of our common stock and other equity
      securities.




Research
      and development expenses consist primarily of salaries and related personnel
      costs, fees paid to consultants and outside service providers for laboratory
      development, 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.




Selling,
      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 general
      legal activities.




Our
        results for the quarter ended June 30, 2006 include share-based compensation
        for
        awards that were granted to employees and nonemployees in from September
        2005 to
        May 1, 2006, but were not measured for accounting purposes until these awards
        were approved by shareholders on May 9 th ,
        2006,
        in accordance with SFAS 123(R). The Company will take the entire expense
        in 2006
        for the shares that would have been expensed in 2005 had the share-based
        awards
        been approved at the time of original issuance.


16




**Critical
      Accounting Policies**





As
      of the date of the filing of this quarterly report, we believe there have been
      no material changes to our critical accounting policies and estimates during
      the
      six months ended June 30, 2006, compared to those discussed in our Annual
      Report on Form 10-K for the year ended December 31, 2005, except for the
      adoption of Financial Accounting Standards Board Statement FAS 123(R) as
      discussed below.





**Share-Based
      Compensation**





On
      January 1, 2006, we adopted the fair value recognition provisions of SFAS
      123(R), which requires the measurement and recognition of compensation expenses
      for all share-based payment awards made to employees and directors including
      stock options based on estimated fair values. SFAS 123(R) supersedes the
      Company's previous accounting for employee stock options using the
      intrinsic-value method in accordance APB No. 25, FIN No. 44,
“Accounting for Certain Transactions Involving Stock Compensation, an
      interpretation of APB No. 25,” and related to interpretations, and the
      disclosure-only provisions of SFAS No. 123.





We
      adopted SFAS 123(R) using the modified-prospective-transition method. Under
      this
      method, compensation costs recognized as of June 30, 2006 include: a)
      compensation costs for all share-based payment awards granted prior to, but
      not
      yet vested as of January 1, 2006, based on grant-date fair value estimated
      in accordance with the original provisions of FAS 123, b) compensation costs
      for
      all share-based payment awards granted subsequent to January 1, 2006, based
      on the grant-date fair value estimated in accordance with the provisions of
      SFAS
      123(R) and c) compensation cost for share-based awards granted by the Company
      prior to becoming a public entity which are accounted for under the prospective
      transition method. In accordance with the modified-prospective-transition
      method, our Consolidated Financial Statements for prior periods have not been
      restated to reflect, and do not include, the impact of SFAS 123(R).





The
      compensation expense is calculated in accordance with the guidance in SFAS
      No. 123R, using the Black-Scholes option pricing model to estimate the fair
      value of the share based compensation. For the six months ended June 30, 2006,
      share based compensation expense was approximately $2.3 million, which consisted
      entirely of the amortization of the fair value of employee stock options and
      restricted stock granted in prior periods, or granted in the six months ended
      June 30, 2006, over the vesting periods. We expect to record additional future
      share based employee compensation expense of $17.0 million over a weighted
      average period of 1.96 years for the portion of the share-based
      compensation that had not been recognized as of June 30, 2006. We have not
      recognized, and do not expect to recognize in the near future, any tax benefit
      related to employee stock-based compensation costs as a result of the full
      valuation allowance on the Company's net deferred tax assets and our net
      operating loss carryforwards. We expect quarterly stock-based compensation
      expense to increase for the remainder of 2006.





**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, the Company 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**




All
      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.





17




**Results
      of Operations**





**Three
      Months Ended June 30, 2006 Compared to Three Months Ended June 30,
      2005**




*Selling,
      General and administrative expenses.* For the three ended June 30, 2006, selling, general and administrative
      (“SG&A”) expense was $2.6 million as compared to $1.0 million for the three
      months ended June 30, 2005. For the three months ended June 30, 2006 the
      increase in G&A of $1.6 million is due primarily to an increase in salaries,
      other employee benefits and personnel related costs of approximately $1.2
      million, specifically relating to employee share-based compensation under SFAS
      123R. For the three months ended June 30, 2006, we also incurred an increase
      of
      approximately $0.2 million in associated professional fees and outside services,
      mainly due to an increase of $0.1 million in share-based compensation for
      consultants and an increase of approximately $0.2 million in legal fees and
      other consulting and professional fees, due mainly to the May 2006 Inex
      Pharmaceuticals licensing transaction.





*Research
      and development expenses.* For the three months ended June 30, 2006, research and development (“R&D”)
      expense was $18.4 million as compared to $1.2 million for the three months
      ended
      June 30, 2005. For the three months ended June 30, 2006, the increase of
      approximately $17.2 million is due primarily to an increase of $15.5 million
      in
      expenses for the clinical development of our product pipeline, including $11.9
      million in license fees related to the Inex license agreement and a $1.0 million
      payment in expense for milestones reached in our license agreements. These
      clinical costs included the physical manufacturing of drug compounds, payments
      to our contract research organization and legal expenses associated with our
      continued patent protection and other professional fees and outside services.
      For the three months ended June 30, 2006, the Company incurred increased salary,
      employee benefits and other personnel related costs of approximately $1.5
      million as compared to the three months ended June 30, 2005, including an
      increase of $1.0 million in employee related stock-based compensation
      expense due to the implementation of SFAS No. 123R, and an increase of $0.5
      million in salary and other benefits expense due to increased headcount. Other
      allocable operating expenses including travel, conferences and insurance
      increased by approximately $0.1 million for the three months ended June 30,
      2006
      compared to the three months ended June 30, 2005.





We
      anticipate that research and development expenses will continue gradually
      increasing in 2006 and substantially in subsequent years as we increase our
      research and development efforts and as our existing product candidates proceed
      through preclinical studies and more costly clinical studies. In particular,
      we
      expect our research and development expenses to increase through the later
      half
      of 2006 and beyond if Marqibo enters a Phase III clinical trial in late 2006.
      Actual expenses may vary considerably based upon timing of program initiation,
      study enrollment rates, and the timing and structure of any collaboration in
      which a partner may incur a portion of these expenses.





*Interest
      income, net.* For the three months ended June 30, 2006, net interest income was $249,426,
      compared to net interest income of $30,495 for the three months ended June
      30,
      2005. The increase of approximately $219,000 resulted from increased cash
      balance in our interest bearing accounts due to our May 2006 financing which
      raised gross proceeds of $40.0 million plus rising interest rates .




**Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005**




*Selling,
      General and administrative expenses.* For
      the six months ended June 30, 2006, SG&A expense was $3.6 million, as
      compared to $1.7 million for the six months ended June 30, 2005. For the six
      months ended June 30, 2006 the increase of $1.9 million is due primarily to
      an
      increase in salaries, other employee benefits and personnel related costs of
      approximately $1.3 million, including an increase of $1.3 million in employee
      related share-based compensation expense due to the implementation of SFAS
      No.123R, salaries and other employee benefits. For the six months ended June
      30,
      2006, we also incurred an increase of approximately $0.3 million in associated
      professional fees and outside services, mainly due to an increase of $0.1million
      in share-based compensation for consultants and an increase of approximately
      $0.1 million in legal fees due to the May Inex license agreement, and an
      increase of approximately $0.1 million in other outside services, including
      payments to members of the Board of Directors, investor relations services,
      marketing expenses and public filing and exchange listing fees.





*Research
      and development expenses.* For the six months ended June 30, 2006, R&D expense was $20.9 million as
      compared to $2.9 million for the six months ended June 30, 2005. For the six
      months ended June 30, 2006, the increase of approximately $18.0 million is
      due
      primarily to an increase in of $16.1 million in expenses for the clinical
      development of our product pipeline, including $11.9 million in license fees
      and
      transaction services related to the Inex license agreement. Also included in
      the
      clinical costs is an increase of $1.1 million in clinical milestone expense
      related to Zensana and Talvesta clinical progress, and an increase of clinical
      costs of $3.1 million for research and development costs related to the
      development costs of our six drug candidates. These clinical costs included
      the
      physical manufacturing of drug compounds, payments to our contract research
      organization and legal expenses associated with our continued patent protection
      and other professional fees and outside services. For the six months ended
      June
      30, 2006, we incurred increased salary, employee benefits and other personnel
      related costs of approximately $1.8 million as compared to the six months ended
      June 30, 2005, including an increase of $1.0 million in employee
      related stock-based compensation expense specifically related to implementation
      of SFAS No. 123R, and an increase of $0.8 million in salary, bonus and other
      benefit expenses due to increased headcount. Other allocable operating expenses
      increased by approximately $0.2 million for the six months ended June 30, 2006
      compared to the six months ended June 30, 2005 travel and conference expenses,
      insurance and other costs.





18




We
      anticipate that research and development expenses will continue gradually
      increasing in 2006 and substantially in subsequent years as we increase our
      research and development efforts and as our existing product candidates proceed
      through preclinical studies and more costly clinical studies. In particular,
      we
      expect our research and development expenses to increase through the later
      half
      of 2006 and beyond if Marqibo enters a Phase III clinical trial in late 2006.
      Actual expenses may vary considerably based upon timing of program initiation,
      study enrollment rates, and the timing and structure of any collaboration in
      which a partner may incur a portion of these expenses.





*Interest
      income, net.* For the six months ended June 30, 2006, net interest income was $384,752,
      compared to net interest income of $50,062 for the six months ended June 30,
      2005. The increase of approximately $335,000, respectively, resulted from
      increased cash balance due to our May 2006 financing which raised gross proceeds
      of $40.0 million plus rising interest rates.





**Liquidity
      and Capital Resources**





From
      inception to June 30, 2006, we have incurred an aggregate net loss of $42.2
      million, primarily as a result of expenses incurred through a combination of
      research and development activities related to the various technologies under
      our control and expenses supporting those activities.





We
      have financed our operations since inception primarily through equity and debt
      financing. From inception through June 30, 2006, we have raised a net increase
      in cash and cash equivalents of $44.3 million. This increase primarily resulted
      from net cash provided by financing activities of $69.4 million from inception
      through June 30, 2006, substantially all of which was derived from our four
      private placements which resulted in aggregate net proceeds to us of $67.9
      million. The increase in cash provided by financing activities was offset by
      net
      cash used in operating activities of $22.2 million and net cash used in
      investing activities of $2.9 million for the cumulative period from inception
      to
      June 30, 2006.





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 June 30, 2006, a significant portion of our financing has been through
      private placements of common stock, preferred stock and debt financing. We
      will
      continue to fund operations from cash on hand and through future placements
      of
      capital stock or debt financings. We can give no assurances that any additional
      capital that we are able to obtain will be sufficient to meet our needs. Given
      the current and desired pace of clinical development of our six product
      candidates, including three to be developed under the Inex license agreement
      dated May 6, 2006, we anticipate that research and development expenses will
      continue to increase in 2006 and substantially in subsequent years as we
      increase our efforts and as our existing product candidates proceed through
      preclinical studies and more costly clinical studies. In particular, because
      we
      plan to initiate a Phase III clinical trial of Marqibo in hematological
      malignancies by the end of 2006, we expect our research and development expenses
      to increase significantly in the second half of 2006 and beyond. We estimate
      that we will have sufficient cash on hand to fund clinical development into
      2007. However, we may seek to raise additional capital before in order to fund
      our future development activities, likely by selling shares of our capital
      stock
      or other securities. There can be no assurance that such capital will be
      available to us on favorable terms or at all. In April 2006, we filed a
      shelf registration statement with the SEC. The registration statement provides
      for the offering of up to $75 million of our common stock. In May 2006, we
      completed a private offering in which we sold 4.7 million shares of common
      stock
      which were part of the filed shelf registration, for gross proceeds of $40.0
      million. We may offer the remaining securities on the shelf registration
      statement from time to time and at such times as we believe a plan of financing
      is in our best interests.





***Financings.*** In February 2004, we received gross proceeds of approximately $4.7 million
      through the sale of 2,802,989 shares of our common stock. In connection with
      this offering, we paid commissions and other offering-related expenses
      consisting of $341,979 in cash and issued a 5-year warrant to purchase 277,331
      shares of our common stock to Paramount BioCapital, Inc., who served as
      placement agent, for their services rendered.





Immediately
      prior to the EMLR - Hana Biosciences merger in July 2004, we received gross
      proceeds of $8.0 million through the sale of 2,395,210 shares of our Series
      A
      Convertible Preferred Stock. Each share of Series A Convertible Preferred
      Stock was convertible at the holder's election into 1.410068 common shares.
      On January 18, 2005, the effective date of the registration statement covering
      the resale of the common shares issuable upon conversion of the Series A
      Preferred Stock, the Series A Preferred Stock automatically converted into
      3,377,409 shares of common shares.





On
      April 22, 2005, we completed a private placement of 3,916,082 shares of our
      common stock at a price of $1.28 per share, resulting in gross proceeds to
      us of
      approximately $5.0 million. In connection with the private placement, we issued
      to the investors and placement agents five-year warrants to purchase an
      aggregate of 1,525,629 shares of common stock at an exercise price of $1.57
      per
      share, of which warrants to purchase an aggregate of 997,791 shares remain
      outstanding.  The terms of the warrants provide that we may, at our option,
      redeem the warrants after such time that the average closing price of our common
      stock exceeds $3.14 per share for a 30-day period, which condition was satisfied
      in August 2005.  Accordingly, we may, at our election, redeem the warrants,
      at a redemption price of $0.01 per warrant share, at any time upon 30
      days' prior written notice to the warrant holders.  The warrants remain
      exercisable by the holders until the expiration of such 30-day notice period.
      In
      connection with the private placement, we paid an aggregate of approximately
      $321,000 in commissions to placement agents.  Included in the amounts paid
      to placement agents were $52,500 in commissions and warrants to purchase 58,593
      shares of common stock to Paramount BioCapital, Inc., a related party. We also
      incurred approximately $14,000 of legal expenses for the private
      placement.




19




On
      October 19, 2005, we completed a private placement of 3,686,716 shares of our
      common stock. Of the total number of shares sold, 3,556,000 shares were sold
      at
      a price of $4.00 per share and 130,716 shares were sold to executive officers
      and affiliates of a director of our company at a price of $4.59 per share,
      which
      resulted in total gross proceeds to us of approximately $14.8 million. In
      addition to the shares of common stock, the investors also received 5-year
      warrants to purchase an aggregate of 737,343 shares at an exercise price of
      $5.80 per share. In connection with the private placement, we paid an aggregate
      of approximately $1.0 million in commissions to placement agents and issued
      5-year warrants to purchase an aggregate of 253,306 shares at an exercise price
      of $5.80 per share. We also incurred approximately $77,500 of legal and other
      expenses paid to placement agents.





On
      May 19, 2006, we completed a registered direct placement of 4,701,100 shares
      of
      our common stock. Of
      the
      total number of shares sold, 4,629,500 shares were sold at a price of $8.50
      per
      share and 71,600 shares were sold to executive officers and affiliates of a
      director of the Company at a price of $9.07 per share, which resulted in total
      gross proceeds to us of approximately $40.0 million. In connection with the
      purchase agreement, we paid an aggregate of approximately $2.4 million in
      commissions to placement agents. We also incurred approximately $535,000 of
      legal and other expenses paid to placement agents





***Current
      and Future Financing Needs.*** We have incurred negative cash flow from operations since we started our
      business. We have spent, and expect to continue to spend, substantial amounts
      in
      connection with implementing our business strategy, including our planned
      product development efforts, our clinical trials, and our research and discovery
      efforts. Given the current and desired pace of clinical development of our
      six
      product candidates, over the next 12 months we estimate that we will need
      approximately $29.5 million in order to fund our research and development
      activities, including amounts to milestone payments that we expect to be
      triggered under the license agreements relating to our product candidates.
      The
      remaining amount of costs are devoted to salaries associated with those
      individuals in the research and development department as well as and the
      manufacturing and clinical trial costs for our six product candidates. We
      estimate that we will have sufficient capital to fund our research and
      development activities through 2006 and into 2007.




However,
      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 preclinical and clinical testing;
  · costs
        associated with commercializing our lead programs, including establishing
        sales
        and marketing functions;
  · costs
        of establishing arrangements for manufacturing our product
        candidates;
  · costs
        of acquiring new drug 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 selling, 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 may be unable to carry out our business plan. As a result, we may
      have to significantly limit our operations and our business, financial condition
      and results of operations would be materially harmed.




20


***Plan
      of Operation***





Our
      plan of operation for the year ending December 31, 2006 is to continue
      implementing our business strategy, including the clinical development of our
      six product candidates. We also intend to expand our drug candidate portfolio
      by
      acquiring additional drug technologies for development. We expect our principal
      expenditures during the next 12 months to include:


· operating
        expenses, including expanded research and development and selling, general
        and
        administrative expenses; and
  · product
        development expenses, including the costs incurred with respect to applications
        to conduct clinical trials in the United States for our six product
        candidates.


As
      part of our planned expansion, we intend to use clinical research organizations
      and third parties to perform our clinical studies and manufacturing. As
      indicated above, at our current and desired pace of clinical development of
      our
      six product candidates, over the next 12 months we expect to spend approximately
      $29.5 million on clinical development (including milestone payments of $6.3
      million that we expect to be triggered under the license agreements relating
      to
      our product candidates), $1.8 million on general corporate and administrative
      expenses, and $600,000 on facilities and rent. We expect to have completed
      the
      remaining Phase I clinical trials in Talvesta. These clinical trials include
      those in solid tumors and acute lymphocytic leukemia, or ALL. In addition
      we expect to initiate a Phase II clinical trial in relapsed or refractory
      gastric cancer as well as a Phase I clinical trial in pediatric solid
      tumors. In addition, we plan to initiate at least one registrational clinical
      trial for Marqibo in hematological malignancies. We also expect to complete
      our
      Phase I clinical trial in sphingosome
      encapsulated vinorelbine, as well as ropidoxuridine, and
      with the potential launch of Zensana scheduled in the first half of 2007 we
      will
      continue to evaluate and manage our launch efforts.





**Research
      and Development Projects**





The
      discussion below describes for each of our development projects the research
      and
      development expenses we have incurred to date and, to the extent we are able
      to
      reasonable ascertain, the amounts we estimate we will have to expend in order
      to
      complete development of each project and the time we estimate it will take
      to
      complete development of each project. Our assumptions relating the expected
      costs of development and timeframe for completion are dependent on numerous
      factors, including the availability of capital, unforeseen safety issues, lack
      of effectiveness, and significant unforeseen delays in the clinical trial and
      regulatory approval process, any of which could be extremely costly. In
      addition, our estimates assume that we will be able to enroll a sufficient
      number of patients in clinical trials.





Since
      our business does not currently generate any cash flow, however, we may need
      to
      raise additional capital to continue development of our product candidates
      beyond 2006. If we are to raise such capital, we expect to raise it primarily
      by
      selling shares of our capital stock. To the extent additional capital is not
      available when we need it, we may be forced to discontinue or scale-back our
      development efforts relating to one or more of our product candidates our
      out-license our rights to our product candidates to a third party, any of which
      would have a material adverse effect on the prospects of our
      business.





***Zensana
      (ondansetron HCl) Oral Spray.*** Since acquiring our rights to Zensana in October 2004, we have incurred $3.6
      million of project costs related to our development through June 30, 2006,
      of
      which $1.3 million and $2.3 million was incurred in the three and six months
      ended June 30, 2006 and $0.9 million was incurred in fiscal 2005. We completed
      our pivotal clinical trials of Zensana in early 2006, and filed an NDA under
      Section 505(b)(2) of the Food, Drug and Cosmetic Act in the second quarter
      of
      2006. If approved by the FDA, we intend to commercially launch Zensana in the
      United States in 2007. We estimate that we will need to expend at least an
      additional $6.3 million before we receive FDA approval for Zensana, if ever,
      which amount includes a milestone payment that would be owed to our licensor
      upon FDA approval.





***Marqibo®.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Marqibo
      in May 2006 we have incurred $437,000 in project costs related to our
      development of Marqibo through June 30, 2006. We plan to initiate a Phase III
      clinical trial in the second half of 2006 and believe we will need to spend
      approximately $2.1 million in 2006 to fund our research and development efforts.
      We estimate that we will need to expend at least an aggregate of approximately
      $47 million in order for us to obtain FDA approval for Marqibo, if ever, which
      amount includes a milestone payment that would be owed to our licensor upon
      FDA
      approval.  We expect that it will take approximately three to four years
      until we will have completed development and obtained FDA approval of Marqibo,
      if ever.





***Talvesta*** . From
      inception through June 30, 2006, we have incurred $3.4 million of costs related
      to our development of Talvesta, of which $1.3 million, $1.0 million and $272,205
      was incurred in fiscal 2005, 2004 and 2003, respectively. For the three and
      six
      months ended June 30, 2006, we incurred $423,000 and $872,000, respectively,
      of
      costs in the development of Talvesta. We believe we currently have sufficient
      capital to fund our planned development activities of Talvesta through 2006.
      We
      estimate that we will need to expend an aggregate of approximately $65 million
      in order to complete development of Talvesta, should we opt to continue
      development. Costs incurred are a direct result of ensuring proper study conduct
      in accordance with local regulations. Should we choose to continue development
      we expect that it will take an additional four to five years before we complete
      development and obtain FDA approval of Talvesta, if ever.




21





***Ropidoxuridine
      (IPdR).*** Since acquiring our rights to ropidoxuridine in February 2004, we have incurred
      $1.7 million of project costs related to our development of ropidoxuridine
      through June 30, 2006, of which $834,900 and $656,251 were incurred in fiscal
      2005 and **** 2004
      respectively. For the three and six months ended June 30, 2006, we incurred
      approximately $85,000 and $156,000, respectively, of project costs related
      to
      the development of ropidoxuridine. Currently, we estimate that we will need
      to
      expend at least an additional $45 million until we receive FDA approval for
      ropidoxuridine, should we opt to continue development. Should we choose to
      continue, we expect that it will take an additional 5 or 6 years until we will
      have completed development and obtained FDA approval of ropidoxuridine, if
      ever.
      We believe we currently have sufficient capital to fund our development
      activities of ropidoxuridine through 2006.





***Sphingosome
      Encapsulated Vinorelbine and Sphingosome Encapsulated
      Topotecan.*** Along with our rights to Marqibo, we acquired our rights to develop and
      commercialize sphingosome encapsulated vinorelbine and sphingosome encapsulated
      topotecan in May 2006 in connection with our license transaction with Inex
      Pharmaceuticals Corporation. Since acquiring the exclusive world-wide rights
      to
      develop and commercialize sphingosome encapsulated vinorelbine and sphingosome
      encapsulated topotecan in May 2006, we have incurred $440,000 and $177,000,
      respectively, in project costs related to our development of these drugs through
      June 30, 2006. As these drugs are early in their clinical development, the registrational
      strategy is still being evaluated.





22


**Item
      3.  Quantitative and Qualitative Disclosure About Market
      Risk**




Our
      exposure to market risk is confined to our cash, cash equivalents, auction
      rate securities and
      our investment in NovaDel Pharma, Inc. We have attempted to minimize risk by
      investing in high-quality financial instruments, primarily money market funds
      with no security having an effective duration longer than 90 days. We are
      subject to risk due to general market conditions, which may adversely impact
      the
      carrying value of our auction rate securities and our investment in NovaDel.
      If
      the market interest rate decreases by 100 basis points or 1%, the fair value
      of
      our cash and cash equivalents portfolio would have minimal to no impact on
      the
      carrying value of our portfolio. We did not hold any derivative instruments
      as
      of June 30, 2006, and we have never held such instruments in the
      past.




**Item
      4. Controls and Procedures**




Based
      on their evaluation as of June 30, 2006, our Chief Executive Officer and Chief
      Financial Officer, with the participation of management, have concluded that
      our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934) are effective to ensure that the
      information required to be disclosed by us in the reports that we file or submit
      under the Securities and Exchange Act of 1934 is recorded, processed, summarized
      and reported within the time periods specified in Securities and Exchange
      Commission rules and forms.




During
      the quarter ended June 30, 2006, 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.





23


**PART
      II - OTHER INFORMATION**


**Item
      1. Legal Proceedings**





We
      are
      not involved in any legal proceeding.




**Item
      1A. Risk Factors**




*You
      should carefully consider all of the risks described below, together with all
      of
      the other information included in this report, in considering our business
      and
      prospects. The risks and uncertainties described below are not the only ones
      facing us. Additional risks and uncertainties not presently known to us or
      that
      we currently deem immaterial also may impair our business operations. The
      occurrence of any of the following risks could harm our business, financial
      condition or results of operations.*





*Except
      as described below, there have been no material changes in the risk factors
      included under Item 1A of Part II of our Quarterly Report on Form 10-Q for
      the
      quarter ended March 31, 2006, other than changes resulting from the following:*




·
              *our
                  operating results and financial condition for and as of the three
                  months
                  ended June 30, 2006;*
  ·
              *our
                  sale of approximately 4.7 million shares of our common stock resulting
                  in
                  gross proceeds of $40 million on May 19, 2006;*
  ·
              *our
                  receipt in May 2006 and June 2006 of orphan drug designation for
                  our
                  product candidates Talvesta and Ropidoxuridine (IPdR), respectively;
                  and*
  ·
              *the
                  submission on June 30, 2006 of our new drug application for Zensana.*
 
 *As
        a
        result of these events, the risk factors identified by the following captions
        have been updated or otherwise revised from those included in our Quarterly
        Report on Form 10-Q for the quarter ended March 31, 2006:*
 
 ·
              *We
                  are a development stage company with a limited operating history
                  and may
                  not be able to commercialize any products, generate significant
                  revenues
                  or attain profitability.*
  ·
              *If
                  we are not able to successfully develop and commercialize Zensana
                  in the
                  United States, we may not generate sufficient revenues to continue
                  our
                  business operations.*
  ·
              *We
                  may need to raise additional capital to fund our operations. If
                  we are
                  unable to raise additional capital when needed, we may have to
                  discontinue
                  our product development programs or relinquish our rights to some
                  or all
                  of our product candidates. The manner in which we raise any additional
                  funds may affect the value of your investment in our common
                  stock.*





**Risks
      Related to Our Business**




***We
      are a development stage company with a limited operating history and may not
      be
      able to commercialize any products, generate significant revenues or attain
      profitability.***




We
      are a
      development stage company with a limited operating history. We have never
      generated revenue and have incurred significant net losses in each year since
      our inception. We expect to incur substantial losses and negative cash flow
      from
      operations for the foreseeable future, and we may never achieve or maintain
      profitability. For the year ended December 31, 2005 and the six months
      ended June 30, 2006, we had net losses of $10.0 million and $24.0 million,
      respectively. From our inception in December 2002 through June 30, 2006, we
      have
      incurred a net loss of $42.1 million.




We
      expect
      our cash requirements to increase substantially in the foreseeable future as
      we:


·
              continue
                  to undertake preclinical development and, if and when permitted
                  by
                  appropriate regulatory agencies, clinical trials for our current
                  and new
                  product candidates;
  ·
              seek
                  regulatory approvals for our product candidates at the appropriate
                  time in
                  the future;
  ·
              implement
                  additional internal systems and
                  infrastructure;
 
 ·
              seek
                  to acquire additional technologies to develop;
                  and
 
 ·
              hire
                  additional personnel.
  24




We
      expect
      to incur losses for the foreseeable future as we fund our operations and capital
      expenditures. As a result, we will need to generate significant revenues in
      order to achieve and maintain profitability. Even if we succeed in developing
      and commercializing one or more of our product candidates, which success is
      not
      assured, we may not be able to generate significant revenues. Even if we do
      generate significant revenues, we may never achieve or maintain profitability.
      Our failure to achieve or maintain profitability could negatively impact the
      trading price of our common stock.




***If
      we are not able to successfully develop and commercialize Zensana in the United
      States, we may not generate sufficient revenues to continue our business
      operations.***




None
      of
      our product candidates have been approved for commercial sale in any country.
      The process to develop, obtain regulatory approval for and commercialize
      potential drug candidates is long, complex and costly. We submitted a New Drug
      Application, or NDA, for our lead product candidate Zensana, to the U.S. Food
      and Drug Administration, or FDA, in June 2006. We licensed Zensana from NovaDel
      Pharma, Inc., or NovaDel, in October 2004. If approved, we expect to
      commercially launch Zensana in the United States in the first half of 2007.
      Another of our product candidates, Marqibo, is currently only in Phase II
      clinical trials. We anticipate requesting authorization to commence a Phase
      III
      clinical trial of Marqibo in relapsed acute lymphocytic leukemia, or ALL, in
      the
      second half of 2006. We licensed Marqibo from Inex Pharmaceuticals, or Inex,
      in
      May 2006. Our other four product candidates are in early stages of clinical
      development.





We
      have
      no internal discovery capabilities and rely solely on our ability to license
      or
      acquire product candidates. As a result, our ability to generate revenues from
      product sales in the foreseeable future depends on our ability to complete
      development, obtain regulatory approval for and successfully commercialize
      Zensana in the United States in a timely manner. If we are unable to
      successfully commercialize Zensana in the United States, we may not be able
      to
      earn sufficient revenues to continue our business without raising significant
      additional capital, which may not be available. Pursuant to our license
      agreement with NovaDel, we do not have the right to develop and commercialize
      Zensana outside the United States and Canada.




***If
      we fail to acquire and develop other product candidates we may be unable to
      grow
      our business.***





We
      intend
      to acquire rights to develop and commercialize additional product candidates.
      Because we currently neither have nor intend to establish internal research
      capabilities, we are dependent upon pharmaceutical and biotechnology companies
      and academic and other researchers to sell or license us their product
      candidates. The success of our strategy depends upon our ability to identify,
      select and acquire pharmaceutical product candidates.





Proposing,
      negotiating and implementing an economically viable product acquisition or
      license is a lengthy and complex process. We compete for partnering arrangements
      and license agreements with pharmaceutical, biopharmaceutical and biotechnology
      companies, many of which have significantly more experience than us and have
      significantly more financial resources than we do. Our competitors may have
      stronger relationships with certain third parties with whom we are interested
      in
      partnering, such as academic research institutions, and may, therefore, have
      a
      competitive advantage in entering into partnering arrangements with those third
      parties. We may not be able to acquire rights to additional product candidates
      on terms that we find acceptable, or at all.





We
      expect
      that any product candidate to which we acquire rights will require significant
      additional development and other efforts prior to commercial sale, including
      extensive clinical testing and approval by the FDA and applicable foreign
      regulatory authorities. All product candidates are subject to the risks of
      failure inherent in pharmaceutical product development, including the
      possibility that the product candidate will not be shown to be sufficiently
      safe
      or effective for approval by regulatory authorities. Even if our product
      candidates are approved, they may not be manufactured or produced economically
      or commercialized successfully.




***If
      we are unable to successfully manage our growth, our business may be harmed.***




In
      the
      future, if we are able to advance our product candidates to the point of, and
      thereafter through, clinical trials, we will need to expand our development,
      regulatory, manufacturing, marketing and sales capabilities or contract with
      third parties to provide these capabilities. Any future growth will place a
      significant strain on our management and on our administrative, operational
      and
      financial resources. Our future financial performance and our ability to
      commercialize our product candidates and to compete effectively will depend,
      in
      part, on our ability to manage any future growth effectively. We are actively
      evaluating additional product candidates to acquire for development. Such
      additional product candidates, if any, could significantly increase our capital
      requirements and place further strain on the time of our existing personnel,
      which may delay or otherwise adversely affect the development of our existing
      product candidates. We must manage our development efforts and clinical trials
      effectively, and hire, train and integrate additional management, administrative
      and sales and marketing personnel. We may not be able to accomplish these tasks,
      and our failure to accomplish any of them could prevent us from successfully
      growing Hana.




25




***We
      rely on key executive officers and their experience and knowledge of our
      business would be difficult to replace in the event any of them left
      Hana.***




We
      are
      highly dependent on Mark Ahn, our president and chief executive officer, Fred
      Vitale, our vice president and chief business officer, Gregory Berk, our senior
      vice president and chief medical officer, and John Iparraguirre, our vice
      president and chief financial officer. Dr. Ahn’s, Mr. Vitale’s and
      Dr. Berk’s employment are governed by written employment agreements.
      Dr. Ahn’s and Mr. Vitale’s employment agreements each provide for
      terms that expire in November 2008. Dr. Berk’s employment term under his
      agreement expires in November 2007. Mr. Iparraguirre does not have a
      written employment agreement with us. Dr. Ahn, Mr. Vitale,
      Dr. Berk and Mr. Iparraguirre may terminate their employment with us
      at any time, subject, however, to certain non-compete and non-solicitation
      covenants. The loss of the technical knowledge and management and industry
      expertise that would result in the event Dr. Ahn left Hana could result in
      delays in the development of our product candidates, and divert management
      resources. The loss of Mr. Vitale could impair our ability to expand our
      product development pipeline and commercialize our product candidates, which
      may
      harm our business prospects. The loss of Dr. Berk could impair our ability
      to initiate new and sustain existing clinical trials, as well as identify
      potential product candidates. The loss of Mr. Iparraguirre could impair our
      ability to obtain additional financing. We do not carry “key person” life
      insurance for any of our officers or key employees.




***If
      we are unable to hire additional qualified personnel, our ability to grow our
      business may be harmed.***




We
      will
      need to hire additional qualified personnel with expertise in preclinical
      testing, clinical research and testing, government regulation, formulation
      and
      manufacturing and sales and marketing. We compete for qualified individuals
      with
      numerous biopharmaceutical companies, universities and other research
      institutions. Competition for such individuals, particularly in the
      San Francisco Bay Area where we are headquartered, is intense, and we
      cannot be certain that our search for such personnel will be successful. Our
      ability to attract and retain qualified personnel is critical to our success.




***We
      may experience difficulty integrating our newly acquired sphingosomal product
      candidates into our business.***




In
      May
      2006, we licensed the rights to develop and commercialize three sphingosomal
      product candidates, including Marqibo, from Inex Pharmaceuticals Corporation,
      which doubled the size of our product candidate pipeline. If all necessary
      regulatory approvals are obtained, we plan to initiate a Phase III clinical
      trial in ALL in Marqibo in the second half of 2006, and Phase I clinical trials
      in two of our other product candidates, sphingosome encapsulated vinorelbine
      and
      sphingosome encapsulated topotecan, in 2007. We need FDA and other approvals
      before we can pursue our clinical trials and there is no assurance we will
      be
      able to obtain such approvals. Moreover, we will be required to devote
      substantial capital and personnel resources to our newly-acquired product
      candidates in order to attempt to successfully continue their development.
      If we
      fail to devote sufficient resources to the development of these product
      candidates, or if our focus on the new sphingosomal product candidates diverts
      our attention from the development of Zensana and other product candidates,
      we
      will not realize the intended benefits from the recently-completed transaction
      and our business will suffer.




***We
      may need to raise additional capital to fund our operations. If we are unable
      to
      raise additional capital when needed, we may have to discontinue our product
      development programs or relinquish our rights to some or all of our product
      candidates. The manner in which we raise any additional funds may affect the
      value of your investment in our common stock.***





We
      expect
      to incur losses at least until we can successfully commercialize one or more
      of
      our product candidates. We may require additional financing to fund our
      development programs and to expand our infrastructure and commercialization
      activities. Net cash used in operating activities was $8.5 million for the
      six
      months ended June 30, 2006 and $8.5 million in 2005. We do not know whether
      additional financing will be available on terms favorable to us when needed,
      if
      at all. Our future capital requirements depend on many factors,
      including:





· costs
      associated with conducting preclinical and clinical testing;





· costs
      associated with commercializing our lead programs, including establishing sales
      and marketing functions;





· costs
      of
      establishing arrangements for manufacturing our product candidates;





· costs
      of
      acquiring new drug 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.




26




To
      the
      extent that we raise additional capital by issuing equity securities, our
      stockholders may experience dilution. We may grant future investors rights
      superior to those of our current common stockholders. If we raise additional
      funds through collaborations and licensing arrangements, it may be necessary
      to
      relinquish some rights to our technologies, product candidates or products,
      or
      grant licenses on terms that are not favorable to us. If we raise additional
      funds by incurring debt, we could incur significant interest expense and become
      subject to covenants in the related transaction documentation that could affect
      the manner in which we conduct our business.




***We
      may incur substantial liabilities and may be required to limit commercialization
      of our products in response to product liability
      lawsuits.***




The
      testing and marketing of pharmaceutical products entail an inherent risk of
      product liability. If we cannot successfully defend ourselves against product
      liability claims, we may incur substantial liabilities or be required to limit
      commercialization of our product candidates, if approved. Even successful
      defense would require significant financial and management resources. Regardless
      of the merit or eventual outcome, liability claims may result in:




· decreased
        demand for our product candidates;
 
 · injury
        to
        our reputation;
 
 · withdrawal
        of clinical trial participants;
 
 · withdrawal
        of prior governmental approvals;
 
 · costs
        of
        related litigation;
 
 · substantial
        monetary awards to patients;
 
 · product
        recalls;
 
 · loss
        of
        revenue; and
 
 · the
        inability to commercialize our product candidates.




Our
      inability to obtain sufficient product liability insurance at an acceptable
      cost
      to protect against potential product liability claims could prevent or inhibit
      the commercialization of pharmaceutical products we develop, alone or with
      collaborators. We currently do not carry product liability insurance but instead
      maintain a $5 million clinical trial insurance policy for our ongoing
      Phase I and Phase I/II clinical trials of one of our product
      candidates, Talvesta (talotrexin). Even if our agreements with any future
      collaborators entitle us to indemnification against damages from product
      liability claims, such indemnification may not be available or adequate should
      any claim arise.




**Risks
      Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our
      Product Candidates**




***If
      we are unable to obtain regulatory approval to sell our lead product candidate,
      Zensana, or another product candidate, Marqibo, our business will
      suffer.***




We
      believe we have completed or may otherwise rely upon all required clinical
      trials, whether conducted by us or others, relating to Zensana and submitted
      our
      NDA for Zensana to the FDA in June 2006 pursuant to Section 505(b)(2) of the
      U.S. Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) of the FDCA is
      the
      section describing NDAs for which at least some of the investigations relied
      upon by the applicant for approval of the application were not conducted by
      or
      for the applicant and for which the applicant has not obtained a right of
      reference or use from the person by or for whom the investigations were
      conducted. While we believe Section 505(b)(2) is applicable to Zensana, it
      is
      possible that the FDA could disagree and require us to submit a “stand-alone” or
“full” Section 505(b)(1) NDA, which would require significantly more clinical
      studies and/or other data collection or analysis. Additionally, in reviewing
      our
      NDA, the FDA may require us to conduct additional extensive clinical or
      non-clinical trials or other analysis or may reject our NDA for a variety of
      other reasons. If the FDA requires us to complete additional clinical trials
      relating to Zensana before it will consider approving our NDA, or if
      non-clinical or other information is requested, the timing of our planned
      commercial launch for Zensana may be significantly delayed or even precluded
      and
      we may be required to incur substantial additional expenses. Depending on the
      types of studies or other analysis required by the FDA, we may never be able
      to
      establish that Zensana is safe for use or effective in use and, thus, may never
      be able to sell Zensana. Furthermore, because the oral ondansetron formulation
      on which our Section 505(b)(2) application is based is protected by two
      unexpired patents and pediatric exclusivity, it is possible that the approval,
      if any, of our Section 505(b)(2) application may be delayed as a result of
      patent infringement litigation. Finally, even if Zensana is approved by the
      FDA,
      such approval may be materially modified or withdrawn by the FDA for a variety
      of reasons.




27




We
      recently licensed Marqibo from Inex. Marqibo is not currently permitted to
      be
      commercially used. Inex submitted an NDA pursuant to Section 505(b)(2) for
      accelerated marketing approval of Marqibo primarily based upon a single arm,
      Phase II clinical trial, which was reviewed by the FDA in 2004 and 2005. In
      January 2005, the FDA issued a not approvable letter to Inex for the Marqibo
      NDA
      for the treatment of patients with relapsed refractory NHL previously treated
      with at least two chemotherapy regimens. The FDA’s not approvable letter cited a
      variety of reasons for not approving the NDA, including the
      following:


· The
        information presented by Inex was inadequate and contained clinical
        deficiencies;
 
 · The
        information presented by Inex failed to provide evidence of an effect on
        a
        surrogate that is reasonably likely to predict clinical benefit;
 
 · The
        information presented by Inex contained chemistry, manufacturing and control
        deficiencies;
 
 · A
        supportive study in NHL patients and ALL patients was not well conducted
        or well
        controlled; and
 
 · The
        information presented by Inex did not demonstrate an improvement over available
        therapy.
  In
        rejecting the NDA, the FDA recommended that, if Inex planned to pursue
        development of Marqibo for the treatment of relapsed refractory NHL, Inex
        should
        conduct additional studies, including but not limited to randomized controlled
        studies comparing Marqibo to other chemotherapy regimens. Even if such studies
        are successfully performed, Marqibo may not receive FDA approval.
  With
        respect to Zensana and Marqibo, additional FDA regulatory risks exist which
        may
        prevent FDA approval of these drug candidates and thereby prevent their
        commercial use. Additionally, if Zensana or Marqibo, or any of our product
        candidates are approved by the FDA, such approval may be withdrawn by the
        FDA
        for a variety of reasons, including:
  ·
              that
                  clinical or other experience, tests, or other scientific data show
                  that
                  the drug is unsafe for use;
 
 ·
              that
                  new evidence of clinical experience or evidence from new tests,
                  evaluated
                  together with the evidence available to the FDA when the NDA was
                  approved,
                  shows that the drug is not shown to be safe for use under the approved
                  conditions of use;
 
 ·
              that
                  on the basis of new information presented to the FDA, there is
                  a lack of
                  substantial evidence that the drug will have the effect it purports
                  or is
                  represented to have under the approved conditions of
                  use;
 
 ·
              that
                  an NDA contains any untrue statement of a material fact; or
 
 ·
              for
                  a drug approved under FDA’s accelerated approval regulations or as a fast
                  track drug, if any required post-approval study is not conducted
                  with due
                  diligence or if such study fails to verify the clinical benefit
                  of the
                  drug.




Other
      regulatory risks may arise as a result of a change in applicable law or
      regulation or the interpretation thereof, and may result in material
      modification or withdrawal of prior FDA approvals.




28


*Many
      of our product candidates are in early
      stages of clinical trials, which are very expensive and time-consuming. Any
      failure or delay in completing clinical trials for our product candidates could
      harm our business.*




Our
      four
      other product candidates, Talvesta, ropidoxuridine (IPdR), sphingosome
      encapsulated vinorelbine and sphingosome encapsulated topotecan, are in early
      stages of development and will require extensive clinical and other testing
      and
      analysis before we will be in a position to consider seeking FDA approval to
      sell such product candidates. In addition to the risks set forth above for
      Zensana and Marqibo, which also apply to Talvesta, ropidoxuridine, sphingosome
      encapsulated vinorelbine and sphingosome encapsulated topotecan, these product
      candidates also have additional risks as each is in an earlier stage of
      development and review.




In
      2003,
      we filed our Investigational New Drug Application, or IND, for Talvesta and
      in
      March 2004 we initiated a Phase I clinical trial at Dana-Farber Cancer
      Institute, Inc., Massachusetts General Hospital and Beth-Israel Deaconess
      Hospital. We have also recently completed an open-label multicenter,
      multinational Phase I and II study of Talvesta in the treatment of relapsed
      or refractory non-small cell lung cancer, or NSCLC, and in June 2005, we
      commenced an open-label, multicenter Phase I and II clinical trial of
      Talvesta in the treatment of refractory leukemia. We also commenced an initial
      Phase I clinical trial of our product candidate ropidoxuridine in September
      2005. We do not expect to request regulatory and other approvals to initiate
      clinical trials on sphingosome encapsulated vinorelbine and sphingosome
      encapsulated topotecan until 2007, if at all.





Conducting
      clinical trials is a lengthy, time consuming and very expensive process and
      the
      results are inherently uncertain. The duration of clinical trials can vary
      substantially according to the type, complexity, novelty and intended use of
      the
      product candidate. We estimate that clinical trials of our product candidates
      will take at least several years to complete. The completion of clinical trials
      for our product candidates may be delayed or prevented by many factors,
      including:




· delays
        in
        patient enrollment, and variability in the number and types of patients
        available for clinical trials;
 
 · difficulty
        in maintaining contact with patients after treatment, resulting in incomplete
        data;
 
 · poor
        effectiveness of product candidates during clinical trials;
 
 · safety
        issues, side effects, or other adverse events;
 
 · results
        that do not demonstrate the safety or effectiveness of the product
        candidates;
 
 · governmental
        or regulatory delays and changes in regulatory requirements, policy and
        guidelines; and
 
 · varying
        interpretation of data by the FDA.


In
      conducting clinical trials, we may fail to establish the effectiveness of a
      compound for the targeted indication or discover that it is unsafe due to
      unforeseen side effects or other reasons. Even if our clinical trials are
      commenced and completed as planned, their results may not support our product
      candidate claims. Further, failure of product candidate development can occur
      at
      any stage of the clinical trials, or even thereafter, and we could encounter
      problems that cause us to abandon or repeat clinical trials. These problems
      could interrupt, delay or halt clinical trials for our product candidates and
      could result in FDA, or other regulatory authorities, delaying approval of
      our
      product candidates for any or all indications. The results from preclinical
      testing and prior clinical trials may not be predictive of results obtained
      in
      later or other larger clinical trials. A number of companies in the
      pharmaceutical industry have suffered significant setbacks in clinical trials,
      even in advanced clinical trials after showing promising results in earlier
      clinical trials. Our failure to adequately demonstrate the safety and
      effectiveness of any of our product candidates will prevent us from receiving
      regulatory approval to market these product candidates and will negatively
      impact our business.




In
      addition, we or the FDA may suspend or curtail our clinical trials at any time
      if it appears that we are exposing participants to unacceptable health risks
      or
      if the FDA finds deficiencies in the conduct of these clinical trials or in
      the
      composition, manufacture or administration of the product candidates.
      Accordingly, we cannot predict with any certainty when or if we will ever be
      in
      a position to submit an NDA for any of our product candidates, or whether any
      such NDA would ever be approved.




***If
      we do not obtain the necessary U.S. or foreign regulatory approvals to
      commercialize our product candidates, we will not be able to market and sell
      our
      product candidates.***




None
      of
      our product candidates have been approved for commercial sale in any country.
      FDA approval is required to commercialize all of our product candidates in
      the
      United States and approvals from the FDA equivalent regulatory authorities
      are
      required in foreign jurisdictions in order to commercialize our product
      candidates in those jurisdictions. We only possess the right to attempt to
      develop and commercialize Zensana within the United States and Canada. We
      possess world-wide rights to develop and commercialize Marqibo and our other
      product candidates.




29




In
      order
      to obtain FDA approval of any of our product candidates, we must submit to
      the
      FDA an NDA, demonstrating that the product candidate is safe for humans and
      effective for its intended use and otherwise meets the requirements of existing
      laws and regulations governing new drugs. This demonstration requires
      significant research and animal tests, which are referred to as preclinical
      studies, and human tests, which are referred to as clinical trials, as well
      as
      additional information and studies. Satisfaction of the FDA’s regulatory
      requirements typically takes many years, depending on the type, complexity
      and
      novelty of the product candidate and requires substantial resources for
      research, development and testing as well as for other purposes. To date, none
      of our product candidates has been approved for sale in the United States or
      in
      any foreign market. We cannot predict whether our research and clinical
      approaches will result in drugs that the FDA considers safe for humans and
      effective for indicated uses. Historically, only a small percentage of all
      drug
      candidates that start clinical trials are eventually approved by the FDA for
      sale. After clinical trials are completed, the FDA has substantial discretion
      in
      the drug approval process and may require us to conduct additional preclinical
      and clinical testing or to perform post-marketing studies. The approval process
      may also be delayed by changes in government regulation, future legislation
      or
      administrative action or changes in FDA policy that occur prior to or during
      our
      regulatory review. Delays in obtaining regulatory approvals may:




· delay
        or
        prevent commercialization of, and our ability to derive product revenues
        from,
        our product candidates;
 
 · impose
        costly procedures on us;
 
 · reduce
        the potential prices we may be able to charge for our product candidates,
        assuming they are approved for sale; and
 
 · diminish
        any competitive advantages that we may otherwise enjoy.


Even
      if
      we comply with all FDA requests, the FDA may ultimately reject one or more
      of
      our NDAs. We cannot be sure that we will ever obtain regulatory approval for
      any
      of our product candidates. Additionally, a change in applicable law or
      regulation, or the interpretation thereof, may result in material modification
      or withdrawal of prior FDA approvals.




Failure
      to obtain FDA approval of any of our product candidates will severely undermine
      our business by reducing our number of saleable products and, therefore,
      corresponding product revenues. If we do not complete clinical trials and obtain
      regulatory approval for a product candidate, we will not be able to recover
      any
      of the substantial costs invested by us in the development of the product
      candidate.




In
      foreign jurisdictions, we must receive approval from the appropriate regulatory
      authorities before we can commercialize our drugs. Foreign regulatory approval
      processes generally include all of the risks associated with the FDA approval
      procedures described above. We cannot assure you that we will receive the
      approvals necessary to commercialize any of our product candidates for sale
      outside the United States.




***Our
      competitive position may be harmed if a competitor obtains orphan drug
      designation and approval for the treatment of ALL for a clinically superior
      drug.***




Orphan
      drug designation is an important element of our competitive strategy because
      the
      latest of our licensors’ patents for Talvesta expires in 2023. In May 2006, the
      FDA approved our application for orphan drug designation for the use of Talvesta
      in treating ALL. The company that obtains the first FDA approval for a
      designated orphan drug for a rare disease generally receives marketing
      exclusivity for use of that drug for the designated condition for a period
      of
      seven years. However, even though we obtained orphan drug status for Talvesta
      in
      the treatment of ALL, the FDA may permit other companies to market a drug for
      the same designated and approved condition during our period of orphan drug
      exclusivity if it can be demonstrated that the drug is clinically superior
      to
      our drug. This could create a more competitive market for us.




30




***Even
      if we obtain regulatory approvals for our products, the terms of approvals
      and
      ongoing monitoring and regulation of our products may limit how we manufacture
      and market our products, which could materially impair our ability to generate
      revenue.***





Even
      if
      regulatory approval is granted in the United States or in a foreign country,
      the
      approved product and its manufacturer, as well as others involved in the
      manufacturing and packaging process, remain subject to continual regulatory
      review and monitoring. Any regulatory approval that we receive for a product
      candidate may be subject to limitations on the indicated uses for which the
      product may be marketed, or include requirements for potentially costly
      post-approval clinical trials. In addition, if the FDA and/or foreign regulatory
      agencies approve any of our product candidates, the labeling, packaging,
      storage, advertising, promotion, recordkeeping and submission of safety and
      other post-marketing information on the product will be subject to extensive
      regulatory requirements which may change over time. We and the manufacturers
      of
      our products, their ingredients, and many aspects of the packaging are also
      required to comply with current good manufacturing practice regulations, which
      include requirements relating to quality control and quality assurance as well
      as the corresponding maintenance of records and documentation. Further,
      regulatory agencies must approve these manufacturing facilities before they
      can
      be used to manufacture our products or their ingredients or certain packagings,
      and these facilities are subject to ongoing regulatory inspection. Discovery
      of
      problems with a product or manufacturer may result in restrictions or sanctions
      with respect to the product, manufacturer and relevant manufacturing facility,
      including withdrawal of the product from the market. If we fail to comply with
      the regulatory requirements of the FDA and other applicable foreign regulatory
      authorities, or if problems with our products, manufacturers or manufacturing
      processes are discovered, we could be subject to administrative or judicially
      imposed sanctions, including:


· restrictions
        on the products, manufacturers or manufacturing process;
 
 · warning
        letters or untitled letters;
 
 · civil
        or
        criminal penalties or fines;
 
 · injunctions;
 
 · product
        seizures, detentions or import bans;
 
 · voluntary
        or mandatory product recalls and publicity requirements;
 
 · suspension
        or withdrawal of regulatory approvals;
 
 · total
        or
        partial suspension of production and/or sale; and
 
 · refusal
        to approve pending applications for marketing approval of new drugs or
        supplements to approved applications.




In
      order
      to market any products outside of the United States, we must establish and
      comply with the numerous and varying regulatory requirements of other countries
      regarding safety and efficacy. Approval procedures vary among countries and
      can
      involve additional product testing and additional administrative review periods.
      The time required to obtain approval in other countries might differ from that
      required to obtain FDA approval. Regulatory approval in one country does not
      ensure regulatory approval in another, but failure or delay in obtaining
      regulatory approval in one country may have a negative effect on the regulatory
      process in others.




***Because
      we are dependent on clinical research institutions and other contractors for
      clinical testing and for research and development activities, the results of
      our
      clinical trials and such research activities are, to a certain extent, beyond
      our control.***




We
      depend
      upon independent investigators and collaborators, such as universities and
      medical institutions, to conduct our preclinical and clinical trials under
      agreements with us. For example, our current Phase I clinical trial for
      Talvesta is being conducted by Dana-Farber Cancer Institute, Inc., Massachusetts
      General Hospital and Beth-Israel Deaconess Hospital. These parties are not
      our
      employees and we cannot control the amount or timing of resources that they
      devote to our programs. These investigators may not assign as great a priority
      to our programs or pursue them as diligently as we would if we were undertaking
      such programs ourselves. If outside collaborators fail to devote sufficient
      time
      and resources to our drug-development programs, or if their performance is
      substandard, the approval of our FDA applications, if any, and our introduction
      of new drugs, if any, will be delayed. These collaborators may also have
      relationships with other commercial entities, some of whom may compete with
      us.
      If our collaborators assist our competitors at our expense, our competitive
      position would be harmed.




31




***Our
      reliance on third parties to formulate and manufacture our product candidates
      exposes us to a number of risks that may delay the development, regulatory
      approval and commercialization of our products or result in higher product
      costs.***




We
      have
      no experience in drug formulation or manufacturing and do not intend to
      establish our own manufacturing facilities. We lack the resources and expertise
      to formulate or manufacture our own product candidates. We contract with one
      or
      more manufacturers to manufacture, supply, store and distribute drug supplies
      for our clinical trials. If any of our product candidates receive FDA approval,
      we will rely on one or more third-party contractors to manufacture our drugs.
      Ferring AB supplied us with our clinical supplies of Zensana, including the
      spray pump and oral applicator used to deliver the drug. We have not entered
      into an agreement with Ferring AB or any other third party for the commercial
      manufacture of Zensana but expect to do so with Ferring AB prior to
      commercialization. Our anticipated future reliance on a limited number of
      third-party manufacturers exposes us to the following risks:




·
            We
                may be unable to identify manufacturers on acceptable terms or at
                all
                because the number of potential manufacturers is limited and the
                FDA must
                approve any replacement contractor. This approval would require new
                testing and compliance inspections. In addition, a new manufacturer
                would
                have to be educated in, or develop substantially equivalent processes
                for,
                production of our products after receipt of FDA approval, if
                any.





·
            Our
                third-party manufacturers might be unable to formulate and manufacture
                our
                drugs in the volume and of the quality required to meet our clinical
                and/or commercial needs, if any.





·
            Our
                future contract manufacturers may not perform as agreed or may not
                remain
                in the contract manufacturing business for the time required to supply
                our
                clinical trials or to successfully produce, store and distribute
                our
                products.





·
            Drug
                manufacturers are subject to ongoing periodic unannounced inspection
                by
                the FDA and corresponding state agencies to ensure strict compliance
                with
                good manufacturing practice and other government regulations and
                corresponding foreign standards. We do not have control over third-party
                manufacturers’ compliance with these regulations and standards, but we
                will be ultimately responsible for any of their
                failures.





·
            If
                any third-party manufacturer makes improvements in the manufacturing
                process for our products, we may not own, or may have to share, the
                intellectual property rights to the innovation. This may prohibit
                us from
                seeking alternative or additional manufacturers for our
                products.




Each
      of
      these risks could delay our clinical trials, the approval, if any, of our
      product candidates by the FDA, or the commercialization of our product
      candidates or result in higher costs or deprive us of potential product
      revenues.




**Risks
      Related to Our Ability to Commercialize Our Product
      Candidates**




***Our
      success depends substantially on Zensana and Marqibo, which are still under
      development and require further regulatory approvals. If we are unable to
      commercialize either or both of Zensana or Marqibo, or experience significant
      delays in doing so, our ability to generate product revenue and our likelihood
      of success will be diminished.***




We
      concluded bioavailability and bioequivalent clinical trials of Zensana, our
      most
      advanced product candidate, in early 2006, and in June 2006, we filed an NDA
      with the FDA. If approved, we expect to commercially launch Zensana in the
      United States in the first half of 2007. We anticipate requesting authorization
      to commence a Phase III clinical trial of Marqibo, our second most advanced
      product candidate, in the second half of 2006. We have invested a significant
      portion of our time and financial resources in the development of these two
      programs. We anticipate that our ability to generate revenues in the near term
      will depend solely on the successful development, regulatory approval and
      commercialization of Zensana.





All
      of
      our other product candidates are in the very early stages of development. Any
      of
      our product candidates could be unsuccessful if they:





·
            do
                not demonstrate acceptable safety and efficacy in preclinical studies
                or
                clinical trials or otherwise do not meet applicable regulatory standards
                for approval;





·
            do
                not offer therapeutic or other improvements over existing or future
                therapies used to treat the same
                conditions;





·
            are
                not capable of being produced in commercial quantities at acceptable
                costs
                or pursuant to applicable rules and regulations;
                or





·
            are
                not accepted in the medical community and by third-party
                payors.




32




We
      do not
      expect Zensana to be commercialized before the first half of 2007, if at all.
      If
      we are unable to commercialize our product candidates, we will not generate
      product revenues. The results of our clinical trials to date do not provide
      assurance that acceptable efficacy or safety will be shown.




***If
      we are unable either to create sales, marketing and distribution capabilities
      or
      enter into agreements with third parties to perform these functions, we will
      be
      unable to commercialize our product candidates successfully.***




We
      currently have no sales, marketing or distribution capabilities. To
      commercialize our product candidates, we must either develop internal sales,
      marketing and distribution capabilities, which will be expensive and time
      consuming, or make arrangements with third parties to perform these services.
      If
      we decide to market any of our products directly, we must commit financial
      and
      managerial resources to develop marketing capabilities and a salesforce with
      technical expertise and with supporting distribution capabilities. If approved
      by the FDA, we intend to market Zensana in the United States with our own
      specialized oncology salesforce of approximately 30 people. Factors that may
      inhibit our efforts to commercialize Zensana and our other product candidates,
      if approved, directly and without strategic partners include:




·
            our
                inability to recruit and retain adequate numbers of effective sales
                and
                marketing personnel;





·
            the
                inability of sales personnel to obtain access to or persuade adequate
                numbers of physicians to prescribe our products;





·
            the
                lack of complementary products to be offered by sales personnel,
                which may
                put us at a competitive disadvantage relative to companies with more
                extensive product lines; and





·
            unforeseen
                costs and expenses associated with creating an independent sales
                and
                marketing organization.




If
      we are
      not able to partner with a third party and are not successful in recruiting
      sales and marketing personnel or in building a sales and marketing
      infrastructure, we will have difficulty commercializing Zensana and our product
      candidates, which would harm our business. If we rely on pharmaceutical or
      biotechnology companies with established distribution systems to market our
      products, we will need to establish and maintain partnership arrangements,
      and
      we may not be able to enter into these arrangements on acceptable terms or
      at
      all. To the extent that we enter into co-promotion or other arrangements, any
      revenues we receive will depend upon the efforts of third parties which may
      not
      be successful and which will be only partially in our control. Our product
      revenues would likely be lower than if we marketed and sold our products
      directly.




***The
      terms of our license agreements relating to intellectual property ownership
      rights may make it more difficult for us to establish collaborations for the
      development and commercialization of our product
      candidates.***





The
      terms
      of our license agreements obligate us to include intellectual property
      assignment provisions in any sublicenses or collaboration agreements that may
      be
      unacceptable to our potential sublicensees and partners. These terms may impede
      our ability to enter into partnerships for some of our existing product
      candidates. Under our license agreement with Inex, Inex, either alone or jointly
      with M.D. Anderson Cancer Center, will be the owner of patents and patent
      applications claiming priority to certain patents licensed to us, and we not
      only have an obligation to assign to Inex our rights to inventions covered
      by
      such patents or patent applications, but also, when negotiating any joint
      venture, collaborative research, development, commercialization or other
      agreement with a third party, to require such third party to do the same. Our
      license agreement with Elan Pharmaceuticals, Inc., or Elan, relating to Marqibo,
      provides that Elan will own all improvements to the licensed patents or licensed
      know-how made by us or any of our sublicensees. Our license agreement with
      NovaDel for Zensana provides that all information and inventions made by or
      on
      behalf of us, our affiliates and sublicenses relating to the oral spray process
      or Zensana will be assigned to NovaDel. Potential collaboration and
      commercialization partners for these product candidates may not agree to such
      intellectual property ownership requirements and therefore not elect to partner
      with us for these product candidates.





***If
      physicians and patients do not accept and use Zensana or our other product
      candidates, our ability to generate revenue from sales of our products will
      be
      materially impaired.***




Even
      if
      the FDA approves Zensana or any of our other product candidates, physicians
      and
      patients may not accept and use them. Acceptance and use of our products will
      depend upon a number of factors including:




33


· perceptions
        by members of the health care community, including physicians, about the
        safety
        and effectiveness of our drugs;
 
 · pharmacological
        benefit and cost-effectiveness of our products relative to competing
        products;
 
 · availability
        of reimbursement for our products from government or other healthcare
        payors;
 
 · effectiveness
        of marketing and distribution efforts by us and our licensees and distributors,
        if any; and
 
 · the
        price
        at which we sell our products.


Because
      we expect sales of Zensana, if FDA-approved, to generate substantially all
      of
      our product revenues for the foreseeable future, the failure of Zensana to
      find
      market acceptance would harm our business and could require us to seek
      additional financing.




***Adequate
      coverage and reimbursement may not be available for our product candidates,
      which could diminish our sales or affect our ability to sell our products
      profitably.***





Market
      acceptance and sales of our product candidates will depend in significant part
      on the levels at which government payors and other third-party payors, such
      as
      private health insurers and health maintenance organizations, cover and pay
      for
      our products. We cannot provide any assurances that third-party payors will
      provide adequate coverage of and reimbursement for any of our product
      candidates. If we are unable to obtain adequate coverage of and payment levels
      for our product candidates from third-party payors, physicians may limit how
      much or under what circumstances they will prescribe or administer them and
      patients may decline to purchase them. This in turn could affect our ability
      to
      successfully commercialize our products and impact our profitability and future
      success.





In
      both
      the United States and certain foreign jurisdictions, there have been a number
      of
      legislative and regulatory policies and proposals in recent years to change
      the
      healthcare system in ways that could impact our ability to sell our products
      profitably. On December 8, 2003, President Bush signed into law the
      Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the
      MMA, which contains, among other changes to the law, a wide variety of changes
      that impact Medicare reimbursement of pharmaceuticals to physicians and
      hospitals. The MMA requires that, as of January 1, 2005, payment rates for
      most drugs covered under Medicare Part B, including drugs furnished
      incident to physicians’ services, are to be based on manufacturer’s average
      sales price, or ASP, of the product. Implementation of the ASP payment
      methodology for drugs furnished in physician’s offices generally resulted in
      reduced payments in 2005, and could result in lower payment rates for drugs
      in
      the future.





The
      MMA
      requires that, beginning in 2006, payment amounts for most drugs administered
      in
      physician offices are to be based on either ASP or on amounts bid by vendors
      under the Competitive Acquisition Program, or CAP. Under the CAP, physicians
      who
      administer drugs in their offices will be offered an option to acquire drugs
      covered under the Medicare Part B benefit from vendors that are selected in
      a
      competitive bidding process. Winning vendors would be selected based on criteria
      that include their bid prices. Implementation of the CAP has been delayed until
      at least July 2006. Implementation of the ASP payment methodology and the CAP
      could negatively impact our ability to sell our product candidates.





The
      MMA
      also revised the method by which Medicare pays for many drugs administered
      in
      hospital outpatient departments beginning in 2005. In addition, the Centers
      for
      Medicare & Medicaid Services, or CMS, which administers the Medicare
      program, published a proposed rule on payment amounts for drugs administered
      in
      hospital outpatient departments for 2006. As a result of the changes in the
      MMA
      and, if the methods suggested by CMS in the proposed 2006 rule are implemented,
      certain newly introduced drugs administered in hospital outpatient departments,
      which we believe would include Zensana, will generally be reimbursed under
      an
      ASP payment methodology, except that during a short introductory period in
      which
      drugs have not been assigned a billing code a higher payment rate is applicable.
      As in the case of physician offices, implementation of the ASP payment
      methodology in the hospital outpatient department could negatively impact our
      ability to sell our product candidates.





The
      MMA
      created a new, voluntary prescription drug benefit for Medicare beneficiaries,
      Medicare Part D, which took effect in 2006. Medicare Part D is a new type
      of coverage that allows for payment for certain prescription drugs not covered
      under Part B. This new benefit will be offered by private managed care
      organizations and freestanding prescription drug plans, which, subject to review
      and approval by CMS, may, and are expected to, establish drug formularies and
      other drug utilization management controls based in part on the price at which
      they can obtain the drugs involved. The drugs that will be covered in each
      therapeutic category and class on the formularies of participating Part D plans
      may be limited, and obtaining favorable treatment on formularies and with
      respect to utilization management controls may affect the prices we can obtain
      for our products. If our product candidates are not placed on such formularies,
      or are subject to utilization management controls, this could negatively impact
      our ability to sell them. It is difficult to predict which of our candidate
      products will be placed on the formularies or subjected to utilization
      management controls and the impact that the Part D program, and the MMA
      generally, will have on us.




34





There
      also likely will continue to be legislative and regulatory proposals that could
      bring about significant changes in the healthcare industry. We cannot predict
      what form those changes might take or the impact on our business of any
      legislation or regulations that may be adopted in the future. The implementation of cost containment measures or other healthcare reforms may
      prevent us from being able to generate revenue, attain profitability or
      commercialize our products.





In
      addition, in many foreign countries, particularly the countries of the European
      Union, the pricing of prescription drugs is subject to government control.
      We
      may face competition for our product candidates from lower priced products
      in
      foreign countries that have placed price controls on pharmaceutical products.
      In
      addition, there may be importation of foreign products that compete with our
      own
      products which could negatively impact our profitability.





***If
      we cannot compete successfully for market share against other drug companies,
      we
      may not achieve sufficient product revenues and our business will
      suffer.***




The
      market for our product candidates is characterized by intense competition and
      rapid technological advances. If our product candidates receive FDA approval,
      they will compete with a number of existing and future drugs and therapies
      developed, manufactured and marketed by others. If approved, Zensana will
      compete with the currently available oral form of ondansetron, which is
      currently being manufactured and sold by GlaxoSmithKline Inc. under the name
      Zofran. In addition, the FDA may approve generic versions of ondansetron before
      and/or after any action on the Zensana marketing application with which we
      might
      compete. If approved, Marqibo will compete with unencapsulated vincristine,
      which is generic, other cytotoxic agents such as antimetabolites, alkylating
      agents, cytotoxic antibiotics, vinca alkyloids, platinum compounds and taxanes,
      and other cytotoxic agents that use different encapsulation technologies. If
      approved, Talvesta will compete with existing antifolate therapies currently
      being sold by Pfizer, Inc. (trimetrexate), Eli Lilly & Co.
      (pemetrexed) and Novartis AG (edatrexate). Although there are no
      FDA-approved radiation sensitizers currently on the market, there are several
      product candidates in development that will compete with our product candidate
      ropidoxuridine and which are significantly further along in development. For
      example, Allos Therapeutics, Inc. and Pharmacyclics, Inc. each have a radiation
      sensitizer in Phase III development. These or other future competing
      products and product candidates may provide greater therapeutic convenience
      or
      clinical or other benefits for a specific indication than our products, or
      may
      offer comparable performance at a lower cost. If our products fail to capture
      and maintain market share, we may not achieve sufficient product revenues and
      our business will suffer.




We
      will
      compete against fully integrated pharmaceutical companies and smaller companies
      that are collaborating with larger pharmaceutical companies, academic
      institutions, government agencies and other public and private research
      organizations. In addition, many of these competitors, either alone or together
      with their collaborative partners, operate larger research and development
      programs and have substantially greater financial resources than we do, as
      well
      as significantly greater experience in:


· developing
        drugs;
 
 · undertaking
        preclinical testing and human clinical trials;
 
 · obtaining
        FDA and other regulatory approvals of drugs;
 
 · formulating
        and manufacturing drugs; and
 
 · launching,
        marketing and selling drugs.




***Developments
      by competitors may render our products or technologies obsolete or
      non-competitive.***




Companies
      that currently sell both generic and proprietary compounds for the treatment
      of
      cancer include, among others, Pfizer, Inc. (trimetrexate), Eli Lilly &
Co. (pemetrexed), Novartis AG (edatrexate), and Allos Therapeutics, Inc. (PDX).
      Alternative technologies are being developed to treat cancer and immunological
      disease, several of which are in advanced clinical trials. In addition,
      companies pursuing different but related fields represent substantial
      competition. Many of these organizations have substantially greater capital
      resources, larger research and development staffs and facilities, longer drug
      development history in obtaining regulatory approvals and greater manufacturing
      and marketing capabilities than we do. These organizations also compete with
      us
      to attract qualified personnel, parties for acquisitions, joint ventures or
      other collaborations.




35




**Risks
      Related to Our Intellectual Property**




***If
      we fail to adequately protect or enforce our intellectual property rights or
      secure rights to patents of others, the value of our intellectual property
      rights would diminish.***




Our
      success, competitive position and future revenues will depend in large part
      on
      our ability and the abilities of our licensors to obtain and maintain patent
      protection for our products, methods, processes and other technologies, to
      preserve our trade secrets, to prevent third parties from infringing on our
      proprietary rights and to operate without infringing the proprietary rights
      of
      third parties.




We
      have
      licensed from third parties rights to numerous issued patents and patent
      applications. To date, through our license agreements for Talvesta,
      ropidoxuridine, Marqibo and Zensana, we hold certain exclusive patent rights,
      including rights under U.S. patents and U.S. patent applications. We
      also have patent rights to applications pending in several foreign
      jurisdictions. We have filed and anticipate filing additional patent
      applications both in the United States and internationally, as appropriate.




The
      rights to product candidates that we acquire from licensors or collaborators
      are
      protected by patents and proprietary rights owned by them, and we rely on the
      patent protection and rights established or acquired by them. We generally
      do
      not unilaterally control, or do not control at all, the prosecution of patent
      applications licensed from third parties. Accordingly, we are unable to exercise
      the same degree of control over this intellectual property as we may exercise
      over internally developed intellectual property. In particular, NovaDel, which
      licensed us Zensana, has the sole right to file, prosecute and maintain patent
      applications, patents and trademarks relating to the Zensana product, and we
      only have the right to comment on such filings and the rights to patent filing,
      prosecution and maintenance if NovaDel elects not to do so in a certain country.




The
      patent positions of pharmaceutical and biotechnology companies can be highly
      uncertain and involve complex legal and factual questions. Even if we are able
      to obtain patents, any patent may be challenged, invalidated, held unenforceable
      or circumvented. The existence of a patent will not necessarily protect us
      from
      competition. Competitors may successfully challenge our patents, produce similar
      drugs or products that do not infringe our patents or produce drugs in countries
      where we have not applied for patent protection or that do not respect our
      patents. Under our license agreements, we generally do not unilaterally control,
      or do not control at all, the enforcement of the licensed patents or the defense
      of third party suits of infringement or invalidity. In particular, with respect
      to Zensana, NovaDel is the party who has the first right to enforce the licensed
      patents and we may only do so if NovaDel fails to enforce such patents. NovaDel
      is also the party who has the first right to defend third party infringement
      claims and who is in control of such proceedings, while we do not have clear
      contractual rights to defend such claims even if NovaDel fails to do
      so.





Furthermore,
      if we become involved in any patent litigation, interference or other
      administrative proceedings, we will incur substantial expense and the efforts
      of
      our technical and management personnel will be significantly diverted. As a
      result of such litigation or proceedings we could lose our proprietary position
      and be restricted or prevented from developing, manufacturing and selling the
      affected products, incur significant damage awards, including punitive damages,
      or be required to seek third-party licenses that may not be available on
      commercially acceptable terms, if at all.





The
      degree of future protection for our proprietary rights is uncertain in part
      because legal means afford only limited protection and may not adequately
      protect our rights, and we will not be able to ensure that:





·
            we
                or our licensors or collaborators were the first to make the inventions
                described in patent applications;





·
            we
                or our licensors or collaborators were the first to file patent
                applications for inventions;





·
            others
                will not independently develop similar or alternative technologies
                or
                duplicate any of our technologies without infringing our intellectual
                property rights;





·
            any
                of our pending patent applications will result in issued
                patents;





·
            any
                patents licensed or issued to us will provide a basis for commercially
                viable products or will provide us with any competitive advantages
                or will
                not be challenged by third parties;





·
            we
                will ultimately be able to enforce our owned or licensed patent rights
                pertaining to our products;





·
            any
                patents licensed or issued to us will not be challenged, invalidated,
                held
                unenforceable or circumvented;





·
            we
                will develop or license proprietary technologies that are patentable;
                or





·
            the
                patents of others will not have an adverse effect on our ability
                to do
                business.




36




Our
      success also depends upon the skills, knowledge and experience of our scientific
      and technical personnel, our consultants and advisors as well as our licensors
      and contractors. To help protect our proprietary know-how and our inventions
      for
      which patents may be unobtainable or difficult to obtain, we rely on trade
      secret protection and confidentiality agreements. To this end, we require all
      of
      our employees to enter into agreements which prohibit the disclosure of
      confidential information and, where applicable, require disclosure and
      assignment to us of the ideas, developments, discoveries and inventions
      important to our business. These agreements may not provide adequate protection
      for our trade secrets, know-how or other proprietary information in the event
      of
      any unauthorized use or disclosure or the lawful development by others of such
      information. If any of our trade secrets, know-how or other proprietary
      information is disclosed, the value of our trade secrets, know-how and other
      proprietary rights would be significantly impaired and our business and
      competitive position would suffer.




***Our
      license agreements relating to our product candidates may be terminated in
      the
      event we commit a material breach, the result of which would harm our business
      and future prospects.***




Our
      license agreements relating to Talvesta, ropidoxuridine and Zensana  are
      subject to termination by our licensors in the event we materially breach those
      agreements. With respect to the Talvesta license, Dana-Farber Cancer Institute,
      Inc. and Ash Stevens, Inc. may terminate the agreement, after giving us notice
      and an opportunity to cure, if we commit a material breach, including failing
      to
      make a scheduled milestone or other payment when due, failing to meet our
      diligence obligations, ceasing to carry on our business with respect to the
      licensed products, or being convicted of a felony relating to the manufacture,
      use, sale or importation of the licensed products. The agreement also provides
      that it may be terminated if we become involved in a bankruptcy, insolvency
      or
      similar proceeding. Our license agreement for ropidoxuridine contains similar
      provisions, in that Yale University and the Research Foundation of State
      University of New York may terminate the agreement, after giving us notice
      and
      an opportunity to cure, if we commit a material breach, including failing to
      make scheduled payments, or terminate the agreement without giving us the
      opportunity to cure for our failure to obtain or maintain adequate insurance,
      or
      our involvement in a bankruptcy. Under the Zensana license, NovaDel may
      terminate our license, after giving us notice and an opportunity to cure, for
      our material breach or payment default. The license also terminates
      automatically if we are involved in a bankruptcy. In the event these license
      agreements are terminated, we will lose all of our rights to develop and
      commercialize the applicable product candidate covered by such license, which
      would harm our business and future prospects.





Our
      license to Marqibo, sphingosome encapsulated vinorelbine and sphingosome
      encapsulated topotecan are governed by a series of transaction agreements which
      may be individually or collectively terminated, not only by Inex, but also
      by
      University of Texas M.D. Anderson Cancer Center, British Columbia Cancer Agency
      or University of British Columbia under the underlying agreements governing
      the
      license or assignment of technology to Inex. Inex may terminate these agreements
      for our uncured material breach, for our involvement in a bankruptcy, for our
      assertion or intention to assert any invalidity challenge on any of the patents
      licensed to us for these products or for our failure to meet our development
      or
      commercialization obligations, including the obligations of continuing to sell
      each product in all major market countries after its launch. In the event that
      these agreements are terminated, not only will we lose all rights to these
      products, we will also have the obligation to transfer all of our data,
      materials, regulatory filings and all other documentation to our licensor,
      and
      our licensor may on its own exploit these products without any compensation
      to
      us, regardless of the progress or amount of investment we have made in the
      products.




***Third
      party claims of intellectual property infringement would require us to spend
      significant time and money and could prevent us from developing or
      commercializing our products.***




In
      order
      to protect or enforce patent rights, we may initiate patent litigation against
      third parties. Similarly, we may be sued by others. We also may become subject
      to proceedings conducted in the U.S. Patent and Trademark Office, including
      interference proceedings to determine the priority of inventions, or
      reexamination proceedings. In addition, any foreign patents that are granted
      may
      become subject to opposition, nullity, or revocation proceedings in foreign
      jurisdictions having such proceedings opposed by third parties in foreign
      jurisdictions having opposition proceedings. The defense and prosecution, if
      necessary, of intellectual property actions are costly and divert technical
      and
      management personnel from their normal responsibilities.





No
      patent
      can protect its holder from a claim of infringement of another patent.
      Therefore, our patent position cannot and does not provide any assurance that
      the commercialization of our products would not infringe the patent rights
      of
      another. While we know of no actual or threatened claim of infringement that
      would be material to us, there can be no assurance that such a claim will not
      be
      asserted.





If
      such a
      claim is asserted, there can be no assurance that the resolution of the claim
      would permit us to continue marketing the relevant product on commercially
      reasonable terms, if at all. We may not have sufficient resources to bring
      these
      actions to a successful conclusion. If we do not successfully defend any
      infringement actions to which we become a party or are unable to have infringed
      patents declared invalid or unenforceable, we may have to pay substantial
      monetary damages, which can be tripled if the infringement is deemed willful,
      or
      be required to discontinue or significantly delay commercialization and
      development of the affected products.




37




We
      are
      aware of certain United States patents that relate to ondansetron compositions
      and uses therefor to treat nausea and vomiting.  These patents pertain to
      Zofran, an FDA-approved first generation 5-HT3 antagonist product upon which
      we based our NDA for Zensana under Section 505(b)(2) of the FDCA. Certain
      of these patents are due to expire in advance of our planned commercial launch
      of Zensana in the United States in the first half of 2007. Upon
      commercialization, if Zensana or its commercial use or production meets all
      of
      the requirements of any of the claims of the aforementioned patents or any
      other
      patents, or patents that may issue from related patent applications or any
      other
      patent applications, then we may need a license to one or more of these patents.
      If any licenses are required, there can be no assurance that we will be able
      to
      obtain any such license on commercially favorable terms, if at all, and if
      these
      licenses are not obtained, we might be prevented from commercializing
      Zensana.





Any
      legal
      action against us or our collaborators claiming damages and seeking to enjoin
      developmental or marketing activities relating to affected products could,
      in
      addition to subjecting us to potential liability for damages, require us or
      our
      collaborators to obtain licenses to continue to develop, manufacture or market
      the affected products. Such a license may not be available to us on commercially
      reasonable terms, if at all.





An
      adverse determination in a proceeding involving our owned or licensed
      intellectual property may allow entry of generic substitutes for our
      products.




**Risks
      Related to Our Common Stock**




***Our
      stock price has, and we expect it to continue to, fluctuate significantly,
      and
      the value of your investment may decline.***




From
      January 1, 2005 to August 11, 2006, the market price of our common stock has
      ranged from a high of $12.94 per share to a low of $1.25 per share.
      The volatile price of our stock makes it difficult for investors to predict
      the
      value of their investment, to sell shares at a profit at any given time, or
      to
      plan purchases and sales in advance. You might not be able to sell your shares
      of common stock at or above the price at which you purchased it due to
      fluctuations in the market price of the common stock arising from changes in
      our
      operating performance or prospects. In addition, the stock markets in general,
      and the markets for biotechnology and biopharmaceutical companies in particular,
      have experienced extreme volatility that has often been unrelated to the
      operating performance of particular companies. A variety of factors may affect
      our operating performance and performance and cause the market price of our
      common stock to fluctuate. These include, but are not limited to:





·
            announcements
                by us or our competitors of regulatory developments, clinical trial
                results, clinical trial enrollment, regulatory filings, new products
                and
                product launches, significant acquisitions, strategic partnerships
                or
                joint ventures;





·
            any
                intellectual property infringement, product liability or any other
                litigation involving us;





·
            developments
                or disputes concerning patents or other proprietary
                rights;





·
            regulatory
                developments in the United States and foreign
                countries;





·
            market
                conditions in the pharmaceutical and biotechnology sectors and issuance
                of
                new or changed securities analysts’ reports or
                recommendations;





·
            economic
                or other crises and other external
                factors;





·
            actual
                or anticipated period-to-period fluctuations in our revenues and
                other
                results of operations;





·
            departure
                of any of our key management personnel;
                or





·
            sales
                of our common stock.






These
      and
      other factors may cause the market price and demand of our common stock to
      fluctuate substantially, which may limit investors from readily selling their
      shares of common stock and may otherwise negatively affect the liquidity or
      value of our common stock.




38




***If
      our results do not meet analysts’ forecasts and expectations, our stock price
      could decline.***




While
      research analysts and others have published forecasts as to the amount and
      timing of our future revenues and earnings, we have stated that we will not
      be
      providing any forecasts of the amount and timing of our future revenues and
      earnings until after two quarters of our sales and marketing efforts. Analysts
      who cover our business and operations provide valuations regarding our stock
      price and make recommendations whether to buy, hold or sell our stock. Our
      stock
      price may be dependent upon such valuations and recommendations. Analysts’
valuations and recommendations are based primarily on our reported results
      and
      their forecasts and expectations concerning our future results regarding, for
      example, expenses, revenues, clinical trials, regulatory marketing approvals
      and
      competition. Our future results are subject to substantial uncertainty, and
      we
      may fail to meet or exceed analysts’ forecasts and expectations as a result of a
      number of factors, including those discussed under the section “Risks Related to
      Our Business.” If our results do not meet analysts’ forecasts and expectations,
      our stock price could decline as a result of analysts lowering their valuations
      and recommendations or otherwise.




***Anti-takeover
      provisions in our charter documents and under Delaware law may make an
      acquisition of us, which may be beneficial to our stockholders, more difficult.***




Provisions
      of our amended and restated certificate of incorporation and bylaws, as well
      as
      provisions of Delaware law, could make it more difficult for a third party
      to
      acquire us, even if doing so would benefit our stockholders. These provisions:





·
            establish
                a classified board of directors so that not all members of our board
                may
                be elected at one time;





·
            authorize
                the issuance of “blank check” preferred stock that could be issued by our
                board of directors to increase the number of outstanding shares and
                hinder
                a takeover attempt;





·
            limit
                who may call a special meeting of stockholders;





·
            prohibit
                stockholder action by written consent, thereby requiring all stockholder
                actions to be taken at a meeting of our stockholders; and





·
            establish
                advance notice requirements for nominations for election to our board
                of
                directors or for proposing matters that can be acted upon at stockholder
                meetings.




In
      addition, Section 203 of the Delaware General Corporation Law, which
      prohibits business combinations between us and one or more significant
      stockholders unless specified conditions are met, may discourage, delay or
      prevent a third party from acquiring us.




***We
      are at risk of securities class action litigation.***




In
      the
      past, securities class action litigation has often been brought against a
      company following a decline in the market price of its securities. This risk
      is
      especially relevant for us because biotechnology companies have experienced
      greater than average stock price volatility in recent years. If we faced such
      litigation, it could result in substantial costs and a diversion of management’s
      attention and resources, which could harm our business.




***Because
      we do not expect to pay dividends, you will not realize any income from an
      investment in our common stock unless and until you sell your shares at
      profit.***




We
      have
      never paid dividends on our common stock and do not anticipate paying any
      dividends for the foreseeable future. You should not rely on an investment
      in
      our stock if you require dividend income. Further, you will only realize income
      on an investment in our shares in the event you sell or otherwise dispose of
      your shares at a price higher than the price you paid for your shares. Such
      a
      gain would result only from an increase in the market price of our common stock,
      which is uncertain and unpredictable.





39





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





In
      the three months ended June 30, 2006, the Company sold an aggregate of 55,154
      shares of its common stock pursuant to the exercise of outstanding warrants,
      as
      summarized below:





**Date
                of Exercise**
            
            **No.
                Shares**
            
            **Exercise
                Price**
            
            **Original
                Warrant**
              **Issuance
                Date**04/26/2006
            
            
            11,718
            
            
            1.57
            
            
            04/22/200504/26/2006
            
            
            5,000
            
            
            5.80
            
            
            10/24/200505/10/2006
            
            
            5,859
            
            
            1.57
            
            
            04/22/200505/10/2006
            
            
            5,859
            
            
            1.57
            
            
            04/22/200505/04/2006
            
            
            15,000
            
            
            5.80
            
            
            10/24/200506/08/2006
            
            
            11,718
            
            
            1.57
            
            
            04/22/2005





The
      shares identified above that were sold at a price of $1.57 per share resulted
      from exercises of warrants issued to the investors in the Company's April 2005
      private placement; and the shares sold at $5.80 per share relate to warrants
      originally issued to the investors in the Company’s October 2005 private
      placement. The Company's sales of the shares in connection with the warrant
      exercises described above were done in reliance on the exemption from the
      registration requirements of the Securities Act of 1933, as amended, provided
      by
      Section 4(2) of such act and/or Rule 506 promulgated thereunder. The Company
      had
      a reasonable basis to believe that each purchaser was an accredited investor
      and/or had knowledge and experience in financial and business matters sufficient
      to evaluate the merits and risks of their investment.





**Item
      3. Defaults Upon Senior Securities**





Not
      applicable




**Item
      4. Submission of Matters to a Vote of Securities Holders**





We
      held
      our Annual Meeting of Stockholders at the Embassy Suites Hotel, 250 Gateway
      Boulevard in South San Francisco, California on May 9, 2006. The stockholders
      took the following actions:




(i)    The
      stockholders elected five directors to serve until the next Annual Meeting
      of
      Stockholders. The stockholders present in person or by proxy cast the following
      numbers of votes in connection with the election of directors, resulting in
      the
      election of all nominees:




**Nominee**
            
            **Votes
                For**
            
            **Votes****Withheld**Mark
                J. Ahn
            
            
            14,636,771
            
            
            5,265Arie
                S. Belldegrun
            
            
            14,635,771
            
            
            6,265Isaac
                Kier
            
            
            14,499,092
            
            
            142,944Leon
                E. Rosenberg
            
            
            14,635,703
            
            
            6,333Michael
                Weiser
            
            
            14,637,868
            
            
            4,168




(ii) 
        The stockholders ratified and approved our 2003 Stock Option Plan.
      There were 9,052,858 votes cast for the proposal; 259,082 votes were cast
      against the proposal; 653,423 votes abstained; and there were 4,676,673 broker
      non-votes.




(iii) 
        The stockholders ratified and approved our 2004 Stock Incentive
      Plan, as amended. There were 9,053,858votes were cast for the proposal; 258,082
      votes were cast against the proposal; 653,423 votes abstained; and there were
      4,676,673 broker non-votes.





(iv)
      The
      stockholders ratified and approved our 2006 Employee Stock Purchase Plan. There
      were 9,244,349 votes were cast for the proposal; 83,433 votes were cast against
      the proposal; 637,581 votes abstained; and there were 4,676,673 broker
      non-votes.





40


**Item
      5. Other Information**




On
      June 1, 2006, the Company entered into a sublease agreement with MJ
      Research Company as sub-lessor. Pursuant to the sublease agreement, the
      Company subleased from MJ Research Company 18,788 square feet of office space
      located at 7000 Shoreline Court in South San Francisco, California. The sublease
      agreement provides for a three-year term commencing June 1, 2006 and requires
      the Company to make average monthly payments of approximately $49,000 during
      the
      term, for an aggregate amount of $1.8 million.




On
      May 9, 2006, we granted 22,000 restricted shares of
      our common stock under our 2004 Stock Incentive Plan to Dr. Gregory I. Berk,
      our
      senior vice president, chief medical officer. The shares vest in two
      installments of 11,000 shares on each of November 1, 2006 and November 1, 2007.
      The restricted stock grant was authorized by our board of directors in
      November 2005, subject to the approval of our 2004 Stock Incentive Plan by
      our
      stockholders, which occurred on May 9, 2006.




**Item
      6. Exhibits**




**Exhibit
                No.**
            
            **Description**10.1
            
            2003
                Stock Option Plan of Hana Biosciences, Inc. (incorporated by reference
                to
                Appendix B of the Company's Definitive Proxy Statement on Schedule
                14A
                filed April 7, 2006).10.2
            
            2004
                Stock Incentive Plan (as amended) of Hana Biosciences, Inc. (incorporated
                by reference to Appendix C of the Company's Definitive Proxy Statement
                on
                Schedule 14A filed April 7, 2006).10.3
            
            2006
                Employee Stock Purchase Plan of Hana Biosciences, Inc. (incorporated
                by
                reference to Appendix D of the Company's Definitive Proxy Statement
                on
                Schedule 14A filed April 7, 2006).10.4
            
            License
                Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals
                Corporation.**10.5
            
            Sublicense
                Agreement dated May 6, 2006 among the Company, Inex Pharmaceuticals
                Corporation and the University of British Columbia.**10.6
            
            Registration
                Rights Agreement dated May 6, 2006 between the Company and Inex
                Pharmaceuticals Corporation.10.7
            
            Transaction
                Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals
                Corporation.10.8
            
            Amended
                and Restated License Agreement among Elan Pharmaceuticals, Inc.,
                Inex
                Pharmaceuticals Corporation (for itself and as successor in interest
                to IE
                Oncology Company Limited), as assigned to the Company by Inex
                Pharmaceuticals Corporation on May 6, 2006.10.9
            
            Placement
                Agent Agreement by and among the Company, Lehman Brothers Inc., Jefferies
                & Company, and Oppenheimer & Co. Inc., dated as of May 16,
                2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
                filed May 17, 2006).10.10
            
            Form
                of common stock purchase agreement dated May 17, 2006 between the
                Company
                and certain investors (incorporated by reference to Exhibit 10.2
                of the
                Company’s Form 8-K filed May 17, 2006).10.11
            
            Amendment
                No. 3 dated June 30, 2006 to Employment Agreement between the Company
                and
                Mark J. Ahn.10.12
            
            Restricted
                Stock Agreement dated June 30, 2006 between the Company and Mark
                J.
                Ahn.10.13
            
            Restricted
                Stock Agreement dated June 30, 2006 between the Company and Fred
                L.
                Vitale.10.14
            
            Restricted
              Stock
              Agreement dated May 9, 2006 between the Company and Gregory I.
              Berk.10.15
            
            Sublease
                Agreement dated May 31, 2006 between the Company and MJ Research
                Company,
                Inc., including amendment thereto dated May 31, 200610.16
            
            Amendment
              to Stock Option Agreements between the Company and Mark J. Alan dated
              June
              30, 2006.10.17
            
            Amendment
              to Stock Option Agreement between the Company and Fred L. Vitale dated
              June 30, 2006.31.1
            
            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).


_______________


**
            Confidential
                treatment has been requested with respect to certain portions of
                this
                exhibit pursuant to Rule 24b-2.





41




**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.**Date:
                August 14, 2006
            By:
            /s/ Mark
                J. AhnMark
                J. Ahn
              President
                and Chief Executive Officer





Date:
                August 14, 2006
            By:
            /s/ John
                P. IparraguirreJohn
                P. Iparraguirre
              Chief
                Financial Officer







42


**Index
        to Exhibits Filed with this Report**
  **Exhibit
                    No.**
                
                **Description**10.1
                
                2003
                    Stock Option Plan of Hana Biosciences, Inc. (incorporated by
                    reference to
                    Appendix B of the Company's Definitive Proxy Statement on Schedule
                    14A
                    filed April 7, 2006).10.2
                
                2004
                    Stock Incentive Plan (as amended) of Hana Biosciences, Inc. (incorporated
                    by reference to Appendix C of the Company's Definitive Proxy
                    Statement on
                    Schedule 14A filed April 7, 2006).10.3
                
                2006
                    Employee Stock Purchase Plan of Hana Biosciences, Inc. (incorporated
                    by
                    reference to Appendix D of the Company's Definitive Proxy Statement
                    on
                    Schedule 14A filed April 7, 2006).10.4
                
                License
                    Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals
                    Corporation.**10.5
                
                Sublicense
                    Agreement dated May 6, 2006 among the Company, Inex Pharmaceuticals
                    Corporation and the University of British Columbia.**10.6
                
                Registration
                    Rights Agreement dated May 6, 2006 between the Company and Inex
                    Pharmaceuticals Corporation.10.7
                
                Transaction
                    Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals
                    Corporation.10.8
                
                Amended
                    and Restated License Agreement among Elan Pharmaceuticals, Inc.,
                    Inex
                    Pharmaceuticals Corporation (for itself and as successor in interest
                    to IE
                    Oncology Company Limited), as assigned to the Company by Inex
                    Pharmaceuticals Corporation on May 6, 2006.10.9
                
                Placement
                    Agent Agreement by and among the Company, Lehman Brothers Inc.,
                    Jefferies
                    & Company, and Oppenheimer & Co. Inc., dated as of May 16,
                    2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
                    filed May 17, 2006).10.10
                
                Form
                    of common stock purchase agreement dated May 17, 2006 between
                    the Company
                    and certain investors (incorporated by reference to Exhibit 10.2
                    of the
                    Company’s Form 8-K filed May 17, 2006).10.11
                
                Amendment
                    No. 3 dated June 30, 2006 to Employment Agreement between the
                    Company and
                    Mark J. Ahn.10.12
                
                Restricted
                    Stock Agreement dated June 30, 2006 between the Company and Mark
                    J.
                    Ahn.10.13
                
                Restricted
                    Stock Agreement dated June 30, 2006 between the Company and Fred
                    L.
                    Vitale.10.14
                
                Restricted
                  Stock
                  Agreement dated May 9, 2006 between the Company and Gregory I.
                  Berk.10.15
                
                Sublease
                    Agreement dated May 31, 2006 between the Company and MJ Research
                    Company,
                    Inc., including amendment thereto dated May 31, 2006.10.16
                
                Amendment
                  to Stock
                  Option Agreements between the Company and Mark J. Alan dated June
                  30,
                  2006.10.17
                
                Amendment
                  to Stock
                  Option Agreement between the Company and Fred L. Vitale dated June
                  30,
                  2006.31.1
                
                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).
 _______________
 **
                Confidential
                    treatment has been requested with respect to certain portions
                    of this
                    exhibit pursuant to Rule 24b-2.
  43