**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 March 31, 2007





OR





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





For
      the
      transition period to .





**Commission
      file number 001-32626**





**Hana
      Biosciences, Inc.**


(Exact
      Name of Registrant as Specified in Its Charter)




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




**(650)
      588-6404**


(Registrant's
      Telephone Number, Including Area Code)





Indicate
      by check mark whether the registrant: (1) 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 x Non-accelerated filer o




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 May
      14, 2007, there were 29,311,783 shares of the registrant's common stock,
      $.001 par value, outstanding.






















**INDEX**




**Page****PART
                I**
            **FINANCIAL
                INFORMATION**
            3Item
                1.
            Unaudited
                Condensed Financial Statements
            3Unaudited
                Condensed Balance Sheets
            3Unaudited
                Condensed Statements of Operations and Other Comprehensive
                Loss
            4Unaudited
                Condensed Statement of Changes in Stockholders' Equity
            5Unaudited
                Condensed Statements of Cash Flows
            6Notes
                to Unaudited Condensed Financial Statements
            8Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            25Item
                4.
            Controls
                and Procedures
            25**PART
                II**
            **OTHER
                INFORMATION**
            27Item
                1.
            Legal
                Proceedings
            27Item
                1A.
            Risk
                Factors
            27Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            27Item
                3.
            Defaults
                Upon Senior Securities
            27Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            27Item
                5.
            Other
                Information
            27Item
                6.
            Exhibits
            27Signatures
            28Index
                of Exhibits Filed with this Report
            29
















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, including when we expect to initiate
                and complete clinical trials of our product
                candidates;




·
            the
                regulatory approval of our drug
                candidates;




·
            our
                use of clinical research centers and other
                contractors;




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




·
            acceptance
                of our products by doctors, patients or
                payors;




·
            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” in our Annual report on Form 10-K for the year ended
      December 31, 2006, 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**




**March
                31,**
            
            **December
                31,****2007**
            
            **2006****ASSETS**
            
            (Unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            21,459,215
            
            $
            29,127,850Available-for-sale
                securities
            
            
            6,170,000
            
            
            6,131,000Prepaid
                expenses and other current assets
            
            
            149,293
            
            
            496,519Total
                current assets
            
            
            27,778,508
            
            
            35,755,369Property
                and equipment, net
            
            
            413,435
            
            
            424,452Restricted
                cash
            
            
            125,000
            
            
            125,000Total
                assets
            
            $
            28,316,943
            
            $
            36,304,821**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,505,546
            
            $
            2,739,956Accrued
                other expenses
            
            
            1,484,351
            
            
            1,547,459Accrued
                personnel related expenses
            
            
            525,571
            
            
            1,050,657Accrued
                research and development costs
            
            
            556,795
            
            
            596,927Total
                current liabilities
            
            
            4,072,263
            
            
            5,934,999Commitment
                and contingencies:Stockholders'
                equity:Common
                stock; $0.001 par value:100,000,000
                shares authorized, 29,295,117 and 29,210,627 shares issued and outstanding
                at March 31, 2007 and December 31, 2006,
                respectively
            
            
            29,295
            
            
            29,211Additional
                paid-in capital
            
            
            95,386,795
            
            
            93,177,445Accumulated
                other comprehensive income(loss)
            
            
            (116,000
            )
            
            20,000Deficit
                accumulated during the development stage
            
            
            (71,055,410
            )
            
            (62,856,834
            )Total
                stockholders' equity
            
            
            24,244,680
            
            
            30,369,822Total
                liabilities and stockholders' equity
            
            $
            28,316,943
            
            $
            36,304,821







See
      accompanying notes to unaudited condensed financial statements.





3





**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS**


**(Unaudited)**








**Three
                Months Ended**
              **March
                31,**
            
            
            **Cumulative**
              **Period
                from**
              **December
                6,**
              **2002
                (date of**
              **inception)
                to**
              **March
                31,****2007**
            
            
            **2006**
            
            
            **2007**Operating
                expenses:Selling,
                general and administrative
            
            $
            3,346,985
            
            $
            983,975
            
            $
            20,986,929Research
                and development
            
            
            5,237,904
            
            
            2,578,132
            
            
            51,899,947Total
                operating expenses
            
            
            8,584,889
            
            
            3,562,107
            
            
            72,886,876Loss
                from operations
            
            
            (8,584,889
            )
            
            (3,562,107
            )
            
            (72,886,876
            )Other
                income (expense):Interest
                income, net
            
            
            391,565
            
            
            135,326
            
            
            1,963,141Other
                expense, net
            
            
            (5,252
            )
            
            (7,892
            )
            
            (131,675
            )Total
                other income
            
            
            386,313
            
            
            127,434
            
            
            1,831,466**Net
                loss**
            
            $
            (8,198,576
            )
            $
            (3,434,673
            )
            $
            (71,055,410
            )Net
                loss per share, basic and diluted
            
            $
            (0.28
            )
            $
            (0.15
            )Shares
                used in computing net loss per share, basic and diluted
            
            
            29,286,139
            
            
            22,456,849Comprehensive
                loss:Net
                loss
            
            $
            (8,198,576
            )
            $
            (3,434,673
            )Unrealized
                gain (loss)
            
            
            (136,000
            )
            
            224,000Comprehensive
                loss
            
            $
            (8,334,576
            )
            $
            (3,210,673
            )




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, 2007 to March 31, 2007





**Common
                stock****Shares**
            
            **Amount**
            
            **Additional
                paid-in capital**
            
            **Accumulated
                other comprehensive income (loss)**
            
            **Deficit
                accumulated during development stage**
            
            **Total
                stockholders' equity**Balance
                at January 1, 2007
            
            
            29,210,627
            
            $
            29,211
            
            $
            93,177,445
            
            $
            20,000
            
            $
            (62,856,834
            )
            $
            30,369,822Issuance
                of shares upon exercise of warrants,
              options
                and restricted stock
            
            
            73,068
            
            
            73
            
            
            (73
            )
            
            --
            
            
            --
            
            
            --Stock-based
                compensation of employees
              amortized
                over vesting period of stock options
            
            
            --
            
            
            --
            
            
            2,401,591
            
            
            --
            
            
            --
            
            
            2,401,591Issuance
                of shares under employee stock purchase plan
            
            
            11,422
            
            
            11
            
            
            61,834
            
            
            --
            
            
            --
            
            
            61,845Share-based
                compensation to
              nonemployees
                for services
            
            
            --
            
            
            --
            
            
            (137,002
            )
            
            --
            
            
            --
            
            
            (137,002
            )Repurchase
                of employee stock options
            
            
            --
            
            
            --
            
            
            (117,000
            )
            
            --
            
            
            --
            
            
            (117,000
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (8,198,576
            )
            
            (8,198,576
            )Unrealized
                gain on available-for-sale securities
            
            
            --
            
            
            --
            
            
            --
            
            
            (136,000
            )
            
            --
            
            
            (136,000
            )Balance
                at March 31, 2007
            
            
            29,295,117
            
            $
            29,295
            
            $
            95,386,795
            
            $
            (116,000
            )
            $
            (71,055,410
            )
            $
            24,244,680







See
      accompanying notes to unaudited condensed financial statements.


5


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Cumulative****Period
                from****Three
                Months Ended**
              **March
                31,**
            
            **December
                6, 2002**
              **(date
                of inception)****to
                March 31,****2007**
            
            **2006**
            
            **2007****Cash
                flows from operating activities:**Net
                loss
            
            $
            (8,198,576
            )
            $
            (3,434,673
            )
            $
            (71,055,410
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            39,785
            
            
            12,462
            
            
            219,505Stock-based
                compensation of employees
            
            
            2,401,591
            
            
            186,397
            
            
            12,479,221Share-based
                compensation to nonemployees for services
            
            
            (137,002
            )
            
            --
            
            
            686,139Shares
                issued to nonemployees - transaction fee
            
            
            --
            
            
            --
            
            
            185,841Services
                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
            
            
            --
            
            
            --
            
            
            249,750Issuance
                of shares in partial consideration for license agreement
            
            
            --
            
            
            --
            
            
            10,929,640Issuance
                of shares in partial consideration of milestone payment
            
            
            --
            
            
            --
            
            
            493,620Loss
                on sale of capital assets
            
            
            --
            
            
            --
            
            
            41,759Changes
                in operating assets and liabilities:(Increase)
                decrease in prepaid expenses and other assets
            
            
            347,226
            
            
            (8,874
            )
            
            (149,293
            )Increase
                (decrease) in accounts payable
            
            
            (1,234,410
            )
            
            118,532
            
            
            1,505,546Increase
                (decrease) in accrued and other liabilities
            
            
            (628,326
            )
            
            (67,732
            )
            
            2,566,717Net
                cash used in operating activities
            
            
            (7,409,712
            )
            
            (3,193,888
            )
            
            (41,598,520
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (28,768
            )
            
            (75,936
            )
            
            (677,458
            )Proceeds
                from sale of equipment
            
            
            --
            
            
            --
            
            
            2,760Purchase
                of equity securities
            
            
            --
            
            
            --
            
            
            (636,000
            )Purchase
                of marketable securities
            
            
            (1,500,000
            )
            
            --
            
            
            (7,575,000
            )Sale
                of marketable securities
            
            
            1,325,000
            
            
            --
            
            
            1,925,000Restricted
                cash deposited in escrow
            
            
            --
            
            
            (500,000
            )
            
            (125,000
            )Net
                cash used in investing activities
            
            
            (203,768
            )
            
            (575,936
            )
            
            (7,085,698
            )**Cash
                flows from financing activities:**Proceeds
                from registered direct financing
            
            
            --
            
            
            --
            
            
            67,927,272Proceeds
                from issuances of notes payable to stockholders
            
            
            --
            
            
            --
            
            
            801,619Collection
                of subscription receivable
            
            
            --
            
            
            --
            
            
            4,000Repayment
                of notes payable to stockholders
            
            
            --
            
            
            --
            
            
            (651,619
            )Repurchase
                of employee stock options
            
            
            (117,000
            )
            
            --
            
            
            (117,000
            )Proceeds
                from exercise of warrants and options and employee stock purchase
                plan
            
            
            61,845
            
            
            561,636
            
            
            2,179,161








6


Net
                cash used in financing activities
            
            
            (55,155
            )
            
            561,636
            
            
            70,143,433Net
                (decrease) increase in cash and cash equivalents
            
            
            (7,668,635
            )
            
            (3,208,188
            )
            
            21,459,215Cash
                and cash equivalents, beginning of period
            
            
            29,127,850
            
            
            17,082,521
            
            
            --Cash
                and cash equivalents, end of period
            
            $
            21,459,215
            
            $
            13,874,333
            
            $
            21,459,215Supplemental
                disclosures of cash flow data:Cash
                paid for interest
            
            $
            1,376
            
            $
            --
            
            $
            42,406Supplemental
                disclosures of noncash financing activities:Common
                stock issued for repayment of debt
            
            $
            --
            
            $
            --
            
            $
            150,000Unrealized
                gain on available-for-sale securities
            
            
            (136,000
            )
            
            224,000
            
            
            (116,000
            )Common
                stock issued to employees for services rendered in 2004
            
            $
            --
            
            $
            -
            
            $
            249,750Common
                stock issued for services to be rendered
            
            
            --
            
            
            --
            
            
            450,948Common
                stock issued on conversion of preferred stock
            
            
            --
            
            
            --
            
            
            2,395






See
      accompanying notes to unaudited condensed financial
      statements.








7





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





*Business*





Hana
      Biosciences, Inc. (“Hana” or the “Company”) is a biopharmaceutical company based
      in South San Francisco, California, which seeks to acquire, develop, and
      commercialize innovative products to enhance cancer care. The Company is
      committed to creating value by accelerating the development of our six lead
      product candidates and expanding its product candidate pipeline by being the
      alliance partner of choice to universities, research centers and other
      institutions.





*Basis
      of Presentation*





The
      Company is a development stage enterprise since it has not generated revenue
      from the sale of its products and its efforts through December 31, 2006 have
      been principally devoted to identification, licensing and the clinical
      development of its products, as well as raising capital. Accordingly, the
      financial statements have been prepared in accordance with the provisions of
      Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and
      Reporting by Development Stage Enterprises.”





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,
      2006, included in the Company's Annual Report on Form 10-K for the year ended
      December 31, 2006 (the “Form 10-K”) filed with the Securities and Exchange
      Commission (“SEC”) on April 2, 2007. The accompanying condensed balance sheet as
      of December 31, 2006 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 reported amounts of assets and
      liabilities, disclosures of contingent assets and liabilities at the date of
      the
      financial statements and the reported amounts of expenses during the reporting
      period. Examples include provisions for deferred taxes and assumptions related
      to share-based compensation expense. Actual results may differ materially from
      those estimates.





*Segment
      Reporting*




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





*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 March 31, 2007 and 2006 upon exercise or conversion that were not included
      in
      the computation of net loss per share totaled 7,621,514 and 4,590,253,
      respectively.





8





*Cash
      and Cash Equivalents and Available-for-sale Securities*




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





*Income
      Taxes*


In
        July
        2006, the FASB issued FASB Interpretation No. 48, “ *Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
        109* ”
(FIN
        48), which clarifies the recognition, measurement, accounting and disclosure
        for
        uncertainty in tax positions. The Company is subject to the provisions of
        FIN 48
        as of January 1, 2007, and has analyzed filing positions in federal and state
        jurisdictions where it has filed income tax returns, as well as all open
        tax
        years in these jurisdictions. The Company is subject to US and California
        taxes
        for tax jurisdictions, as defined. The only periods subject to examination
        for
        the Company’s federal return are the 2003 through 2006 tax years. The periods
        subject to examination for the Company’s state returns in California are years
        2002 through 2006. There are currently no ongoing examinations by the relevant
        tax authorities.
 At
          the
          adoption date and as of March 31, 2007, we had no material unrecognized
          tax
          benefits and no adjustments to liabilities or operations were required.
          There
          was no interest or penalties recognized related to uncertain tax positions.
          The
          Company will account for any interest related to uncertain tax positions
          as
          interest expense, and for penalties as tax expense.


**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**




On
      September 15, 2006 the Financial Accounting Standards Board (FASB) issued
      Statement No. 157, *Fair
      Value Measurements.* The Statement provides guidance for using fair value to measure assets and
      liabilities.  This Statement references fair value as the price that would
      be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value.  The Statement
      does not expand the use of fair value in any new circumstances.  It is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years.  The
      adoption of SFAS No. 157 is not expected to have a material impact on the
      Company’s financial statements.





In
      February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115* ”.
      SFAS
      No. 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. This statement provides entities the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply the hedge
      accounting provisions as prescribed by SFAS No. 133 “ *Accounting
      for Derivative Instruments and Hedging Activities* ”.
      This
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. Management is currently evaluating the
      impact of adopting this Statement.





9








**NOTE
      3. LIQUIDITY AND CAPITAL RESOURCES**





The
      Company reported a net loss of $8.2 million for the three months ended March
      31,
      2007. The net loss from date of inception, December 6, 2002 to March 31, 2007
      amounted to $71.1 million. The Company's operating activities have used $41.6
      million in cash since its inception.





The
      Company has financed its operations since inception primarily through equity
      and
      debt financing. During the three months ended March 31, 2007, the Company had
      a
      net decrease of $7.7 million in cash and cash equivalents. This decrease
      primarily resulted from net cash used in operating activities of $7.4 million
      for the three months ended March 31, 2007. Total cash and cash equivalents
      and
      marketable securities as of March 31, 2007 were $27.6 million compared to $35.3
      million at December 31, 2006.





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 products that have reached FDA approval. Through March
      31, 2007, 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
      potential sale of 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. Given the current and desired pace of
      clinical development of the Company’s product candidates, the Company estimates
      that it will have sufficient cash on hand to fund clinical development through
      2007 and into 2008. However, the Company may 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
      Incentive Plans.* The
      Company has two stockholder approved stock incentive plans under which it grants
      or has granted options to purchase shares of its common stock and restricted
      stock awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the
      2004 Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the chief
      executive officer, when designated by the Board, is responsible for
      administration of the Company’s employee stock incentive plans and determines
      the term, exercise price and vesting terms of each option. In general, stock
      options issued under the 2003 Plan and 2004 Plan have a vesting period of three
      years and expire ten years from the date of grant.





The
      2003
      Plan was adopted by the Company's Board of Directors in October 2003. The 2003
      Plan authorizes a total of 1,410,068 shares of common stock for issuance. In
      May
      2006, the Company's stockholders ratified and approved the 2003 Plan. The
      Company may make future stock option issuances from this plan.





In
      September 2004, the Company's Board of Directors approved and adopted the 2004
      Plan, which initially authorized 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 May 2006 Annual Meeting, the Company's
      stockholders ratified and approved the 2004 Plan, as amended. The Company may
      make future stock option issuances from this 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”),
      which had been approved by the Company’s Board of Directors on March 31, 2006.
      The 2006 Plan provides the Company's eligible employees with the opportunity
      to
      purchase shares of Company common stock through lump sum payments or payroll
      deductions. The 2006 Plan is intended to qualify as an “employee stock purchase
      plan” under Section 423 of the Internal Revenue Code. As adopted, the 2006
      Plan authorized the issuance of up to a maximum of 750,000 shares of common
      stock. As of March 31, 2007, there have been 11,422 shares issued under the
      2006
      Plan.









10








*Restricted
      Stock Awards* The
      Company's Board of Directors has issued, under the 2004 Plan, 524,264 restricted
      stock awards as of March 31, 2007, at no cost to the Company's executive
      officers and directors pursuant to the 2004 Plan.





A
      summary
      of the status of the Company's restricted stock awards as of March 31, 2007
      and
      changes during the three months ended March 31, 2007 is as follows:




**Nonvested
                Restricted Stock Awards**
            
            **Number of Shares**
            
            **Weighted Average**
              **Grant-Date**
              **Fair
                Value**Nonvested
                at January 1, 2007
            
            
            460,764
            
            $
            10.65Granted
            
            
            --
            
            
            --Vested
            
            
            (73,068
            )
            
            9.50Cancelled/Forfeited
            
            
            --
            
            
            --Nonvested
                at March 31, 2007
            
            
            387,696
            
            $
            10.87





*Share-based
      Compensation* .
      The
      Company currently awards stock option grants under its 2003 and 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 March
      31, 2007 and changes in outstanding options in the three months then ended,
      all
      of which are at fixed prices:







NUMBER
                OF SHARES SUBJECT TO OPTIONS OUTSTANDING
            
            WEIGHTED AVERAGE
                EXERCISE PRICE PER SHARE
            
            WEIGHTED
                AVERAGE REMAINING CONTRACTUAL TERM
              (in
                years)
            
            AGGREGATE
                INTRINSIC VALUEOutstanding
                January 1, 2007
            
            
            5,123,917
            
            $
            4.27Options
                granted
            
            
            254,000
            
            
            5.72Options
                cancelled
            
            
            (160,001
            )
            
            4.85Options
                exercised
            
            
            --
            
            
            --Outstanding
                March 31, 2007
            
            
            5,217,916
            
            
            4.32
            
            
            8.5
            
            $
            2,013,074Exercisable
                at March 31, 2007
            
            
            1,984,573
            
            $
            1.83
            
            
            7.5
            
            $
            1,752,771





Total
      stock-based compensation was approximately $2.4 million and $0.2 million related
      to employee stock options and restricted stock recognized in the operating
      results for the three months ended March 31, 2007 and 2006, respectively.




11


The
      following table summarizes information about stock options outstanding at March
      31, 2007:









**Options
                Outstanding**
            
            
            
            **Options
                Exercisable****Number
                of Shares Subject to Options**
            
            **Weighted
                Average**
            
            **Weighted
                Average Remaining Contractual Life of Options**
            
            **Number
                of Options**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Outstanding**
            
            **Exercise
              Price**
            
            **Outstanding**
            
            **Exercisable**
            
            **Exercise
              Price**$  
                0.07 - $ 1.69
            
            
            1,677,669
            
            $
            0.71
            
            
            7.2
                yrs
            
            
            1,304,746
            
            $
            0.57$  
                2.17 - $ 4.75
            
            
            1,284,247
            
            
            4.28
            
            
            8.4
                yrs
            
            
            640,328
            
            
            4.14$ 
                4.97 - $ 7.42
            
            
            2,006,500
            
            
            6.69
            
            
            9.6
                yrs
            
            
            39,499
            
            
            6.00$8.08
                - $11.81
            
            
            249,500
            
            
            9.76
            
            
            8.5
                yrs
            
            
            --
            
            
            --$0.07
                - $11.81
            
            
            5,217,916
            
            $
            4.32
            
            
            8.5
                yrs
            
            
            1,984,573
            
            $
            1.83





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





Through
      March 31, 2007, the Company had issued 11,422 shares under the 2006 Plan. For
      the three months ended March 31, 2007, the total stock-based compensation
      expense recognized related to the 2006 Plan under SFAS 123(R) was approximately
      $68,000. There was no stock-based compensation realized for the same period
      in
      2006 as the Company had not initiated the 2006 Plan until July 1,
      2007.








The
      following table summarizes the assumptions used in applying the
      Black-Scholes-Merton option pricing model to determine the fair value of options
      granted during the three months ended March 31, 2007 and March 31, 2006,
      respectively:





**Three
                Months Ended March 31,****2007**
            
            **2006**1***Employee
                stock options***Risk-free
                interest rate
            
            
            4.50
            %
            
            --
            %Expected
                life (in years)
            
            
            5.5
                - 6.0
            
            
            --Volatility
            
            
            0.8
            
            
            --Dividend
                Yield
            
            
            0
            %
            
            --
            %***Employee
                stock purchase plan***Risk-free
                interest rate
            
            
            4.82%
                -5.24
            %
            
            -Expected
                life (in years)
            
            
            0.5
                - 2
            
            
            -Volatility
            
            
            0.54
                - 1.15
            
            
            -Dividend
                Yield
            
            
            0
            %
            
            -





The
      Company's computation of expected volatility of employee stock options 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
      two
      and a half years as of March 31, 2007. In selecting the peer companies, the
      Company considered the following factors: industry, stage of life cycle, size,
      and financial leverage. For the 2006 Plan, the Company used actual volatilities
      as the Company had sufficient historical data for the expected term used in
      the
      Black-Scholes-Merton calculation. To determine the expected term of the
      Company's employee stock options granted upon adoption of SFAS 123(R) 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 5.5 to 6 years for options granted during the three months
      ended March 31 2007. 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.




1For the
      three months ended March 31, 2006 options were granted to employees and
      nonemployees under the 2004 Plan that were not measured for accounting purposes
      until these awards were approved by shareholders on May 9, 2006, in accordance
      with SFAS 123(R). Thus, in the three months ended March 31, 2006, no options
      were valued under the Black-Scholes-Merton calculation.





12










*Non-Employee
      Stock Options.* The
      Company has also granted stock options to 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-Merton option pricing model
      to
      determine the fair value of such awards.  For the three months ended
      March 31, 2007, the Company recognized a credit of $0.1 million of stock-based
      compensation expense related to stock options held by non-employee consultants,
      due to the decline in the Company’s stock price at March 31, 2007 compared to
      December 31, 2006. During the same period in 2006, the Company did not recognize
      any stock-based compensation related to stock options held by non-employee
      consultants.




*Warrants* .
      The
      following table summarizes the warrants outstanding as of March 31, 2007 and
      the
      changes in outstanding warrants in the three months then ended:




NUMBER
                OF
              SHARES SUBJECT
              TO
                WARRANTS
              OUTSTANDING
            
            
            WEIGHTED-AVERAGE
              EXERCISE
                PRICEWarrants
                outstanding January 1, 2007
            
            
            2,015,901
            
            $
            3.41Warrants
                exercised
            
            
            --
            
            
            --Warrants
                cancelled
            
            
            --
            
            
            --Warrants
                outstanding March 31, 2007
            
            
            2,015,901
            
            $
            3.41








**NOTE
      5. SHORT-TERM INVESTMENTS**





On
      March
      31, 2007, the Company had $6,170,000 in total marketable securities which
      consisted of shares of NovaDel Pharma, Inc (“NovaDel”) purchased in conjunction
      with the Zensana license agreement, and other short-term
      investments.




At
      March 31, 2007, the Company had $5,650,000 of
      marketable securities invested in auction rate securities and other short-term
      investments. These are highly liquid, investment-grade securities. Auction
      rate
      securities generally have stated maturities of 20 to 30 years. However, these
      securities have economic characteristics of short-term investments due to a
      rate-setting mechanism and the ability for holders to liquidate them through
      a
      Dutch auction process that occurs on pre-determined intervals of less than
      90
      days. As such and because of management's intent regarding these securities,
      the
      Company classifies these investments as short-term investments. There were
      no
      unrealized gains or losses associated with these investments as of March 31,
      2007.




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 March
      31, 2007, was $520,000 and for the three months ended March 31, 2007, the
      Company had an unrealized loss of $116,000 since the original purchase in
      October 2004. On March 31, 2006, the market value of these shares was $696,000
      and the Company had an unrealized gain of $60,000 since the original purchase
      in
      October 2004. The following table summarizes the NovaDel shares classified
      as
      available-for-sale securities as of March 31, 2007 and March 31,
      2006:








13








**March 31, 2007****Original**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Loss**
            
            **Gross**
              **Unrealized**
              **Gain**
            
            **Market Value**Shares
                of NovaDel Pharma Inc.
            
            $
            636,000
            
            
            $
            116,000
            
            
            
            $
            --
            
            
            $
            520,000








**March 31, 2006****Original**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Loss**
            
            **Gross**
              **Unrealized**
              **Gain**
            
            **Market Value**Shares
                of NovaDel Pharma Inc.
            
            $
            636,000
            
            
            $
            --
            
            
            
            $
            60,000
            
            
            $
            696,000





**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**





***Employment
      Agreements.*** ** 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 minimum aggregate amount of gross salary compensation to
      be
      provided over the remaining term of the agreement amounted to approximately
      $546,000 at March 31, 2007.





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 minimum aggregate amount of gross salary compensation to
      be
      provided over the remaining term of the agreement amounted to approximately
      $396,000 at March 31, 2007.




The
        Company entered into a written three year employment agreement with its Senior
        Vice President and Chief Medical Officer, Dr. Greg Berk, on October 21, 2004.
        This agreement was amended in October 2006. However, in May 2007, the Company
        terminated the employment of Dr. Berk and pursuant to the terms of the
        employment agreement, Dr. Berk is entitled to receive his current base salary,
        currently $340,000, for a period of one year from the date of such termination.
        See Note 8 Subsequent Events, for further discussion of this matter.




The
      Company entered into a written an employment agreement with its Vice President
      and Chief Financial Officer on December 18, 2006. This agreement provides for
      an
      employment term that expires in November 2008. The minimum aggregate amount
      of
      gross salary compensation to be provided for over the remaining term of the
      agreement amounted to approximately $277,000 at March 31, 2007.





***Lease.*** The
      Company entered into a three year sublease, which commenced on May 31, 2006,
      for
      property at 7000 Shoreline Court in South San Francisco, California, where
      the
      Company has relocated its executive offices. The total cash payments due for
      the
      duration of the sublease equaled approximately $1.3 million on March 31, 2007.




**NOTE
        8. SUBSEQUENT EVENTS**
 
 On
        May 6,
        the Company and Dr. Steven R. Deitcher entered into an employment
        agreement pursuant to which Dr. Deitcher was appointed the
        Company's Executive Vice President and Chief Medical Officer, effective May
        21,
        2007.  The agreement provides for a term of three years, ending May 21,
        2010, although the agreement may be terminated earlier. Dr. Deitcher will
        receive an annualized base salary of $380,000, which is subject to annual
        increases at the discretion of the Company’s Board of Directors, a signing bonus
        of $75,000 upon the commencement of his employment and will be eligible for
        an
        annual performance-based bonus at a target amount equal to 40% of his base
        salary, which bonus is guaranteed for 2007.  The employment agreement also
        provides that Dr. Deitcher is entitled to receive total stock options relating
        to 400,000 shares of the Company’s common stock.
 
 Effective
        May 14, 2007, the Company terminated the employment of Dr. Gregory I. Berk,
        the
        Company’s former Chief Medical Officer.  Pursuant to the terms of the
        Company’s employment agreement with Dr. Berk dated October 21,  2004 (as
        amended), Dr. Berk is entitled to receive his base salary, currently $340,000,
        for a period of one year from the date of such termination.  However, the
        Company’s obligation to pay such severance is subject to offset by any amounts
        otherwise received by Dr. Berk from any subsequent employment during the
        one
        year period following such termination.  The Company is also required to
        maintain Dr. Berk’s health insurance for such 1-year period. Additionally,
        pursuant to the terms of the original employment agreement, Dr. Berk’s
        termination triggered an acceleration clause for all stock options granted
        to
        him prior to his termination. All stock options that were scheduled to vest
        by
        October 21, 2007 were deemed vested as of May 14,
        2007.


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 to those
      statements included elsewhere in this Quarterly Report on Form 10-Q. This
      discussion includes forward-looking statements that involve risks and
      uncertainties. As a result of many factors, such as those set forth under “Risk
      Factors” in Item 1A of our Annual Report on Form 10-K for the year ended
      December 31, 2006, our actual results may differ materially from those
      anticipated in these forward-looking statements* .





**Overview**





We
      are a
      development-stage based biopharmaceutical company focused on acquiring,
      developing, and commercializing innovative products to advance cancer care.
      We
      seek to license novel, late preclinical and early clinical oncology product
      candidates, primarily from academia and research institutes, in order to
      accelerate clinical development and time to commercialization.





We
      currently have six product candidates in various stages of
      development:





·
            ***Marqibo
                (vincristine sulfate liposomes injection)****- A Novel Targeted Anti-Cancer Compound for Non-Hodgkin's Lymphoma
                and
                Acute Lymphoblastic Leukemia.*We
                acquired our rights to Marqibo from Inex Pharmaceuticals Corporation
                in
                May 2006. Marqibo has been evaluated in 13 clinical trials with over
                600
                patients, including Phase 2 clinical trials in patients with non-Hodgkin’s
                lymphoma, or NHL, and acute lymphoblastic leukemia, or ALL. We also
                plan
                to conduct a Phase 3 first line clinical trial in adults with ALL
                as a
                primary registrational trial. This Phase 3 randomized, multicenter
                trial
                will compare Marqibo to vincristine in the induction, consolidation,
                and
                maintenance phases of treatment in elderly patients with ALL.  We
                plan to conduct this study in collaboration with three major oncology
                cooperative groups. Pending finalization of the protocol by the
                cooperative groups, we plan to initiate this study in 2007. In addition,
                we anticipate pursuing a randomized pivotal trial in front-line
                Non-Hodgkin’s Lymphoma, where Marqibo has previously demonstrated positive
                indications of clinical benefit.




·
            ***Talvesta
                (talotrexin)****for
                Injection********-
                A Novel Antifolate for Solid and Hematological Malignancies. Talvesta
                is a
                novel antifolate product candidate under development for treatment
                of
                various types of tumors.*In
                April 2004, we commenced an NCI-sponsored Phase 1 clinical trial
                to evaluate the safety of Talvesta when administering it intravenously
                on
                days 1, 8 and 15 of a 28-day cycle to patients with solid tumors. In
                March 2007, this clinical trial was discontinued due to toxicity.
                Fifty
                subjects received doses of Talvesta with one patient death being
                reported
                during this clinical trial. We commenced a Phase 1/2 clinical trial
                in
                non-small cell lung cancer in February 2005. In the Phase 1 portion
                of
                this clinical trial, which is now closed for enrollment, multiple
                infusions of Talvesta were administered to patients to ascertain
                the
                maximum tolerated doses of the drug. The aim of the Phase 2 portion
                of the
                clinical trial is primarily to demonstrate an improvement in overall
                survival of the patients. We have suspended enrollment in the Phase
                2portion of this clinical trial for additional safety analysis. In
                May
                2005, we commenced a Phase 1/2 clinical trial in ALL. Phase 1 of
                this
                clinical trial is closed for enrollment. Based on the observations
                from
                the Phase 1 solid tumor trial, we have decided to conduct additional
                toxicology studies.  While we have not seen issues related to
                toxicity in the ALL trial, we proactively suspended enrollment in
                the
                Phase 2 ALL trial as a safety precaution.  We postponed the
                initiation of new clinical trials with Talvesta until these additional
                toxicology studies have been reviewed. Subsequent to our postponement
                of
                initiating new clinical trials, we were informed by the FDA that
                it had
                placed the Talotrexin study on clinical hold. We anticipate meeting
                with
                the FDA upon the completion of our additional toxicology studies,
                which we
                anticipate to be completed in the fourth quarter of 2007. Based on
                the
                data from the toxicology studies, the final safety and efficacy analysis
                of the completed trials and our meeting with the FDA, we expect to
                launch
                additional trials in solid and hematological
                malignancies.




·
            ***Alocrest
                (vinorelbine tartrate liposomes injection)****-
                A Novel Targeted Anti-Cancer Compound for Breast and Lung Cancer.*In
                August 2006, we initiated a Phase 1 clinical trial to assess the
                safety,
                tolerability and preliminary efficacy of Alocrest in patients with
                advanced solid tumors, including non-small cell lung and breast cancers.
                The trial is being conducted at the Cancer Therapy and Research Center
                in
                San Antonio, Texas and at**McGill
                University in Montreal, with plans to include an additional site,
                South
                Texas Accelerated Research Therapeutics, in the first half of
                2007.







15








·
            ***Sphingosome
                Encapsulated Topotecan****- A Novel Targeted Anti-Cancer Compound for Small-Cell Lung Cancer
                and
                Ovarian Cancer.*Following
                completion of preclinical development, we expect to file an
                investigational new drug application, or IND, and to initiate clinical
                trials in 2007.




·
            ***Zensana
                (ondansetron HCI) Oral Spray****- Bioequivalent to 8mg Oral Zofran Tablet with Multidose Convenience
                and
                Desirable Route of Administration.*In
                June 2006, we submitted our new drug application, or NDA, for Zensana
                for
                the prevention of chemotherapy-induced, radiation-induced and
                post-operative nausea and vomiting, referred to as CINV, RINV and
                PONV,
                respectively, under Section 505(b)(2) of the FDCA, a form of
                registration that relies, at least in part, on data in previously
                approved
                NDAs or published literature for which we do not have a right of
                reference
                or both. While our NDA was pending with the FDA, long-term stability
                studies revealed small amounts of precipitated material in scale-up
                batches of Zensana. Through further investigation of this issue,
                we
                determined that the precipitation is caused by an issue with the
                original
                formulation, and was not related to the manufacturing process. As
                a
                result, in March 2007, we withdrew our NDA without prejudice, and
                have
                stopped further investigation of the original formulation. Our partner
                and
                licensor, NovaDel, has developed an alternate formulation of the
                product.
                The alternate formulation is currently under active investigation
                and
                scale-up. If this alternative formulation is stable, we will then
                need to
                reestablish bioequivalency through new clinical trials. If these
                studies
                are successful, we anticipate being in a position to file an NDA
                sometime
                in 2008, at the earliest.




·
            ***Menadione****- A Topical Compound for Skin Rashes Associated with EGFR Inhibitors.*We
                acquired the rights to Menadione in October 2006 pursuant to a license
                agreement with the Albert Einstein College of Medicine, or AECOM. We
                expect to complete formulation of Menadione by the end of 2007 and
                to file
                an IND in 2008.




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.




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. 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. 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.




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.







16








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 accounting
      and general legal activities.





**Critical
      Accounting Policies**





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




***Share
      Based Compensation***




Effective
      January 1, 2006, we 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-Merton option
      pricing model, and is recognized as an expense over the employee's requisite
      service period (generally the vesting period of the equity award). We adopted
      SFAS No.123R using the modified prospective method for share-based awards
      granted after we became a public entity and the prospective method for
      share-based awards granted prior to the time we became 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, we
      estimated the fair value of each option award on the date of grant using the
      Black-Scholes-Merton 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 us, including industry, stage
      of
      life cycle, size and financial leverage. As we have so far only awarded “plain
      vanilla options” as described by the SEC’s Staff Accounting Bulletin No. 107, we
      used the “simplified method” for determining the expected life of the options
      granted. This method is allowed until December 31, 2007, after which we will
      be
      required to adopt another method to determine expected life of the option awards
      in 2006. 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,
      we currently estimate that 10% annually of our stock options awarded will be
      forfeited. For options granted while we were a nonpublic entity, we applied
      the
      prospective method in which the awards that were valued under the minimum value
      method for pro forma disclosure purposes will continue to be expensed using
      the
      intrinsic value method of APB 25.




Prior
      to
      January 1, 2006, we 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,” or 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, we were 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 common stock underlying the option over the exercise price.





If
      factors change and we employ different assumptions for estimating stock-based
      compensation expense in future periods or if we decide to use a different
      valuation model, the future periods may differ significantly from what we have
      recorded in the current period and could materially affect our operating income,
      net income and net income per share.





17








The
      Black-Scholes-Merton option-pricing model was developed for use in estimating
      the fair value of traded options that have no vesting restrictions and are
      fully
      transferable, characteristics not present in our option grants and employee
      stock purchase plan shares. Existing valuation models, including the
      Black-Scholes-Merton and lattice binomial models, may not provide reliable
      measures of the fair values of our stock-based compensation. Consequently,
      there
      is a risk that our estimates of the fair values of our stock-based compensation
      awards on the grant dates may bear little resemblance to the actual values
      realized upon the exercise, expiration, early termination or forfeiture of
      those
      stock-based payments in the future. Certain stock-based payments, such as
      employee stock options, may expire worthless or otherwise result in zero
      intrinsic value as compared to the fair values originally estimated on the
      grant
      date and reported in our financial statements. Alternatively, value may be
      realized from these instruments that are significantly higher than the fair
      values originally estimated on the grant date and reported in our financial
      statements. There currently is no market-based mechanism or other practical
      application to verify the reliability and accuracy of the estimates stemming
      from these valuation models, nor is there a means to compare and adjust the
      estimates to actual values.




The
      guidance in SFAS 123R and SAB 107 is relatively new. The application of these
      principles may be subject to further interpretation and refinement over time.
      There are significant differences among valuation models, and there is a
      possibility that we will adopt different valuation models in the future. This
      may result in a lack of consistency in future periods and materially affect
      the
      fair value estimate of stock-based payments. It may also result in a lack of
      comparability with other companies that use different models, methods and
      assumptions.





See
      Note
      4 of our condensed unaudited financial statements included elsewhere in this
      Quarterly Report for further information regarding the SFAS 123R
      disclosures.





***Licensed
      In-Process Research and Development***




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





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




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.







18





**Recent
        Accounting Pronouncements**





On
      September 15, 2006, FASB issued Statement No. 157, *Fair
      Value Measurements.* This Statement provides guidance for using fair value to measure assets and
      liabilities.  This Statement references fair value as the price that would
      be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value.  The Statement
      does not expand the use of fair value in any new circumstances.  It is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years.  The
      adoption of SFAS No. 157 is not expected to have a material impact on the
      Company’s financial statements.





On
      February 15, 2007, FASB issued Statement of Financial Accounting Standards
      No.
      159, The Fair Value Option for Financial Assets and Financial Liabilities,
      or
      SFAS 159. The statement provides companies with an option to report selected
      financial assets and liabilities at fair value. SFAS 159 also establishes
      presentation and disclosure requirements to facilitate comparisons between
      companies using different measurement attributes for similar types of assets
      and
      liabilities. The statement is effective as of the beginning of the first fiscal
      year that begins after November 15, 2007. Earlier adoption is permitted provided
      the company also elects to apply the provisions of SFAS 157, Fair Value
      Measurement. The Company is currently evaluating the impact that this standard
      may have on our financial statements.




**Results
      of Operations**





***Three
      Months Ended March 31, 2007 Compared to Three Months Ended March 31,
      2006***




*Selling,
      general and administrative expenses.* For the
      three months ended March 31, 2007, selling, general and administrative, or
      SG&A, expense was $3.3 million, as compared to $1.0 million for the three
      months ended March 31, 2006. The increase of $2.3 million is due primarily
      to an increase in salaries, other employee benefits and personnel related
      costs of approximately $1.5 million, including an increase of $1.2 million
      in
      employee related share-based compensation expense due to increased employee
      stock options and restriced stock issued in subsequent quarters of 2006 and
      in
      2007 as well as increased salary, bonus and benefits of $0.3 due to increased
      wages and headcount in 2007 compared to 2006 as two individuals were hired
      in
      anticipation of the expected launch of Zensana in 2007. For the three months
      ended March 31, 2007, we also incurred an increase of approximately $0.5 million
      in outside services and professional service fees mainly related to increased
      audit, consulting and outside services related to sales and marketing. The
      increase in accounting and consulting fees related mainly to increased cost
      of
      complying with Section 404 of the Sarbanes-Oxley Act, including increased
      external audit fees, consulting fees for management’s assessment of internal
      controls. Outside service expenses also increased in preparation for the planned
      launch of Zensana in the second half of 2007. Also for the three months ended
      March 31, 2007, there was an increase of approximately $0.3 million in allocable
      expenses, including an increase of $0.2 million in marketing costs related
      to
      the launch of Zensana and an increase of $0.1 million in rent, insurance and
      other allocable expenses.





*Research
      and development expenses.* For the
      three months ended March 31, 2007, research and development, or R&D, expense
      was $5.2 million, as compared to $2.6 million for the three months ended March
      31, 2006. The increase of $2.6 million is due primarily to an increase of $1.7
      million in employee related expenses including an increase in salaries, other
      employee benefits and personnel related costs of approximately $0.7 million
      and
      an increase of $1.0 million in employee related share-based compensation expense
      due to increased employee stock options issued in subsequent quarters 2006
      and
      in 2007. The increase in salary, bonus and benefits was due to increased wages
      and headcount in 2007 compared to 2006 as the research and development teams
      expanded with the acquisition of 4 additional drugs in 2006. Research and
      development costs for the clinical development of our product pipeline increased
      $0.6 million in 2007 compared to 2006. Clinical development costs for IPdR,
      Talvesta and Zensana decreased by $0.6 million. The IPdR program was terminated
      in February 2007. The decreases in IPdR, Talvesta and Zensana were offset by
      an
      increase in clinical development costs related to Marqibo, Alocrest, Topotecan
      and Menadione of $1.2 million. Marqibo, Alocrest and Topotecan were acquired
      in
      the Inex license agreement in May 2006 and Menadione was licensed from AECOM
      in
      October 2006. These clinical costs included the physical manufacturing of drug
      compounds, payments to our contract research organizations. Other outside
      services, consultants and professional fees related to research and development
      projects increased $0.1 million in the three months ended March 31, 2007
      compared to the three months ended March 31, 2006. Other allocable operating
      expenses increased by approximately $0.2 million for the three months ended
      March 31, 2007 compared to the three months ended March 31, 2006. This includes
      a $0.1 million increase in travel and conference expenses, and a $0.1 million
      increase in rent, insurance and other allocable costs as head count increased
      in
      2007 over 2006.





19











*Interest
      income (expense), net.* For the
      three months ended March 31, 2007, net interest income was $0.4 million as
      compared to net interest income of $0.1 million for the three months ended
      March
      31, 2006. The increase of $0.3 million resulted from increased cash balance
      in
      our interest bearing accounts due to our May 2006 financing which resulted
      in
      net proceeds of $37.1 million, plus rising interest rates.





**Liquidity
      and Capital Resources**




From
      inception to March 31, 2007, we have incurred an aggregate net loss of $71.1
      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 March 31, 2007, we had a net increase in
      cash
      and cash equivalents and marketable securities of $27.6 million. This increase
      primarily resulted from net cash provided by financing activities of $70.1
      million, substantially all of which was derived from our five private placements
      which netted proceeds of $68.0 million. The increase in cash provided by
      financing activities was offset by net cash used in operating activities of
      $41.6 million and net cash used in investing activities of $7.1 million for
      the
      cumulative period from inception to March 31, 2007. 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 March 31, 2007,
      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, we estimate
      that we will have sufficient cash on hand to fund clinical development through
      2007 and into 2008. We may, however, choose to raise additional capital before
      2008 in order to fund our future development activities, likely by selling
      shares of our capital stock or other securities. If we are unable to raise
      additional capital, we will likely be forced to curtail our desired development
      activities, which will delay the development of our product candidates. There
      can be no assurance that such capital will be available to us on favorable
      terms
      or at all. We will need additional financing thereafter until we can achieve
      profitability, if ever.





***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., which served as placement agent,
      for
      its services rendered.





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, all of which converted
      into
      3,377,409 shares of common shares in January 2005.





In
      April
      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.







20








In
      October 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.





In
      May
      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 one of our directors at a price of $9.07 per share, which resulted
      in total gross proceeds to us of approximately $40.0 million. In connection
      with
      this offering, 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 Capital Requirements.*** Our plan
      of operation for the year ending December 31, 2007 is to continue implementing
      our business strategy, including the continued development of our six product
      candidates that are currently in clinical and preclinical phases. 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;




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





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
      $21.0 million on clinical development (including milestone payments of $2.5
      million that we expect to be triggered under the license agreements relating
      to
      our product candidates), $3.5 million on general corporate and administrative
      expenses, and $600,000 on facilities and rent. We plan to initiate a Phase
      2,
      open-label trial in relapsed adult ALL. We also plan to conduct a Phase 3
      registrational clinical trial for Marqibo in front-line ALL. We also expect
      to
      complete our Phase 1 clinical trial and initiate a Phase 2 clinical trial for
      Alocrest in solid tumors. We expect to initiate a Phase 1 study in Sphingosome
      Encapsulated Topotecan We also plan to complete formulation and preclinical
      work
      on menadione, and anticipate filing an IND in 2007.





We
      believe that our cash, cash equivalents and marketable securities, which totaled
      $27.6 million as of March 31, 2007, will be sufficient to meet our anticipated
      operating needs through 2007 and into 2008 based upon current operating and
      spending assumptions. However, we expect to incur substantial expenses as we
      continue our drug discovery and development efforts, particularly to the extent
      we advance our lead candidate Marqibo into and through a pivotal clinical study.
      We cannot guarantee that future financing will be available in amounts or on
      terms acceptable to us, if at all.





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;







21








·
            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.





***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
      reasonably 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. In addition to those risks identified
      under Item 1A of our Annual Report on Form 10-K for the year ended December
      31,
      2006, our assumptions relating the expected costs of development and timeframe
      for completion are dependent on numerous risks and other 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 positive cash flow, however, we will likely
      need to raise additional capital to continue development of our product
      candidates beyond 2007. 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.





***Marqibo.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Marqibo
      in May 2006, we have incurred $2.0 million in project costs related to our
      development of Marqibo through March 31, 2007, of which $0.7 million and $1.3
      million was incurred in 2007 and 2006, respectively. We plan to initiate a
      Phase
      2, open-label trial in relapsed adult ALL in 2007. We also plan to conduct
      a
      Phase 3 registrational trial in front-line ALL in 2007. 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
      believe we currently have sufficient capital to fund our planned development
      activities of Marqibo through 2007 and into 2008. 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.





22








***Talvesta*** . From
      inception through March 31, 2007, we have incurred $4.2 million of costs related
      to our development of Talvesta, of which $0.2 million and $1.7 million was
      incurred in 2007 and 2006, respectively. We believe we currently have sufficient
      capital to fund our planned development activities of Talvesta through 2007
      and
      into 2008. 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.




***Alocrest.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Alocrest
      in May 2006 we have incurred $1.1 million in project costs related to our
      development of Alocrest through March 31, 2007, of which $0.3 million and $0.8
      million was incurred in 2007 and 2006, respectively. We initiated a Phase 1
      clinical trial in August 2006. This Phase 1 trial is designed to assess safety,
      tolerability and preliminary efficacy in patients with advanced solid tumors,
      including non-small cell lung and breast cancers. 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 Alocrest, if ever, which amount includes milestone
      payments that would be owed to our licensor upon FDA approval.  We believe
      we currently have sufficient capital to fund our planned development activities
      of Alocrest through 2007. We expect that it will take approximately five to
      six
      years until we will have completed development and obtained FDA approval of
      Alocrest, if ever.





***Sphingosome
      Encapsulated Topotecan.*** Along
      with our rights to Marqibo, we acquired our rights to develop and commercialize
      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
      topotecan in May 2006, we have incurred $1.1 million in project costs related
      to
      our development of this drug through March 31, 2007, of which $0.1 million
      and
      $1.0 million was incurred in 2007 and 2006, respectively. Following completion
      of additional preclinical development, we expect to file an IND and initiate
      clinical trials in 2007. As this drug is early in its clinical development,
      both
      the registrational strategy and total expenditures to obtain FDA approval are
      still being evaluated.




***Zensana
      (ondansetron HCl) Oral Spray*** ***.***  Since
      acquiring our rights to Zensana in October 2004, we have incurred $7.7 million
      of project costs related to our development through March 31, 2007, of which
      $0.7 million and $6.1 million was incurred in 2007 and 2006, respectively.
      In
      June 2006, we submitted our NDA for Zensana for the prevention of CINV, RINV
      and
      PONV under Section 505(b)(2) of the FDCA. While our NDA was pending with the
      FDA, long-term stability studies revealed small amounts of precipitated material
      in scale-up batches of Zensana. Through further investigation of this issue,
      we
      have determined that the precipitation issue in long-term stability was not
      related to the manufacturing process, but is in fact an issue with the original
      formulation. As a result, in March 2007, we withdrew our NDA previously
      submitted to the FDA. Our partner and licensor, NovaDel, has developed an
      alternate formulation of the product. The alternate formulation is currently
      under active investigation and scale-up. If this alternative formulation is
      stable, we will then need to reestablish bioequivalency through new clinical
      trials. If these studies are successful, we anticipate being in a position
      to
      file an NDA sometime in 2008, at the earliest. If we are able to use this
      alternative formulation for Zensana, we estimate that we will need to expend
      at
      least an additional $10.0 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.





***Menadione*** *.* We
      licensed our rights to menadione from the Albert Einstein College of Medicine
      in
      October 2006 and have incurred approximately $0.4 million in project costs
      related to our development of this drug through March 31, 2007, of which $0.1
      million and $0.3 million was incurred in 2007 and 2006, respectively. We expect
      to complete formulation of menadione in 2007 and to file an IND by the end
      of
      2008. We will incur approximately $1.3 million in costs to fund our
      research and development efforts for this drug during 2007. As this drug is
      early in its clinical development, both the registrational strategy and total
      expenditures to obtain FDA approval are still being evaluated.





23








**Off-Balance
      Sheet Arrangements**





We
      do not
      have any “off-balance sheet agreements,” as that term is defined by SEC
      regulation. We do, however, have various commitments under certain agreements,
      as follows:





***License
      Agreements.***





In
      the
      event we achieve certain milestones in connection with the development of our
      product candidates, we will be obligated to make milestone payments to our
      licensors in accordance with the terms of our license agreements, as discussed
      below. The development of pharmaceutical product candidates is subject to
      numerous risks and uncertainties, including, without limitation, the following:
      (1) risk of delays in or discontinuation of development from lack of financing,
      (2) our inability to obtain necessary regulatory approvals to market the
      products, (3) unforeseen safety issues relating to the products, (4) our ability
      to enroll a sufficient number of patients in our clinical trials, and (5)
      dependence on third party collaborators to conduct research and development
      of
      the products. Additionally, on a historical basis, only approximately 11 percent
      of all product candidates that enter human clinical trials are eventually
      approved for sale. Accordingly, we cannot state that it is reasonably likely
      that we will be obligated to make any milestone payments under our license
      agreements. Summarized below are our future commitments under our license
      agreements, as well as the amounts we have paid to date under such
      agreements.





***Talvesta
      License*** *.* Our
      rights to Talvesta are governed by the terms of a December 2002 license
      agreement with Dana-Farber Cancer Institute and Ash Stevens, Inc. The agreement
      provides us with an exclusive worldwide royalty bearing license, including
      the
      right to grant sublicenses, to the intellectual property rights and know-how
      relating to Talvesta and all of its uses. Upon execution of the license
      agreement, we paid a $100,000 license fee and reimbursed our licensors for
      approximately $11,000 of patent-related expenses. The license agreement also
      requires us to make an annual license fee payment of $25,000 and provides for
      future payments totaling up to $6 million upon the achievement of certain
      milestones, including a $5 million payment upon approval by the FDA of a New
      Drug Application for Talvesta. To date, we have made two of these milestone
      payments totaling $200,000 following commencement of the Phase 1 clinical trial
      and upon reaching 50% enrollment of a Phase 1 clinical trial. Additionally,
      we
      are obligated to pay royalties in the amount of 3.5 percent of “net sales” (as
      defined in the license agreement) of Talvesta. We are also required to pay
      to
      the licensors 20 percent of fees or non-royalty consideration (e.g., milestone
      payments, license fees) received by us in connection with any sublicense of
      Talvesta granted prior to the start of a Phase 2 trial, and 15 percent of such
      fees after initiation of a Phase 2 clinical trial.





***Zensana
      License.*** Our
      rights to Zensana are subject to the terms of an October 2004 license agreement
      with NovaDel Pharma, Inc. The license agreement grants us a royalty-bearing,
      exclusive right and license to develop and commercialize Zensana within the
      United States and Canada. The technology licensed to us under the license
      agreement currently covers one United States issued patent, which expires in
      March 2022. In consideration for the license, we issued 73,121 shares of our
      common stock to NovaDel and have agreed to make double-digit royalty payments
      to
      NovaDel based on a percentage of “net sales” (as defined in the agreement). In
      addition, we purchased from NovaDel 400,000 shares of its common stock at a
      price of $2.50 per share for an aggregate payment of $1 million.




***Inex
      License Agreement.*** **** In
      May
      2006, we entered into a series of related agreements with Inex Pharmaceuticals
      Corporation. Pursuant to a license agreement with Inex, we received an
      exclusive, worldwide license to patents, technology and other intellectual
      property relating to our Marqibo, Alocrest and sphingosome encapsulated
      topotecan product candidates. Under the license agreement, we also received
      an
      exclusive, worldwide sublicense to other patents and intellectual property
      relating to these product candidates held by the M.D. Anderson Cancer Center.
      In
      addition, we 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 us
      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.





In
      consideration for the rights and assets acquired from Inex, we paid to Inex
      aggregate consideration of $11.8 million, which payment consisted of $1.5
      million in cash and 1,118,568 shares of our common stock. We also agreed to
      pay
      to Inex royalties on 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. The
      milestones and other payments may include annual license maintenance fees and
      milestones. To date, we have made one milestone payment of $1.0 million to
      Inex
      upon initiation of a Phase 1 clinical trial in Alocrest.





24











***Menadione
      License Agreement.*** In
      October 2006, we entered into a license agreement with the Albert Einstein
      College of Medicine of Yeshiva University, a division of Yeshiva University,
      or
      the College. Pursuant to the Agreement, we acquired an exclusive, worldwide,
      royalty-bearing license to certain patent applications, and other intellectual
      property relating to topical menadione. In consideration for the license, we
      agreed to issue the College $150,000 of our common stock, valued at
      $7.36 per share (representing the closing sale price on October 11, 2006).
      We
      also agreed to make an additional cash payment within 30 days of signing the
      agreement, and pay annual maintenance fees. Further, we agreed to make
      milestone payments in the aggregate amount of $2,750,000 upon the achievement
      of
      various clinical and regulatory milestones, as described in the agreement.
      We
      may also make annual maintenance fees as part of the agreement. We also agreed
      to make royalty payments to the College on net sales of any products covered
      by
      a claim in any licensed patent. We may also grant sublicenses to the licensed
      patents and the proceeds resulting from such sublicenses will be shared with
      the
      College.




**Lease
      Agreements** .
      We
      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 $1.3 million on March 31,
      2007.








**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 March 31, 2007, and we have never held
      such instruments in the past.





**Item
      4. Controls and Procedures**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Securities Exchange Act of 1934
      reports is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and forms, and
      that such information is accumulated and communicated to our management,
      including our chief executive officer and chief financial officer, as
      appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating the disclosure controls and procedures, management
      recognized that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable and not absolute assurance of achieving
      the desired control objectives. In reaching a reasonable level of assurance,
      management necessarily was required to apply its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures. In addition,
      the
      design of any system of controls also is based in part upon certain assumptions
      about the likelihood of future events, and there can be no assurance that any
      design will succeed in achieving its stated goals under all potential future
      conditions; over time, a control may become inadequate because of changes in
      conditions, or the degree of compliance with policies or procedures may
      deteriorate. Because of the inherent limitations in a cost-effective control
      system, misstatements due to error or fraud may occur and not be
      detected.





Based
      on
      their evaluation as of March 31, 2007, 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.







25








During
      the quarter ended March 31, 2007, there were no changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect, our internal controls over financial
      reporting.








26





**PART
      II - OTHER INFORMATION**


**Item
      1. Legal Proceedings**





We
      are
      not involved in any legal proceeding.





**Item
      1A. Risk Factors**





We
      have
      not had any material changes to our risk factors disclosed in response to Item
      1A of Part II of our Quarterly Report on Form 10-K for the year ended December
      31, 2006.




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





None




**Item
      3. Defaults Upon Senior Securities**





Not
      applicable





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





None





**Item
      5. Other Information**




A
      summary
      of the Company’s compensation arrangement with its outside directors, including
      its non-executive board chair, is attached to this Form 10-Q as Exhibit 10.1
      and
      is incorporated herein by reference.





**Item
      6. Exhibits**




**Exhibit
                No.**
            
            **Description**10.1
            
            Summary
                of Non-employee Director Compensation Arrangement.31.1
            
            Certification
                of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
                15d-14(a).31.2
            
            Certification
                of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
                15d-14(a).32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer, as required
                by Section 1350 of Chapter 63 of Title 18 of the United States Code
                (18
                U.S.C. 1350).













27








**SIGNATURES**




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





**Hana
                Biosciences, Inc.**Dated:
                May 14, 2007
            By:
            /s/
                Mark J. AhnMark
                J. AhnPresident
                and Chief Executive OfficerDated:
                May 14, 2007
            By:
            /s/
                John P. IparraguirreJohn
                P. IparraguirreVice
                President, Chief Financial Officer





28





**Index
      to Exhibits Filed with this Report**


**Exhibit
                  No.**
              
              **Description**10.1
              
              Summary
                  of Non-employee Director Compensation Arrangement.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).


29